Good morning, everyone, and thank you for joining us today for NAB's Full Year 2022 Results. I'm Sally Mihell, Head of Investor Relations. Before we start, I'd like to acknowledge the traditional owners of the land I'm joining from, the Gadigal peoples of the Eora Nation. I'd like to pay respect to their elders past, present, and emerging, and to the elders of the traditional lands in which you are also calling in from. Presenting today will be Ross McEwan, our group CEO, and Gary Lennon, our group CFO. We're also joined in the room by members of NAB's executive team. At the end of the presentation, which will take about 40 minutes, we'll open up to Q&A. Just a reminder for those of you joining us online, you'll need to be on the phone line to ask a question. I'll now hand to Ross.
Thanks very much, Sal, and welcome to NAB's 2022 Full Year Results. Actually nice to have some people in the room. I think it's the first time since I've been here in three years that we've been able to have people in the room, so a big warm welcome to all those who've come on in. I am pleased to report that we have again delivered strong financial results with all of our businesses contributing. Disciplined execution of our strategy continues to drive targeted momentum and improved shareholder returns. The strong balance sheet settings we've maintained over recent years puts us in a good position for a changing environment, with increasing cash rates and higher inflation. Our continued focus on cost discipline sees us well-placed to manage the impact of inflation on our businesses.
We know some households and businesses are being challenged by a higher cost of living and higher interest rates. We are here to help them manage through this period. Overall, we remain confident in the resilience of our customers given the significant increase in savings over the past two years, and an expectation that the unemployment rates will remain low in 2023. NAB is well positioned for these uncertain times with the right business mix, targeted momentum across our businesses, and a strong balance sheet. This means that we can make deliberate choices about where we invest to continue to grow and to maximize returns. In 2022, revenue grew by 8.9%, benefiting from strong volume growth and higher margins. Costs, excluding Citi, were up 3.9%, in line with the guidance we provided with our third quarter trading update.
Excluding costs relating to AUSTRAC and enforceable undertaking and other remediation, our underlying costs were up 1.3%. Underlying earnings increased by 11.5%, and cash earnings rose by 8.3% over the year. The final dividend of AUD 0.78 brings total dividends for the year to AUD 1.51 per share, which represents 68% of cash earnings. These results reflect strong contributions by all of our businesses, and Gary will spend some time discussing the key drivers of group performance. We said we would deliver improved returns to shareholders, and I'm pleased to say that we have. Cash ROE is 11.7% for the year, comfortably within our target range of double-digit. However, this remains behind the returns generated off a lower capital base in 2019, and we see further improvements ahead. We have delivered improved returns while maintaining a strong balance sheet.
Our collective provision to credit risk weighted assets is 1.31%, 35 basis points higher than it was in September 2019. Our funding position has been strengthened by the increase in customer deposits. On our balance sheet, customer deposits now fund 81% of our total loans, up from 70% in 2019. Our capital position is also strong. Over the year, we've continued to buy back capital to move us closer to our current target CET1 range of 10.7%-11.25% and deliver long-term ROE benefits to shareholders. APRA's revised capital framework is expected to increase our CET1 ratio by around 40 basis points. Together with the impact of the AUD 600 million remaining buyback, our pro forma CET1 ratio will be approximately 11.8%.
This is above our revised target capital range of 11-11.5% from the first of January. Turning to our strategic ambition, you have seen this slide before and it hasn't changed. We are now in the third year of our refreshed group strategy, which is focused on delivering better outcomes for our customers and colleagues, and we'll do this by being relationship-led and easy to do business with, while adopting a safe and long-term sustainable approach to managing our business. Customers and colleagues are the twin peaks of our strategy. We want great bankers for our customers and great leaders. Investing in our colleagues is key to delivering a better customer experience and overall performance. Our training programs are focused on building the skills and capabilities we need in areas like climate and in digital. Colleague engagement was stable over the year.
However, it remains below our target of top quartile, and this is an ongoing area of focus for us all. You may have seen reporting on discussions regarding our new enterprise agreement. We do see an opportunity to simplify and modernize this agreement and strike a good balance between rewarding our colleagues while supporting their well-being. This is key to our ability to continue to attract and retain talented professionals into the bank. Relationships are at the core of our service to customers, and we continue to have the number one Net Promoter Score of the major banks for consumers in Australia and New Zealand, but there is more to do to achieve the Net Promoter Score results we aspire to. In business, NAB score declined by 2 points. We are again ranked number two overall.
While it's pleasing to see we are ranked first and second in some of our key business segments, we need to do more to improve our Net Promoter Score in the micro-business segment. In Corporate and Institutional Banking, we ranked number one again in the most recent Peter Lee survey. This is our best result on record, in particular for relationship strength and transaction banking. NAB recorded the highest score of any bank in the history of the survey. Our transactional banking strength is an important driver of improving returns in this business. We have delivered good momentum across our businesses in 2022, which reflects the hard work of all of our colleagues.
Importantly, this growth has been aligned to our strategy, which is focused on growing share in our core SME franchise in Australia and New Zealand, a disciplined approach to growth in C&IB and home lending and growing our share of deposits. In NAB's largest division, Business and Private Banking, we have maintained our market-leading position. Over 2022, business lending in this division increased by almost AUD 16 billion, representing 13% growth and 1.3 times system. Total Australian business lending, which includes both corporate and institutional and SME lending, grew by 12%, which is slightly below system for the year. This was a deliberate choice to constrain growth in corporate and institutional banking in the second half to optimize returns across the group. In Australian home lending, we grew by AUD 22 billion this year, excluding the AUD 9 billion of home loans acquired with the Citi Consumer Business.
This represents 1.1 times system over the 12 months. Balancing volume and returns in an increasingly challenging housing market is important, and I'll talk a little bit more about this shortly. Our business deposits across business and private banking and corporate and institutional grew by 17% in 2022, which is 1.8 times system. We also grew our household deposits in Australia by 11% this year, which was slightly above system. BNZ has performed well in a slowing market, with lending growth tilted towards business lending. Our home lending grew just below system as we took deliberate steps to reduce our share of higher-leveraged lending in the New Zealand marketplace. New Zealand deposit growth this year was 5.4%. I want to spend some time on our leading business and private banking division, which has had another very good year.
Our core franchise is based on a relationship-led business model, which has been built over many, many years. We have 3,000 bankers supporting around 1.4 million customers. These relationships between customers and bankers are increasingly being complemented by digital data and analytics capability that are adding greater value. As our business customers took the opportunity to invest and grow this year, we invested in our own franchise, including the addition of more than 300 new customer-facing roles. The strong growth in business lending in the first half was sustained in the second half to achieve 13.4% growth across the year. Across the franchise, there was a broad-based growth demonstrating our long-standing commitment to supporting the business community. Merchant payments is an integral part of our customer relationship, particularly in small and micro business, where we see opportunities for good growth.
Our small business customers are benefiting from the launch of simple, easy payment solutions, including NAB Easy Tap, which turns a merchant's Android phone into an EFTPOS reader for contactless card payments, and the NAB Hive Merchant Portal, which lets customers manage business and payments needed via a flexible digital portal. We are continuing to invest here. During the past two years, we've been working on the build and rollout of a simple home loan platform across our distribution channels. About 90% of applications via our retail channel are now submitted via the front end of our simple home loan platform, delivering faster and better experience for customers and bankers. The next stage for our retail channel will be focusing on automating and digitizing the end-to-end process right through to settlements.
We've also started the rollout of simple home loans to our broker network and through our business banking and private banking network. We'll gradually extend this to more loans and borrowers. Over the past 18 months, the actions we've taken to improve the customer broker experience have enabled us to grow ahead of system and home lending while maintaining price discipline. However, the market dynamics in home lending are changing as volumes slow, interest rates increase, and a substantial volume of fixed-rate loans approach their expiry. In this changing market dynamic, we have the products and processes in place to continue to grow our business and maximize customer retention. However, we will make choices to strike the right balance between volume and price while maintaining risk discipline.
This may result in us being below system for a period, as you see on the slide in the fourth quarter of 2022. Our strategy in personal banking is based on a simple and digital strategy. Improving digital engagement with our customers and providing enhanced self-service capability is delivering an improved customer experience across our channels. Our online banking NPS is now rated equal first, and our mobile app NPS is rated or ranked second of the major banks. The work Angela Mentis and Patrick Wright are doing with our businesses are leading us to getting a better digital offerings, with more to come. The acquisition of Citi Consumer Business completed on the 1st of June. We remain confident that the additional scale and expertise will support our ambition to deliver a market-leading capability in unsecured lending.
The financial performance of the Citi Consumer Business for the four months to September reflects current market conditions, including lower margins in home lending and increased funding costs. While the current run rate costs are a bit higher than historical levels, we continue to target sustainable cost base of less than AUD 300 million following the expiry of the transitional service agreement. We are continuing to invest to grow our business in a safe and sustainable way. Our investment spend in 2023 will be approximately AUD 1.5 billion, which is about AUD 100 million higher than the year 2022. This increase is largely driven by additional investment in financial crime detection and prevention and cybersecurity capability. Cybercrime is one of the greatest threats of our time, and we must be ever vigilant to keep our customers and bank safe from criminal activity.
We'll also maintain our investment in our core strategic projects, which support long-term growth and drive sustainable cost efficiencies. Higher inflation is impacting our business primarily through higher wages and vendor costs. Costs associated with AUSTRAC enforceable undertaking are expected to be AUD 80 million-AUD 120 million in both 2023 and 2024, which is consistent with our previous disclosures. Progressing our productivity agenda remains a key to helping offset cost inflation and creating capacity to invest to deliver long-term value for shareholders. In 2022, we delivered AUD 465 million of productivity savings, and we are targeting around AUD 400 million-plus of productivity benefits in 2023. Forecasting cost growth is difficult in this environment, but we expect the cost to income ratio to continue to trend downwards in 2023.
Responding to climate change is one of the key priorities in the long-term pillar of our group strategy. We are taking actions to support our customers and the economy, transition to net zero by 2050. The transition is complex. Every business and every household will need to make changes. This AUD 20 trillion will need to be spent differently in Australia over the next 30 years. NAB is supporting our customers to make the investment necessary to decarbonize and build resilience. Today, we have released our first climate report, which shows the progress we have made and where we see opportunities to grow. The strength of customer relationships in our corporate institutional bank is a key advantage. The next decade is critical. We have set 2030 decarbonization targets for four of our most emissions intensive sectors.
We support an orderly transition in the energy system while reducing our exposure to fossil fuels. We remain the number one Australian bank for global renewable transactions, and we have exceeded our target of AUD 70 billion of environmental financing by 2025. We're being guided by the science. This is what our customers, our colleagues, and our shareholders rightly expect. With that, I'll pass over to Gary, who will take you through the results in more detail.
Fabulous. Thank you, Ross. Let's start with our usual high-level overview of the financials. This is a strong set of results across all key measures of profit on both a year-on-year and half-on-half basis. Once again, you'll see there are no large notable items. Underlying profit rose 12% over the year and 6% over the half, with strong revenue growth outpacing cost growth ex Citi in both periods. The increase in cash earnings of 8% over the year and 4% over the half is a bit less than the underlying profit growth reflecting CICs, which while remaining at low levels, have increased from a write-back in full year 2021 and a small charge in first half 2022. While not on this slide, it's worth noting that the statutory profit declined 6% over the half.
This reflects volatility in some of our economic hedges, increased acquisition integration costs, primarily relating to 86 400, LanternPay in the Citi Consumer business, partly offset by a gain on sale of BNZ Life. All of our divisions contributed to the group's strong underlying profit performance over both the year and the half. Business and Private, Corporate, Institutional, and New Zealand all delivered very pleasing growth in underlying profit driven by revenue growth, including the benefit of the rising rate environment in second half 2022, along with good volume momentum. Growth in PB over the half was limited by home lending margin pressure, and CIB had a slower second half impacted by lower markets income and disciplined portfolio management.
Turning to revenue growth, which has been the key driver of our strong earnings performance this period, my focus will be mostly on the half-on-half. Our second half 2022 earnings included a four-month contribution from the Citi Consumer Business acquired on 1 June 2020, which I'll also exclude just for the sake of comparability. Total revenue rose 7.2% over the half, excluding the acquisition of Citi and an AUD 132 million drag from markets and treasury, which I'll discuss in more detail shortly. Underlying revenue growth was 6.7%. Strong volumes contributed AUD 263 million, and higher margins, ex markets and treasury, added AUD 406 million. Fees and commissions was a drag of AUD 60 million.
This reflects a AUD 29 million impact from higher customer remediation charges, as well as lower merchant acquiring income relating to increased scheme fees. Partly offsetting these impacts was higher business-related and JBWere fees. Markets and treasury income reduced AUD 131 million over the period off the back of a stronger first half. The key driver was trading income, which has been impacted by the ongoing excess liquidity in the system, combined with a challenging trading environment in the second half 2022. Customer-related revenues held up reasonably well in the half. Turning now to margins. Net interest margin increased four basis points over the half year. Markets and treasury was a drag of four basis points. Two basis points comes from higher holdings of liquids, and the balance relates to economically hedged positions, and is mostly offset in other operating income.
Excluding markets and treasury, underlying NIM increased 8 basis points. The key driver of this increase has been the rising rate, the rising interest rate environment. The impact is reflected in both higher returns on our unhedged low rate deposits exposed to cash rate changes in Australia, New Zealand and offshore, combined with higher returns from our deposit and capital replicating portfolios exposed to the 3 to 5 year swap rates. Deposits grew 18 basis points, including 10 basis points relating to the impact of the Australian unhedged deposit balances, which is broadly consistent with the sensitivities we provided at the first half. Deposit mix had minimal impact in second half 2022.
The overall impact across deposits and capital from higher Australian replicating portfolio returns has been approximately five basis points over the half, including the benefit from an AUD 8 billion increase in the size of our deposit hedge up to AUD 80 billion. Offsetting these positive impacts, the lending margin's down seven basis points, mostly reflecting competitive pressures in home lending. Funding costs has also been a drag of five basis points in the half, mostly relating to the increase in short-term funding costs. Looking forward, we expect further upside from the higher interest rates in FY23. On our unhedged low rate deposits, we expect the benefit to NIM from cash rate increases to peak in first half 2023, with more modest upside thereafter.
The benefit of higher returns from our deposit and capital replicating portfolios will move around a bit with swap rates. Based on 30 September rates, the upside for FY23 is approximately 10 basis points. Against these tailwinds, we see a number of headwinds to margins. We're starting to see deposit mix shifting and expect this to become more of a headwind in FY23, along with higher funding costs. Home lending competition is also expected to accelerate as growth slows and refinancing activity picks up. We don't expect liquids to be a NIM drag going forward, as further growth in liquids should be in line with the overall growth in the balance sheet. Turning now to costs, which rose 3.9% over the year ex-Citi, consistent with the guidance in our 3Q trading update.
This includes AUD 208 million of costs relating to the first year of our enforceable undertaking and additional provisions required for existing payroll and customer-related remediation programs. The EU costs were AUD 103 million, and this is expected to continue at around about that AUD 80-120 million range for the next two years. In respect of payroll and customer remediation, out of our 20 large legacy programs, 16 are either complete or expected to be practically complete by the end of this calendar year, with four continuing into next year. Excluding this above AUD 208 million, the underlying cost increase, as Ross noted, was 1.3% year-on-year. Salary costs increased AUD 135 million. We've also continued to invest in growth across our business, which has added AUD 233 million to costs.
This includes new bankers and resources to support growth, particularly in Business and Private Banking. It also includes costs relating to the first time inclusion of LanternPay and the full period impact of 86 400. Technology costs are AUD 140 million higher. This includes additional volume growth-related costs for such things such as cloud, infrastructure and licensing, vendor inflation, and the cost of running new technology investments made in FY21. While investment spend is higher over the year at AUD 1.4 million, the OpEx component is actually relatively flat. Other costs decreased AUD 43 million this period, with a key driver being lower performance-based pay. Offsetting these headwinds has been productivity savings of AUD 465 million, largely generated through simplification, restructuring, third-party savings, and lower occupancy costs. Now, looking ahead to FY23, we see a number of cost headwinds.
The inflationary environment is expected to impact salaries and vendor costs. As Ross mentioned, we're also expecting to lift the investment spend to approximately AUD 1.5 billion, and the OpEx rate is likely to remain fairly constant at around 50%. Higher D&A is expected in FY 2023 of approximately AUD 140 million, reflecting the increase in investment spend over recent years on growth initiatives such as simple home loans, data, and merchant capability, which are being deployed currently, along with EU-related items, BS11 impacts out of New Zealand, and some property-related depreciation. Productivity is key to helping us offset these headwinds, and we continue to expect savings of circa AUD 400 million in FY 2023. As Ross has mentioned, forecasting cost in this inflationary environment is difficult, but we are confident of achieving a lower overall cost-to-income ratio in FY 2023.
Now, turning to CICs and asset quality. The CIC charge for second half 2022 is AUD 123 million and remains at very low levels. This includes underlying charges of AUD 196 million, which reflects continued low specific charges, improved asset quality, and volume growth. The largest driver of the increase in underlying charges over the half is the non-repeat of collective provision releases for the Australian mortgage portfolio in the prior period. CICs this half also include a AUD 73 million release from forward-looking provisions. Asset qualities continue to improve, and our ratios are at post GFC lows. The ratio of 90 days past due in gross impaired assets has reduced 9 basis points to 66 basis points, with continued improvements in Australian mortgage delinquencies, low levels of new impairments, and successful workouts in our business lending portfolios.
Watchlist loans are lower, mainly due to improvements in the aviation portfolio. While this strong asset quality performance is pleasing, we do know there are headwinds in the outlook with higher rates, higher inflation, falling house prices, so let's discuss that, what that might mean in a little more detail. Starting with our home lending book, customers face a more challenging outlook. House prices have started falling and expected to decline circa 20% pre-peak to trough. The impact of higher cash rates on home lending and repayments is also accelerating. In the case of variable rate loans, we are reviewing all these by early January 2023 and adjusting payments accordingly.
At a cash rate of 3.6%, approximately three-quarters of our variable rate P&I accounts will see an increase in monthly repayments with an average increase estimated at 34% or additional AUD 549 per month. Reassuringly, most customers ended this period in good shape with offset balances up 30% since March 2020, and the average dynamic LVR and negative equity levels are at very low levels. Importantly, strong employment conditions are expected to continue in FY 2023. While this means on average, customers should be able to manage, we know there will be some who face difficulties. We see the most at-risk customers are those who borrowed over the last three years when interest rates were very low and serviceability was tested at less than 6%, and this amounts to around about AUD 177 billion of lending.
We have considered the impact of a 3.6% cash rate on repayments of these customers and narrowed down the at-risk population to those with repayment buffers of less than 12 months. Of these balances, between AUD 1 billion to AUD 9.7 billion have a dynamic LVR greater than 80% with no LMI or no first home buyer government guarantee. Representing balances at risk of potential loss should house prices fall a further 20% from September 2022 levels, which already incorporates a 5% reduction from peak. The highest risk cohort is around AUD 1 billion of balances with less than 3 months worth of repayment buffers and a dynamic LVR greater than 90%.
In the scheme of our total Australian mortgage book of AUD 329 billion, while these numbers are still large, this does represent a relatively manageable exposure, and we'll be working hard to ensure we support these customers who need help. Now, turning to our SME business lending book totaling AUD 132 billion. In an environment of slowing economic growth, rising in interest rates, and higher inflation, it is likely there will be more challenges for SME businesses, and an impact on asset quality outcomes, and will impact asset quality outcomes for this book. Managing SME credit risk is a core capability of NAB. We've been in this business a long time and seen many cycles. It starts with strong origination practices. Our exposures are well diversified by industry, and we have a highly secured portfolio even after applying material discounts to market security valuations.
Only 6% of loans are unsecured. All loans are assessed at minimum interest rates, which have recently increased materially. These origination practices have seen the quality of our front book lending improve in line with our back book when looking at exposures with probabilities of default greater than 2%. This is despite the strong lending growth in recent times. Our customers are in good shape, and the environment is currently very supportive for SMEs. Business profitability trends remain strong, and most customers are able to pass on the majority of higher input costs. Liquidity remains high with BNPL deposits up more than 25% since September 2020, and gearing is low, with loan utilization rates below pre-COVID levels. Similar to home lending, while this means the majority of customers look well-placed to manage a more challenging outlook, we do know some will struggle.
We see our highest risk SME balances are those with a probability of default greater than 2%, which are not fully secured. This amounts to AUD 8.5 billion in balances with loss potential, or AUD 1.5 billion if we just consider those balances that are unsecured. Again, while large, these amounts are fairly manageable in the context of a 132 billion business book. Turning to provisioning, which has been maintained at strong levels given the more challenging outlook. Collective provisions stand at AUD 4.8 billion, up AUD 192 million from March. This includes AUD 1.6 billion of additional forward-looking provisions when compared to September 2019 levels. Collective provision coverage to credit risk-weighted assets is also well above pre-COVID levels at 1.31% and stable over the half, despite improved asset quality this period.
Provisions for total expected credit losses increased AUD 101 million from March to AUD 5.4 billion. This incorporates more stressed economic assumptions in our base case scenario, including house price declines in FY23 of 14% on top of the 5% that has already occurred in FY22. We have also increased the weighting to the downside scenario from 40% to 45% over the half. This downside scenario has unemployment remaining above 8% over the forecast period and cumulative house price declines of around 30%.
As stress has eased in some of our COVID-19 related sectors, such as airlines, our targeted sector FLA for these exposures has been released, but this has been partially offset by a new construction sector FLA and a new Australian energy FLA to reflect the impact of high energy prices on manufacturing and transport subsectors, which are heavy energy users but face challenges passing on these high input costs. It's also worth highlighting in relation to the more challenging housing outlook, we are currently holding approximately AUD 1.3 billion of pre-provisions across the group for potential losses to this sector. Now turning to capital. Our CET1 stands at 11.51% at September, down 97 basis points from March.
Organic capital generation added 3 basis points or 19 basis points if you exclude the non-credit related risk-weighted asset movements, primarily relating to IRRBB, which I'll discuss shortly. Credit risk-weighted asset growth accounted for 8 basis points of capital over the period, excluding the impact of FX and Citi, with strong volume growth mostly offset by improved credit quality. Over the half, we bought back 1.9 billion of ordinary shares, equating to 44 basis points of capital. M&A had a 24 basis impact relating to the Citi acquisition less the BNZ Life sale. The movement in other of 32 basis points include 14 basis points from FX, as well as drags from deferred tax asset movements, software, and a few other miscellaneous items.
From 1 January 2023, our CET1 target range will be 11%-11.5% to align with APRA's revised capital framework. Adjusting for the remaining AUD 600 million buyback, which is about 13 basis points impact, and an estimated 40 basis points impact as a result, benefit from the new framework, our pro forma CET1 is estimated at 11.8%. IRRBB risk-weighted assets have increased a further AUD 6.8 billion this half, with most of this due to embedded losses arising from further increases in the three-year swap rates relative to the regulatory one-year comparison rate. You can see from the chart included here, we're now holding AUD 6.2 billion of embedded loss risk weights, equivalent to 45 basis points of CET1.
While subject to rate movements, we do expect to see most of this reverse over FY 2023 and 2024. Repricing and yield curve risk have also increased due to the rate increases, but we don't expect this to reverse in the short to medium term. Turning finally to funding and liquidity, both have remained strong for the period. LCR increased to 137, and excluding the CLF, sits at 128%, well above the 100% minimum required. NSFR has declined slightly to 119% over the half. Despite volatility in funding markets and widening credit spreads in FY 2022, we issued AUD 39 billion of term wholesale funding over the year, with AUD 18 billion in the second half of 2022, which reflects a return to more normal levels of issuance for NAB.
We do expect to continue to access wholesale funding markets over FY 2023 to support growth and refinancing requirements, as well as to position us well or position the balance sheet well for the phasing out of the CLF and for TFF maturities. With that, I will now hand back to you, Ross.
Thank you, Gary. As we end a period of greater economic uncertainty, we are well-positioned. For three years now, we've been executing a clear and consistent strategy with discipline and with focus. This is the bank that has sustained momentum, that is delivering better outcomes for customers and colleagues, which is translating into better returns for our shareholders. The strength of our relationship with our business customers, large and small, is a key differentiator. Our priorities as well are well established and supported by mature governance and control frameworks. At the same time, we have maintained strong capital and provisioning levels. This provides capacity to support our customers through this period of uncertainty.
The strength, stability, and consistency is enabling us to make deliberate choices about where we want to invest, where we want to grow, and where we want to pull back a little because the returns are not as attractive. In closing, customers and colleagues will continue to be a key focus in 2023. A disciplined approach to managing our costs with a focus on productivity. We will get right the work we have agreed with AUSTRAC to keep our bank and customers safe. Finally, we will progress the integration of previous acquisitions, including the Citi Consumer Business and 86 400 into UBank, to ensure we deliver the benefits of these transactions. I am confident in the outlook for NAB and for Australia and New Zealand.
We are better placed than any other countries globally to navigate the challenges ahead. Thanks again for the time and physically seeing you, and I'll hand back to Sal for some Q&A.
Thank you, Ross. We'll start by taking some questions in the room. I know I don't need to remind you, but please limit to two questions. I'll start with Jarrod.
Jarrod Martin from Credit Suisse.
Gary, you know the question that's coming.
Which of two is it?
No comment.
Other banks have disclosed, are you willing to actually disclose what your exit margin is for FY 2022?
Look, Gary, maybe they haven't picked up on the quarterly exit margin that you gave last quarter and this quarter. Maybe you're there, because I think that's pretty well the right.
That's a very good point, Ross. Answer your question.
The right thing to disclose as opposed to the minute at the end of the day NIM that Jarrod is after.
In my mind, to answer the question seriously and with respect, I've been on record for a long time with my nervousness and concerns around final month exit NIMs, because the reality is they can be distorting. There's a whole bunch of things can go through in the final month, particularly of a year, which means any guide to give directly off that is fraught with danger. It can be volatile, and I've seen that over many years, so that's why we avoid doing it. Understand the need that you wanna get a decent understanding of what momentum looks like as we're exiting the year. That's why we do, in all seriousness, think the disclosures we've given on the quarterly gives you a really good sense of what trajectory, or what the trajectory is.
We said in our Q3 update, there was very little benefit from rising interest rates in that Q3 update, and that it would start to come through in Q4. You can see from our disclosures, that's exactly what's happened. We were, you know, down to 1.62 in Q3, and that's gone up ten basis points to 1.72 in Q4.
That 10 basis points is a fair reflection of the underlying run rates, impetus with that we're exiting the year with. I think it's better than asking for, you know, any spot monthly NIM.
I appreciate that. Maybe if I can also come at it another way as well. You've said that within your waterfall there on slide 24, 10 basis points from the Australian unhedged balances, which was in line with your sensitivity. I think your sensitivity was, what, 2 basis points per 25?
That implies 125 basis points. We've had double of that, there's a further 10 basis points to come from that. A further 10 basis points to come from the swap rates, et cetera. You know, you're looking in terms of the tailwinds going into FY 2023, potentially being 20+ basis points on what the second half margin is. Do you sort of agree with that from a tailwind perspective? We can all put-
Go on, I'm sorry.
Yeah, I think you can all put your own numbers on this. There's a couple important points to call out. On the replicating portfolio, the 10 basis points that we called out for next year, as long as swap rates sort of behave there and thereabouts, that's gonna be a pretty solid number. On what we've achieved this year on the unhedged portfolio, if you'd sort of did the midpoint maths on our guidance, comes out at about 9.5 basis points, we delivered on about 10. It's slightly better. But it's also we thought that there would be less pass through in the earlier rate rises. It's not unexpected that it was a bit better than guidance for this period that's just gone past.
What we're seeing in more recent times is the pass-through is coming off a bit. The two basis points, it's probably less than two basis points and starting to decline. That's just, you know, a consequence that as rates continue to increase, the sensitivities do change. That would be the best guidance. Definitely there will be some flow-through effects of what's already happened in the second half, plus new rate rises, plus the 10 basis points. It does give you a pretty positive outlook for the first half 2023.
Yes.
It'll start to moderate. I don't think it'll collapse, but it won't continue at that rate of pace. I think there will be continued increases after that, just at a more moderate level.
Andrew.
Thanks. Andrew Lyons from Goldman Sachs. Just staying on NIM, you've provided a variety of qualitative comments on your NIM outlook for 2023, including deposit mix being a headwind. Just looking at your deposit growth in the half, it was up AUD 26 billion, with term deposits actually rising by AUD 39 billion in the half. I'm just wondering about how you're sort of thinking about the ability of the deposit franchise to the extent you continue to see good growth in SME, to I guess continue to sort of fund economically, because we probably haven't seen that degree of I guess mix shift already from your peers. Just keen to understand how you're sort of thinking about the mix.
In terms of the shift in the TDs?
The shift in the TDs. We haven't seen as much from peers, and I'm just keen to understand to the extent we continue to see growth, what sort of an impact do you think that will have? Then I've got a second question.
A large portion of that mix in the TDs is coming out of David's business, so it's more of a top-end institutional corporate shift, which you'd expect that shift should be first. How we think about, well, where this is likely to play out, if you go back this time into 2021, I think TDs was around about 19% of the book. They've now moved up to, from memory, about 25%. I think if you go back pre-COVID, they were 35%. It gives you. I think that's a fair reflection on where we are in that journey. We were way back to 19%. We've moved ahead a bit with the higher end deposits moving across.
Ultimately, you would think it may move closer to that 35% of the total book in time, but I think that will be progressive. We are starting to see more of that migration starting into, in the SME and even starting in the consumer sector as well. It is starting, but it's still pretty slow. I would've thought peers would be experiencing relatively the same thing.
Similar.
Yeah.
Thanks, Gary. Just a second one, just on capital. You've provided great disclosures around your ECL modeling and particularly the downside scenario, which does look pretty conservative. Just be keen to understand perhaps what your capital impact would look like in that sort of a scenario if it was to play out. How would your risk-weighted assets respond in a scenario like the one that you've given us for your ECL downside?
Yeah, obviously, you're talking about the more severe one?
Yeah
We do have modeling. I won't quote numbers, but just to give a sense of, you know, what's happened to date, and this might be useful to size up that downside. Through COVID period, where we have seen increases in risk-weighted assets or decreases in risk-weighted assets because of credit quality improvements, there's a bit of noise around that, but the true improvement level through that period's been about 30 basis points of capital. That is, we've got a benefit from through that period. How I've always thought about it, if we entered into a relatively severe, maybe not as bad as that full downside scenario, but that's not a bad starting point to consider the impact of that 30, you would think may reverse, and it just gives you a bit of a sense.
The numbers aren't massive. You know, a lot of these are through the cycle PDs and other things. You know, the biggest driver of capital impact is when you do start to get re-ratings of customers rather than the underlying PDs and LGDs tend to be relatively.
Stable.
Stable, yeah.
John.
Thank you. Jonathan Mott from Barrenjoey. Two questions if I could. The first one on the NIM. If you go through the divisions, you did mention this in the CIB, the Corporate Institutional Bank. What you saw was only a 3 basis point expansion, excluding the markets. You did mention that there was a shift into TDs to some extent, but I would've expected a bit more leverage coming through in the Institutional Bank pretty quickly. Why haven't we seen that? Is that an area that should be coming in future? What's going on there? I've got a second question.
There is a little bit of noise in there, but the main reason is that if there's an area that's higher pass through, it's in that area, and we have been seeing, particularly in more recent times, far more intense competition in CIB than any other area. You'll see our overall growth in deposits and growth in TDs. You know, a lot has been coming out of that area, which is way more competitive. We're seeing different levels of competition for those deposits now, probably in the last three months, it's quite intensified.
A second question if I could. Everyone's quite excited about business credit growth. It's 14.7%, I think, nationally, highest level it's been almost excluding the GFC in 30 years. There was an interesting comment, actually came out of the New Zealand regulator, that they're saying while asset quality is currently strong, greater utilization of credit limits and demand for working capital in recent months are potential signs of cash flow pressure in the business sector. Are you starting to see any signs yet that, you know, we're starting to see companies draw down capital? Why is the regulator starting to get a bit concerned about this, but none of the banks are?
Yeah. It's something we're watching closely for exactly the reasons, John, that you've called out, but we're not seeing anything yet.
Andrew may like to comment on it, but we're not seeing it in the book at the moment. You got Andrew sitting there looking after the book, so.
Yeah. We're not seeing it. Utilization's below pre-COVID levels, and it's pretty constant. If anything, I'm surprised it hasn't ticked up a little bit as clients have had to invest in, you know, extended working capital cycles. We'll watch it really tightly, but we haven't seen it.
Would it be fair to say, Andrew, that we are seeing a slight pause at the moment? With all the supply chain challenges, a lot of your businesses are really ramping up to how to mitigate that, build their own factories, build out mitigants to that. There's quite a strong credit pipeline. Given all the narrative that's going on, there's a bit of just pausing and waiting.
Yeah, that's exactly right. The pipeline is still strong, but you know, I think clients wanna see and have confidence that, you know, making the investment decisions that they want to make are the right calls. I would say that post the election, we probably had three or four months of increased uncertainty as clients wanted to understand the impact of rate rises. I actually feel like their confidence has increased a bit, that Australia has been able to navigate those rate rises and it feels more like a soft landing. We're starting to see you know, that pipeline transition to activity a little bit now. Hopefully that continues.
Victor.
Thank you. Victor German from Macquarie. Maybe a follow-up question on business. We've now heard pretty much every one of your competitors highlighting that that's the area that they want to focus on, and you're delivering a fantastic set of numbers. How are you finding competitive pressures on the lending side? One of the things that you provided was with the retail bank is proportion of volume coming through broker channel. It'd be interesting to get an update in terms of what's happening in business channel as well. Second question on. What would you want to answer this one first?
On in terms of mix of volumes, I would say, you know, our back book's kind of in the teens in terms of mix of broker to prop. If you look at front book, it's more like 25%, 75% in terms of mix. We are seeing a skew to broker. Broker margins in the business lending are a little different than in consumer. We actually have similar NIMs in broker as we would in proprietary. ROEs are lower because we have a little bit less cross-sell, a little bit less deposit in that channel. But the actual NIMs that we get in broker are pretty good. That is pleasing. What was the first? Oh, yeah, on competition.
Look, everyone wants to be in this business 'cause it's a good business. You know, this is a relationship business, so it's not that easy to kind of go in. It's a bit less price sensitive, and relationships are built over time through cycles. You know, we're really good at it. I would say, you know, it's bankers are always in high demand, because you know, you want good business bankers, and so we're working really hard to improve our processes and be the destination bank for any business banker to want to grow their careers. What we're really happy with is our attrition rates of bankers is really strong and a lot better than it would have been a couple of years ago.
We're keeping our people, and when you do that, you typically keep your customers. You know, we're
This is an area of absolute focus for us as a bank, and we're delighted with the results coming out of it. We've got really strong bankers. We've grown the number of bankers. We've grown the support for our bankers. Andrew's team have put a lot of support into the processes that their bankers work with. Lots to do. You know, our time to yes in the business banking side is some of the best in the market today. Couldn't have said that three years ago. We were losing bankers. We're not losing bankers as much as we were. We're actually probably best in market.
We like this business, and we're bloody good at it, and we're gonna stay good at it and bring them on. Victor, just to round out the three of us or whatever, the very good question, Victor. It's the dynamics in Business and Private is so different from consumer if you see what's going on. Like you would've seen our second half NIM of 3%. It's gone up to 3%, and the compression on the lending NIM is pretty modest. It goes to all the points that Andrew said, that this is not a commoditized business. It goes down to a huge amount around relationships. Most of our SME business will say that whilst interest rates are going up, in the overall scheme of things, it's not that high.
You know, that just goes to show that it is a really powerful franchise, but difficult to attack in the short term. How many halves have we been? That question's come up. How many halves has that question come up? It's probably when the announcement got put out that year, John, is how many halves this question comes up. If we do our business well, it's incredibly difficult to attack because it has to be customer by customer, relationship by relationship, and that's why you're not seeing the same sort of margin compression on the lending side that you do see in the consumer businesses.
We are investing well in this business. You know, we've got a lot of things that we want to do. I put up there just in the small micro market around merchant payments. We've got a lot of work to do in the micro market. We're doing very well in the small medium market now. Our metro business is really strong today. Three years ago, it was a bit weaker. It's very strong. Our agri business has gone well on the back end of, you know, the market going well, but we've grown market share in a growing market. This is a business that's heartland for NAB, and it's our turn, and we're not gonna let this go. Please pass that on to others.
Maybe just to touch on margins as well. I appreciate that perhaps the delivery in this half was consistent with your expectations back in the first half that you've provided. If we look at what others delivered, it was probably slightly better. We haven't seen as much shift perhaps in earlier rate rises as perhaps was expected earlier on. I guess as you reflect on it, do you think it's timing difference, or do you think once we kind of get through this rate cycle, the leverage to higher rates for NAB are gonna be lower than peers?
You know, I don't think there's any sense that we're at a disadvantaged position versus peers. You would know, and we find it that actually dissecting everyone's NIM waterfall and getting the real comparative, it's not a straightforward exercise. There's, you know, there's some things. Can you actually line it up? For example, some of the, our increased funding costs that we've called out just normally in the waterfall, there is certainly a portion of that that relates to liquids. I know others put that in a different part of the waterfall, and then, you know, our increase would look higher off the back of that reclassification. I think there's lots of moving parts. On the outcome for the second half based on the first half guidance, you know, it didn't come.
Well, it came in at 15, and our guidance said 13.5, so we did do better than what we thought we were gonna do. To date, it's held up in a reasonably stable way. Actually, the other important point versus peers is there's some timing issues with peers. We've had the quality problem of growing. When you have a franchise that is growing across the board, we've had to go out there, and you've got TFF coming, and you've got CLF coming off. We had a lot of funding tasks to do, and we've been doing pre-funding to prepare ourselves for TFF as well. Whereas if you don't have growth, you don't have to do that.
Yeah.
You know, that's where that will end as they are starting to return to some level of growth, but that will be a timing difference.
John Storey.
Thanks very much, Chair. John Storey from UBS. Ross, just a question for you on some of the APRA trends that we saw from September. It looked like NAB slowed down in some key product categories there. Maybe if you could just comment on that. Then the second question I had was just around the positive jaws guidance that you provided for 2023. Just wanted to get a better sense of what the market's performance potentially could look like. I see markets RWAs have obviously gone down, and the slide that you provided today, obviously you're run rating well below where you have historically. Just to get a sense of how important that piece is with regards to the positive jaws guidance. Thanks.
Yeah, thanks. Now, look, we in the second half was a little bit different to the first. We kept very strong position in our SME franchise. We did make some adjustments in our settings in our mortgage business, and we experienced some, there's a lot of competition in that marketplace. As Gary said, if you've got options as to where you put the money, you'd put it to where the best return is. We're looking after our mortgage franchise, and we want to continue to grow it. I do not see on the pricing that's in that marketplace that we'd be wanting to grow it as we did last year. We wanna look after existing customers and make sure they're, you know, we're funding them well.
Do I wanna grow in that market at those sort of margins? No, I'd rather put it into other parts of the business. That's the great thing about this franchise. I've now got options. We're playing those options. We had a quieter time in Corporate and Institutional. The returns starting to come through there. They'll probably get a bit more of our funding going forward, while others may not. We'll play it by a six-monthly basis. We've got the capability in our mortgage business being built over the last two years. We've got another probably two years of really building a machine in there. There's just one mortgage factory. We've given you an update on that. I'm delighted with the performance coming through there.
It's not as though it's a service issue that we get volume and, you know, we choke on it. That is not the case for this bank. It's about where do you make the money, and where do you put your efforts. That's why the APRA stats are a little bit different, and I think you'll see them swing around. The other side that we haven't chatted much, that's really important to this franchise is deposits and transaction accounts. This has been one of the weaknesses of this franchise for decades, and it is now becoming less of a weakness, actually becoming a strength of the organization. That's where we're focusing both on our personal bank, our business bank, and our corporate bank, and in New Zealand.
To get that weakness, and as you've seen, the ratios have changed quite dramatically even since 2019. I think you need to also see what we're doing on balancing this portfolio very well. It's also why we wanted to buy the Citi Consumer Business unsecured book business. Otherwise, you end up being a mortgage factory, and that's not what we want for our personal bank. That move alone has helped us become the number two player in the unsecured market. It means we can invest in it and put new systems and technology in place. There's some pretty strategic moves being made quietly behind the scenes here that are starting to come through. Yeah, some very deliberate decisions being made by myself and my executive team as to where we quietly move our funding.
On the other one, I might throw to David just on his view on what's happening in the Corporate and Institutional Banking, if I may, Gary.
Was that part of the question?
It was part of the question.
Okay
I think, wasn't it? The second part.
I think the second part of the question was specifically around markets performance.
What to expect there. What we certainly saw both through half one but then into half two is pretty solid risk management performance from markets off the back of our customer franchise. That continued. What we've seen and what I think we'll continue to see is periods where we go risk off depending on the amount of volatility that we're seeing out there. The trading revenues will still continue to be up and down half on half. I think your question was, you know, do you see a reversion over time to where we may have been a few years ago? You know, you can't anticipate that. You know, it was a quieter second half after actually quite a strong first half in trading.
I think year-on-year, it's a pretty good result from the markets team, but you will have halves that are up and halves that are down.
I would add to that, David, that there is and broadening out the treasury as well. You know, at the pre-COVID levels, we were running about AUD 1.8 billion, currently run rate AUD 1.4 billion. A lot of factors, a lot of changes in the environment, huge amount of liquidity, spreads are tightening, sometimes negative. As liquidity gets withdrawn from the market, it's quite reasonable to expect, particularly on treasury, but a bit on FICC as well, that some of those margins will widen and some of those arbitrage opportunities will come back. But I'd see that sort of playing out over the next three years, say, as liquidity gets withdrawn. We'll just watch.
In the nature of markets and treasury, difficult on the timing exactly, but over that sort of three-year period, you should sort of, you know, trending back to that 1.7%-1.8% level ultimately. The good news is it's all about the trading. The customer flows have been holding up.
Very strong.
You know, pretty well despite margin compression. We're getting continued flow uplift there, which you would expect in a volatile environment.
Ed.
Thanks. Ed Henning from Citi. Just following on mortgages. You know, today you've again talked about improvement in technology on the mortgage process and how that's all going. Obviously, you've dropped, you know, the 0.6 times system. You know, are you saying here that even though you're improving your process and mortgage systems, it's really just all about price, and that's what driving the customer decision? Can you just run through that in a little bit more detail on how we should think about that going forward with you spending money on your process and then getting extra share or at least towards system?
It's not all about price. It is an important factor. You just have to be competitive in the marketplace. There is a price for performance on service, and I'll get Rachel to talk on that because I think we're doing a very, very good job in this space at the moment. There are, you know, players that want this more than we do at a price that we think is probably not worth being in the market to the volumes we were getting last year as we were at. We still wanna be in this market, and we are. Will we put in the same level at 1.1x, 1.2x system on these pricings? Probably not, is what I'm signaling to you. There is a price for service, and we've been extracting that.
There is a price that you say, "That's all very interesting. We'll leave it to somebody else.
We just think we have other options for where we'd put the funding, that's all. Rachel, you may want to talk about that.
I'll just jump in then. There's important, and Rachel will add to this, I'm sure, that there's an important dynamic and change that's going on in the housing market at the moment that I think all of us probably is expecting, but we're really seeing it, and it has a direct relevance to your question. As growth slows, then this market is changing to more, from a market that was more about new sales, where the criticality of speed to market was high. When you're good at speed to market, you can charge a greater premium for that service. We're rapidly entering into an environment where slow growth, big refi market, and refis are moving up each and every month.
Because of the nature of that. The whole speed to market, because you've already got a property you just want to refinance, is not as important a factor. The premium you can get for that service premium is coming in. It's increasingly becoming, for a period anyway, more about price. You know, a lot of our competitors were keen to grow and, you know, they did what they had to do to grow. It does mean that returns are challenged.
Rachel, any comments from you? Or has Gary done a beautiful job? I did all this.
Gary's pretty much pinched all my thunder. No.
Apologies.
I think I'd just add to what Ross said. I mean, our focus in that market at the moment is really focused on our existing customers and, you know, focused on the retention there. Particularly, you know, we've still got another AUD 85 billion of fixed rates to roll over the next couple of years. How we approach that and the capability we've got to put offers to customers, and, you know, we're pleased with how we're going there. We're only a little bit of the way through that. I think the other thing with September was, and you guys know this, you'd see it in the investor presentation in particular, some changes that we had to make on high leverage lending around DTI.
We've got that under control now. You'll just see that start to look a bit different into the new year as well.
Thanks. Can I just ask a second question just on costs? You know, you've again called out productivity benefits coming through, but you know, they are slightly below the last couple of years, and maybe that's a rounding error or not, but the cost base has been increasing. Can you just touch on the ability to continue to get productivity savings? Are they getting harder? Do you need to invest more money to get-
To get more out? Just in thinking about the future cost growth.
You know, beyond 2023 would be helpful. Thank you.
Yeah, I think the where we find the cost is different, not whether it's hard or not, but it's always been difficult. Taking cost out of a business is always difficult, and you've got to keep at it all the time. Gary runs a fortnightly Friday afternoon session with the executive on that.
They love it.
They love it.
It's one you'd sell tickets to. Popular. you know, it's around discipline. you know, I talked in my piece, it's just about the cadence and the discipline you have to have in running these and keeping your eye on them and keeping them focused, and that's what it's about. It's different. We're doing a lot of work around our technology and therefore, you know, an end-to-end process. Then you've got to go after the pieces that are no longer required and are stripped out through because of your, the automation that's going in. We're doing a lot of work around that. I think we've still got lots of opportunities in this bank to continue to improve, but it's quite different to what it was for the last two years. We've got-
It's still there.
It's still there.
There's still plenty of opportunities there. You're right that the first phases tends to be, you know, have a more of a tactical element to it. Now, you know, we've got our investment program set up in a very different way with a continuous cadence to that, where you're building multi-year capability. It's pivoted to that more strategic long-term investments where you can start planning and you can see when the productivity is coming out over the next years, through a lens of we're heading towards this target state where there's a lot more digitalization, a lot less manual process, a lot less folks in the back office. We've been doing parts of that all the way through, but it's been pockets. It's now, you know, really got that multi-year cadence to it now that it's.
We still think there's magnitudes.
There's still opportunity.
Out of that, AUD 400 million range.
With that, do you see confidence in being able to run below inflation over the medium term on cost growth?
Define medium term.
Yeah. Define inflation over the medium term, then we're gonna give you guidance, which I'm not going to do. Look, we've got real discipline on this, and we'll keep the discipline in our cost position. Yeah, as I say, we are focused on it very strongly, given the pressures on every business in Australia. It's not just us. Every business has got exactly the same pressures, and we've got to deal with them. I think we're in pretty good shape to do that. It does take relentless focus every fortnight. People don't like it. Everybody tells me how wonderful they are until you then get in and have a jolly good look, and they go, "Whoops, sorry, I didn't see that." You go round and round again. Most businesses don't have that relentless focus.
We're building that cadence.
Andrew.
It's never finished.
Andrew Triggs from J.P. Morgan. Just a question firstly on deposits. The good slide at the back in slide 78 shows the segmentation deposits, and really it looks like while there's been talk about deposit mix changes, the growth in term deposits really looks like it's just funded the growth in the book. There's also good disclosure there with AUD 92 billion of Australian deposits earning below a basis point on the interest rate. So just a couple of questions there. Is that how we should think about that term deposit growth as effectively an alternative to wholesale funding, given it sits on the higher end of the CIB market?
Secondly, that AUD 92 billion, when, Gary, do you think that starts to decline if you do get a sort of genuine deposit mix shift away from really low-cost deposits to more flat rate sensitive deposits?
In terms of the first part, there's some truth in that. Still, the TD rates you're paying for are still well inside wholesale at the moment. There is definite benefits to acquiring these deposits. We maintain a very disciplined approach to these deposit pricing. You don't wanna go too soft, you don't wanna go too hard. You have to get the nuance right and the balance so it's not. There's broader implications to pin your ears back and grow as much TDs and CIB as you can just because it's got a lower rate than wholesale. You'll end up paying for that. It's something that the teams work very closely together to get that balance right about where's the best place for the next dollar.
As we mentioned previously, as Ross mentioned previously, that, you know, we want to continue to grow our deposit franchise. We're looking at that. TDs is part of it. More importantly is our transactional-
Transactional accounts.
Yeah. Our transactional capability. Rachel, Andrew, and David are all enormously focused on that. We've had some pretty good success to date. We see plenty of upside because we're probably underweight in that space. Issuing more product, more focus, more bankers targeting those areas, we feel pretty good that the next couple of years we can continue to grow, you know, what are the highest quality deposits.
It's also why the merchant space is quite important to us, particularly in the SME. It's the bundling. Why we're putting the effort into our merchant piece, 'cause you put together a merchant capability with a transaction account, it's good business. I think we haven't focused well enough on that over the last probably decade. Now we're well and truly into it. It starts with the micro end of it, right the way through. Right across the board, doesn't matter whether it's UBank, we've basically doubled the number of transaction accounts coming through there. Rachel's now got automatic capability of online through the work that Angie and Patrick have been doing on digitization. We're getting that in the business bank as well, the small end.
It's all, kind of, starting to come together, but a much better focus. Andrew's been driving that very hard, that, you know, there's two sides of a balance sheet we look after as a banker, not just one side.
Jarrod, just on the AUD 92 billion, which is the one on the top left here on that slide, isn't it? That the zero, the less than 0.1%. There is a how long it will stay? There is an element of who knows, but there is also a pretty reasonable theory that, a lot of those customers, if you haven't moved yet, you're probably not moving. That, that won't be for the whole balance, but I think there is a real possibility that could be quite sticky now. We've had enough rate increases, and we have seen customers migrate, but there are a number that just aren't rated rate sensitive. With each, increase, we potentially expect to see less from a percentage sense of that cohort move.
Thank you. Just a second, quick second question. The 40 basis point uplift expected from the APRA capital changes 1 January next year. Surprised that it's not a little bit bigger, especially given the institutional book had some commercial property exposures, I think, you know, that were captured under supervisory slotting approach. Can you just generally comment on what the changes have been there and whether what's happening to the mortgage RWAs under that new capital framework?
We are getting benefits, so it's around about what we thought it would be, the upside. Publicly, there was a few rule changes moving around that could have had a quite a sizable impact. There was times we said the benefit would be modest. I think last half I talked about it being a modest upside. Forty basis points maybe is a bit better than modest. We are getting benefit in David's business, absolutely, with credit lines and pre-slotting exposures getting a much better treatment, and that will help institutional business. I think that's maybe the misunderstanding, but it's really institutional end that gets the biggest benefit from these changes.
On mortgages overall, we think it's gonna be pretty neutral for us in terms of our risk-weighted asset density on mortgages. A bit of that is we do have more of the more complex mortgages in Andrew's business. That sort of, you know, works against some of these other benefits that we might see.
We'll go to questions on the phone line.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first phone question comes from Brendan Sproules with Citi. Please go ahead.
Good morning. Just I've got a question on NIMs, particularly the drag on funding costs, which were down five basis points for the half, which is quite different to peers. When I look at your issuance that you've done during the period, which is shown on slide 31, the quantum doesn't actually look that different to peers. In fact, in this period, not surprisingly, you've had more secured as a percentage. Could you maybe help us understand where the drag is coming from, particularly relative to the peer group? I have a second question.
Sure. Of those five basis points, and I talked a little bit about the drivers earlier by where peers are somewhat different to ourselves. We have had a year of pretty high growth. That together with the CLF coming off, and preparing ourselves for the TFF has meant we've had a pretty active year of funding. Of the five basis points decrease, about three basis points, that is short-term funding. A bit of that's rates with bills always coming back up, which is, you know, something that wasn't there previously, which peers would have that dynamic. The second is, and some of it goes back to the point where it's disclosed, I suspect one of the peers has this issue, but it's disclosed somewhere else in the waterfall.
We have been using short-term wholesale funding to increase our liquids book in preparation for the CLF coming off. That has been a major driver of the short-term wholesale funding, which, if you didn't have a large CLF, you wouldn't have that problem. One of the peers does, and I think they just disclosed it in the markets and treasury area. As I said, the other half would be rate-driven. Of the two basis points, I think there's essentially a basis point which relates to New Zealand and pretty similar dynamics, and really only one basis point relating to term issuance. Whilst that's a volume-driven impact and really linked to preparing ourselves for TFF.
The actual quantum of debt, term debt rolling off this period, the price of that term debt and what we had to issue at it, was reasonably benign. It was just the fact we had to go hard in the market this year as we position ourselves well for the TFF maturities next year. We have been carrying a bit of extra volume, and then that goes, that excess, and that flows through into NIM.
Just a follow-up question. When I look forward, and you obviously have to now move your attention away from the CLF to the TFF, given the pricing difference between what you know long-term debt costs you, particularly in offshore markets versus what you have to pay on the term funding facility, is that really gonna hit in FY 2024, just given the timing of when that first tranche is due and then again in FY 2025, and that's where we'll see an acceleration of this component of NIM?
Yeah, that's essentially right. There's quite a delayed impact of this roll-off that, you know, for 2023, it will be pretty minimal. That will start to escalate a bit more in 2024, and I think it's probably by 2025, you get the full run rate of that impact. You know, in my head, I view it that's, you know, over that three-year period, we're talking about a 4-5 basis point headwind, so we're not talking about super massive headwinds. It is broken down that more of that is back-ended than front-loaded.
That's tricky. Thank you.
Thank you. Your next question comes from Brian Johnson with Jefferies. Please go ahead.
Thank you very much for the opportunity to ask some questions, and congratulations on some really great disclosure, which obviously scared the market. Just a few questions, if I may. If we go to slide 25, what we can see is that you've realized AUD 465 million of productivity gains. And I've noticed, thanks, this has been happening for a long time. If it wasn't for those productivity gains, it implies that the cost base would have been up some 7%. How long can we see this bank continue to basically expend that much money?
On that, with the salary increases being AUD 135 million, which itself is a 1.7% increase in the cost base year-over-year, have you actually accrued anything for the pay rises that you're about to put through under what you've actually offered the staff?
Well, first off, Brian, on the 465, I think any business has to go through and work through how does it improve its business and its productivity on an ongoing basis. That's what we've got in the rhythm of doing, of taking costs out as we've invested in the business. I think we've done a reasonably good job on that for quite some years, even before my time, and we've continued on with that. We've got to, as we've signaled today, we've got to keep doing that. We see some pretty good opportunities across the business to get better productivity out of using our digital capability and efficiency that we're investing in the business. I think that is practical. We can keep doing that.
Salaries, yes, we're right in the middle of going out to our own colleagues on a pay deal on an enterprise agreement. There are some things to take in that agreement that we were hoping to achieve, which I think will be beneficial both to colleagues and to the organization over the long term, 'cause that agreement is, as I described it at the FSU, about 30 years old, and it still has some arrangements in it that, you know, way back to when we even had bankers in an airport, which we no longer have, and a few other items like that, including things like leave loadings, which I thought went out some time ago.
We're looking to actually tidy it up and actually put a better structured agreement for our colleagues and for ourselves. Now, there is a cost in that, but you know, we're having to bring on people at higher rates now, so there's no reason why we shouldn't be passing it through to our own existing staff.
You know you'd have got to go after the productivity. Every cost, we're examining very clearly in this bank and looking for ways of changing the shape of the bank. Yeah, we haven't accrued anything going forward. It is just a cost of doing business going forward, the increases we put through.
Ross, the way we should interpret that slide, we've got whatever the opening accrual is for long service, annual leave, everything. Just looking at the other side of it, you can see there's AUD 140 million increase in depreciation and amortization year-over-year. Your capitalization threshold on your software is actually quite low relative to your peers. We keep on seeing the balance rising quite high to your peers. Does this basically absent some kind of restatement at some point in time? Does this just embed a higher starting point of operating cost growth than would otherwise be the case?
Yes, it does. It does. Brian, the only numbers I look at are the real cost of running the business because everybody puts in all these other strange-looking numbers that they justify why their costs were lower than they actually were. You know, I just go to what was the real cost of running the business. You know, we all know that there's a greater cost coming through this year than there was last year that we're gonna have to work our way through. I think, look at the true number at the end number of true costs, including remediation, including EU. That's the number the shareholder pays for, no matter which way you put it.
Brian, the core premise of your question is true. All the banks are in an interesting period where we are having to invest more. You've got to. It would be, I think, a pretty high-risk strategy to not be investing in digitalization, simplifying, investing in data. That's something I think we're just going through a phase, that there's a higher level of investment on that, and that's for the health of the bank and the health of the franchise and the whole industry going forward. On top of that, for us, you know, we've been fortunate. We've seen some pretty solid growth opportunities that we've been or we've made the decision to back those growth opportunities and invested in more bankers in Andrew's business.
On top of that, so that's sort of already inbuilt that you've got some multi-year momentum on costs. We've got the EU with AUSTRAC and now inflation coming through, which is the pay increases. You know, there's just a series of fronts, all for slightly different reasons, but adds up to the current situation. As Ross said, it just means that it's got to be an absolute imperative to go harder on productivity to see how much of these headwinds you can offset. You know, when you're not doing pay increases and then having higher attrition is false economy, as we all know. With long and hard thought and not spending money to get out of the EU, that would be a very short-term decision. We feel like we're making all the right decisions.
That just does mean there's a lot of moving parts in terms of our cost headwind for FY 2023.
Gary, I tell you what, if I was sitting in your seat, mate, I'd be looking at that software capitalization threshold and raising it. Going on to the next one, Gary, absolutely fantastic disclosures, which is awesome. Sharp contrast with some of your peers, it seems to be everything will be all right. If we have a look at all your analysis, it's done on a cash rate peaking at 3.6%. Then when I have a look at the forecast right at the very back, interest rates go back down. The problem is that when I have a look at what financial markets are telling me, they're still telling me the peak interest rate is around 4%. Would 4% materially make everything worse?
Because if you think about it, that would be a higher proportion of the home loan book that face dramatically higher repayments. As things get worse, history tells us that everything actually becomes more correlated. Can you share some insights as to what 4% would mean as opposed to 3.6%?
We use the 3.6 just to line up with our economist view of the terminal rate, and that's where the 3.6 comes from. I totally concede that, you know, who knows where that terminal rate's gonna land between 3.5 and 4. We've been very aware of this fact and, in fact, this question. We have rerun these numbers at 4% for exactly the reasons that you've highlighted, Brian, and it doesn't make much of a difference. There's a bit of, you know, a modest uptick in at-risk customers, but I'd say it's there's no massive cliffs that this falls over or no exponential increase in the at-risk customer cohort.
The 3.6% threshold was a pretty reasonable one, I think, to zero in on the key at-risk areas.
Gary, that observation that everything becomes more correlated than anyone ever expects, is that?
Actually, it will. I don't think 4% is that trigger point.
Okay. Thank you very much.
Thank you. Your next question comes from Richard Wiles with Morgan Stanley. Please go ahead.
Good morning. Just a question on margins. You've said that in the mortgage market, you're not competing as aggressively. There are players who want this more than you do. You've also said that in business lending where you're overweight, you're not seeing the same lending margin pressure as in the consumer book. Given those two sort of favorable factors, can you explain why your
Margin expansion in the last quarter is pretty similar to Westpac and less than ANZ. Shouldn't you actually be getting better margin outcomes given your stance in mortgages and your position in business banking? Well, probably some of that'll be a little bit of timing because it's only been the last two or three months that the mortgage market we've been offering online system. That has very little impact on the book. You're probably talking less than AUD 1 billion out of 300 and something. Probably 1 point would be the major one there. I wouldn't have seen much difference coming through in the timing of that, Richard. Would be the only one I'd think about.
We've probably been doing more funding than they have. That's key to the. The part of this for us is the. They haven't been in the market as much. Our premise would be, Richard, this is somewhat of a timing difference, and 'cause your observations are true. We're trying to be disciplined and less focused at system growth at all cost in housing, which is incredibly intense in the competition and spreads are challenged. Really looking to grow on SME and maybe a bit more in CIB. What's happened this period, it goes to my earlier comments. If you take one of our peers that's overweight New Zealand, that's been quite a good place to be given where interest rates are in New Zealand. There's additional tailwinds for that.
There could be additional problems down the track in New Zealand. It might be timing on that front. That's one reason. They also had more foreign currency deposits than we had, and also they weren't in the funding market as we are, so they didn't get that headwind, but they will have to going forward. Westpac a little bit the same, where, you know, we've been far more active in funding markets. You know, they do have a decent deposit franchise and a larger deposit franchise than ours. They'll probably get some of the benefits earlier. I expect this to be somewhat timing as our business mix together with the discipline does bode well for our margin performance over time. Okay, that's helpful. Thank you. Just one further question. Can you tell.
I know it's sort of early days, but can you tell us what proportion of your maturing fixed rate customers in the mortgage market that you've retained over the last half? Yeah. It is small. I think it's like 15%, you know, AUD 16 billion out of 100-something is sort of what's matured. We hope to get better from this actually, but our current run rate is around about 85% retention. Thank you.
Thank you. Your next question comes from Azib Khan with E&P. Please go ahead.
Thank you very much. First question on margins. Just going back to the very first question from Jarrod. Gary, it sounds like you're suggesting that the NIM increase from the third quarter to the fourth quarter is a better guide to the NIM trajectory into first half 2023 compared with the exit margin. But you've also said on slide 24 that the estimated benefit of cash rate increases from October 2022 is expected to be lower. So is that quarterly NIM expansion from the third quarter to fourth quarter a good guide going into first half 2023? And is the reason why you expect a lower benefit from October 2022 because of greater pass-through through to rate sensitive deposits and the shifting deposit mix?
Yeah, there's a little bit in that question. I would put forward that a quarterly NIM is the best exit NIM. Not that it's not an exit NIM, 'cause how is it defined over what time period? I'll leave that for a moment. The 10 basis point uplift, I do think is the best guide. Then as we head into 2023, there'll be a whole bunch of things occurring in tandem. Yes, for future rate rises, the incremental benefit from future rate rises are starting to come down from that sensitivity of 2%. What is also heading in the positive direction is why we only got the 10 basis points from unhedged in the first half.
It's just timing around when those rate rises occurred, and we get a full half benefit for that as we go through the full half, first half of next year. That's an additional tailwind plus the additional ten basis points on the replicating portfolio. That's where I think when you add all that up, we're exiting the year with strong upward trajectory on NIM, and with some other benefits to play out. Another reason why I think it's not unreasonable to think that the first half will be the best half for the sector is a lot of the negativity takes, and a lot of the headwinds will take a little while to click in and may well be second half or even FY 2024 issues.
Whether that be some of the earlier questions on really aggressive deposit pricing coming through, further migration of deposit pricing, continued cumulative impact of home lending, margin decline. All that will take a little while. You know, there'll be some of that in the first half. It'll take a little while. I think that will be a much bigger factor in the back end of 2023, when the tailwind from higher interest rates is moderating and these other factors are starting to increase. That would be my sort of hypothesis on how it could play out.
Thanks, Gary. Just another question on margins. The NIM waterfall shows a 7 basis points drag from lending margins. Can you please tell us how much of that 7 basis points is due to rate lag and how much is due to front to back book?
There is a little bit in there on rate lag. I'd say it's sort of just a bit of reality that there's always gonna be some in these declines, so I don't tend to over-index calling them out. It probably in the order of three basis points relates to rate lag.
The remainder would all be Australian mortgage front to back book?
Yes, and New Zealand as well. Australia and New Zealand flowing through that as well.
I think previously Australian mortgage front to back book was running at about three basis points per half, at least in the first half. That's been largely unchanged, that headwind.
The data I see is definitely increasing. You're somewhat right, it ends up being accumulative, but it's definitely increasing in the last half.
Okay, thank you.
Thank you. There are no further questions at this time. I'll now hand back to Ross McEwan for closing remarks.
Thanks very much for joining us. Nice to have people physically here today. Long may it continue. Yeah, thanks for joining Gary and I. Look, good solid result here today and a nice clean one as well, which we're aiming to continue to give to you. The business is performing well and we're making decisions about where we put our funding to maximize returns but also look after our customers. Costs are an issue for every business in Australia and we are very focused on making sure that we get the productivity out of this business as we invest very well in it. But again, thanks very much for joining us. As I say, nice to see you physically today. Thank you, Sally, for organizing.