Thank you for standing by, and welcome to the National Australia Bank First Half 2025 Results Presentation. Thank you, please go ahead.
Thank you, Operator. Good morning, everyone. Thank you for joining us today for NAB's Half-Year 2025 Results. I'm Sally Mihell, and I'm the Head of Investor Relations. I would like to acknowledge the traditional owners of the land I'm joining you from, the Wurundjeri People of the Kulin Nation. I'd like to pay respect to their elders past and present, and to the elders of the traditional lands in which you are also joining from.
Presenting today will be Andrew Irvine, our Group CEO, and Shaun Dooley, our Group CFO. We're also joined in the room by members of NAB's executive team. Andrew will present an update on the business and his strategic priorities. Shaun will provide details of the financial performance this half. Following the presentations, there'll be an opportunity for analysts and investors to ask questions. I'll now hand to Andrew.
Thank you, Sally, and welcome to our Half-Year 2025 Results. We are managing our business well in continued challenging operating conditions, delivering higher cash earnings and return on equity. NAB's balance sheet settings remain strong, enabling us to support our customers through the cycle. This includes helping our customers who have opportunities to grow and those who are finding the conditions tougher. Execution of our refresh strategy is underway.
This is focused on driving stronger customer advocacy, supported by simplification of policies and processes, and investment in modernizing our technology. Six months in, I am pleased to say there are some promising early signs. We continue to make deliberate choices on where to invest and grow to drive sustainable long-term returns. We have three clear priorities. These are to grow our core business banking franchise, to drive our performance in deposits, and to improve in proprietary home lending.
We have also reached an important milestone with the completion of our required activities under the Enforceable Undertaking we agreed with AUSTRAC three years ago. The significant work we are doing across our organization to uplift the financial crime systems and controls will continue as we adapt to a constantly evolving landscape. Recent changes to U.S. trade policy have led to significant market volatility and an uncertain outlook for global growth.
Australia remains well positioned in this environment relative to other global economies. Inflation is easing, and we have a resilient labor market. This provides capacity for further rate cuts to help offset potential global headwinds on the domestic economy. Cash earnings increased 0.8% over the half. This was mainly driven by an improvement in underlying profit, which benefited from a strong performance in markets and treasury and disciplined cost management.
Revenue growth, excluding markets and treasury, was down slightly, reflecting what remains a competitive environment across our core markets. We continue to see the impacts of asset quality cycle play out. While we expect economic conditions to improve in the second half, this remains a difficult environment for some customers, with high interest rates and elevated costs providing challenges for both businesses and households. Our bankers, as always, are there to support them.
Shaun will talk more about the drivers of our financial performance shortly. Our cash return on equity of 11.7% is 10 basis points higher than FY2024. This is an attractive return. We continue to benefit from our skew to higher returning business banking segments and ongoing cost and capital management discipline. We have declared an interim dividend of AUD 0.85.
This represents 72.7% of cash earnings for the half, which is in line with our target payout ratio policy of 65%-75% of cash earnings. The delivery of sustainable returns over four years has been achieved while maintaining prudent balance sheet settings. Following APRA's decision to phase out additional Tier 1 securities, we have increased our common equity Tier 1 ratio target by 25 basis points to be greater than 11.25%.
Our common equity Tier 1 ratio of 12.01% is comfortably above this new revised target. This strong capital position means we can fund profitable balance sheet growth and support our customers who want to grow or who need some extra support. There is no change to our approach to capital management, and we retain a bias to reduce share count over time to drive returns.
Since August 2021, we have completed AUD 8 billion of buybacks, which has added around 1% to our first half 2025 ROE. We will also neutralize the DRP for our interim dividend. Our total provisioning remains strong at 1.67% of credit risk-weighted assets, including collective provision coverage of 1.42%. Both the liquidity coverage ratio and the net stable funding ratio are well above minimum requirements. I'm pleased that a continuing focus on growing deposits has resulted in the share of lending funded by customer deposits increasing to 84%.
This is a meaningful improvement from 70% in 2019. Three years ago, we entered into an enforceable undertaking with AUSTRAC, which required us to implement a comprehensive plan for the improvement of our financial crime systems, processes, and controls.
I'm pleased to report we have completed delivery of all the required activities, and the external auditor's final report has now been provided to AUSTRAC for its consideration. Defending against frauds and scams remains a key priority for us, and we are committed to working with others across government, corporates, and communities to help keep our customers safe.
We are particularly focused on doing what we can to help prevent scams through our investment in initiatives such as real-time payment alerts. These alerts have resulted in customers stopping more than AUD 195 million in payments being made to potential scammers in the past six months alone. At the end of last year, I spoke to you about our refresh strategy and our ambition to be a more customer-centric, simpler, and faster organization. This slide outlines our strategy.
Every day, we have bankers who delight our customers, but we need to do this more consistently across our entire bank to drive improved customer advocacy. The successful execution of our strategy will deliver better experiences for customers and colleagues, which will in turn drive sustainable revenue growth and strong returns for shareholders over time.
Our focus on customer advocacy is anchored in a belief that this will drive deeper customer relationships, together with improved retention and referrals. All of these will in turn lead to higher sustainable returns over time. To deliver on this ambition, there are three key actions to which we are dedicating significant effort. Firstly, we have identified 20 must-win battles that represent the experiences and interactions which are most important to our customers.
This includes customers doing their day-to-day banking, together with interactions at moments that matter most to them, such as applying for a business loan. We are standing up teams specifically focused on driving much better performance for our customers in these critical interactions. Secondly, we need a more systematic approach to listening, to learning, and to acting on customer feedback. We are rolling out consistent feedback processes across all our customer-facing teams.
This includes our contact centers, branches, business relationship managers, and our digital teams. Finally, we will track our performance across these interactions using more granular customer experience metrics to drive accountability and alignment across our organization. On this page, we have summarized the early results from the rollout of our strategy in our business contact center, which started in November.
New frontline disciplines have been embedded to more consistently capture customer feedback and to identify actions which can be taken. This will include issues which can be resolved within the contact center team and issues which need to be escalated to other teams, such as product or technology, to resolve. To date, over 100 customer experiences have been improved by the business contact center team.
Some of these will be small, but the combined impact of improvements for both our customers and for our colleagues is significant. We can see this in the customer interaction MPS and the colleague engagement scores for this team. While we clearly have work to do, over time, we expect the rollout of our customer advocacy strategy to drive improvements in our strategic MPS scores. We now sit at number two in mass consumer and business MPS.
However, our performance in high net worth and mass affluent has fallen this half. This is disappointing, and we have looked closely at the feedback and the drivers. One of the issues raised has been the realignment of a cohort of customers recently undertaken as part of the build-out of our premier banking strategy. We know this was disruptive for some customers as we worked to get the right customer experience and the right proposition for each segment.
On a more positive note, BNZ is ranked first for consumer NPS across the five major banks in New Zealand. The improvements in customer experience are also reflected in BNZ's recent above-system growth in both household deposits and home lending. This is a great performance by Dan and his team. Having engaged colleagues who are customer-obsessed will play a key role in achieving our strategy.
Our colleague engagement score remains top quartile, with a score of 78 in our most recent survey. An improvement of colleague experiences will be supported by a focus on simplifying tools and processes and the ongoing investment in modernizing our technology. The use of AI and GenAI tools, such as call analytics and a knowledge management interface, are examples of how new technology is enabling our colleagues to be better for customers.
We have said for some time now that NAB's strategy is underpinned by deliberate choices on where we invest and grow. We have three key strategic priorities which will help drive stronger, sustainable returns. The first is to drive continued growth in our market-leading business banking franchise. SME banking has attracted increased competition, which is not surprising given the opportunity for higher returns.
NAB competes in this market from a position of strength, with the benefit of scale and expertise across our franchise. We remain focused on executing our long-term strategy to win in this market while managing margins and returns. The second is to continue to drive our performance in deposits, which has been a historical weakness for us.
Our above-system growth this half in both household and business deposits has been supported by consistent management focus and investment in recent years, but there is still more we can do. Third is to improve our performance in proprietary home lending. Home lending is an important product for NAB and for our customers. In recent years, we've been too reliant on brokers to grow. Over the past 12 months, we have implemented a number of initiatives to improve the share of lending through our proprietary channels, with early signs of success.
I will now spend a bit more time outlining these three priorities in more detail. As discussed, our first key priority is driving growth in business banking. We are the largest business lender in Australia. We have a 21.2% share of total business lending and a 27.8% share of lending to small and medium-sized businesses. Importantly, we have increased our share of SME lending this half, driven by growth in our core medium franchise.
Total business credit at a system level has been strong in the first half of 2025. This has been driven by lending to larger businesses where returns tend to reflect the competitive nature of these transactions. Our below-system growth this period in total business lending reflects the disciplined growth strategy in our corporate and institutional banking business. CNIB remains focused on long-term relationships with target sector clients to deliver attractive and sustainable returns.
SME lending growth has been more subdued this half, including a decline in agri lending as a strong cropping season supported higher-than-usual paydowns. Agri lending has improved in April, and we expect it will continue to recover in the second half, consistent with usual seasonal trends. SME banking is at the heart of NAB and has been for many years.
We have supported our SME customers through many cycles. To do this, we take a consistent, long-term approach to investing in and managing our business. It starts with having strong, long-term relationships, proprietary bankers who are available when and where our customers need them, who understand their customers and their industries deeply. For our bankers to be great at their jobs, we need them to have the right tools and capabilities. Managing our business for the long term also requires deep SME credit expertise and strong balance sheet settings.
Having the confidence, the skills, and the settings to support a customer in tough times is when relationships really count. This approach has delivered a compelling franchise with attractive returns. BNPP is a significant scale business. We bank one in four of the SME market and one in three of the agri market. It is a relationship business which skews heavily to proprietary distribution with declining banker turnover. Our relationships are deep and enduring.
For our relationship managers' customers, the median tenure is over 10 years, and over 90% of these customers have an active business transaction account with NAB. We are well set for growth. Our multi-year investment program to develop an end-to-end digital business lending platform has passed a key milestone in first half 2025. The major migration of business lending onto the new platform is supporting faster, more seamless lending experiences.
At the same time, our pipeline today is materially higher than this time last year. Our second priority is to continue to improve our performance in deposits. In personal banking, we are investing in frontline capabilities and our premier banking strategy, which is focused on improving relationships with mass affluent customers. We grew our share of household deposits this half and also delivered strong growth in our transaction account openings, with more of these openings now being initiated in our retail branches.
We have achieved strong growth in business deposits this half and now have the highest market share of all peers with a 22% share. Our growth in business deposits is supported by continued investment to improve our transaction banking capability and deliver better experiences for our customers.
This has included investment in innovative real-time payment solutions such as NAB Pay by Bank, which offers customers a fast, simple, and secure way to initiate both one-off and recurring payments directly from customer bank accounts. In business and private banking, we are also building out additional features and enhancements to NAB Portal Pay, which offers a specialist payment solution for the real estate industry.
Our recently announced partnership with MRI Property Tree will make it easier and simpler for property managers to automatically reconcile rental payments. Corporate and institutional banking's investment in payment and treasury solutions is supporting customer growth, including the recent appointment of NAB as one of the banking partners for the New South Wales Government. Our third priority is to improve our performance in proprietary home lending. Our home lending strategy is aligned to our broader focus on delivering improved customer advocacy.
We aim to deliver a seamless customer, banker, and broker experience supported by simplifying our processes and policies and investment in modern technology. I said six months ago I wanted our home lending performance to be closer to system, and I'm pleased to report our momentum in this business has improved, with balances growing 2.3% this half, representing 0.9 times system. Returns in Australian home lending have seen a gradual improvement this half but remain challenged.
We continue to navigate these dynamic market conditions with a disciplined approach to manage returns. This includes a focus on improving the performance of our proprietary distribution. Over the last six months, we've implemented a number of initiatives to achieve this, including uplifting our banker capability through the onboarding of around 150 new home loan bankers. Successful execution of our home loan strategy will require more than just hiring bankers.
We have also improved our operating rhythms and have invested in tools required to support better performance. It's still very much early days, but we've seen a 25% increase in proprietary drawdowns over the last 12 months. The investment in our proprietary channels is also expected to benefit our broader personal banking franchise through the opportunity to deepen customer relationships directly. I will now pass to Shaun, who will take you through the results in more detail.
Thanks, Andrew, and good morning, everyone. If I could direct you to slide 19. Our results are fairly stable this period. On a half-on-half basis, underlying profit rose 1.9%, with revenue up 1.7% and costs 1.4% higher. Markets and treasury income were stronger over the half, but excluding this, revenue fell 1%.
Cash earnings increased just under 1%, with underlying profit growth and lower credit impairment charges partly offset by a higher effective tax rate. Statutory profit was 1.7% lower, with the gap to cash earnings growth mainly reflecting the non-repeat of a gain on the sale of our New Zealand wealth businesses in the second half of 2024. As set out on slide 20, from a divisional perspective, we have again benefited from our skew to high-returning business banking segments.
In this result, Corporate and Institutional Banking is the standout performer with underlying profit growth of approximately 7% half-on-half. This has been led by revenue with strong volume growth and higher markets income. At the same time, ongoing simplification of Corporate and Institutional Banking's business has helped drive expenses lower. Business and Private Banking had a softer performance this period, with underlying profit 1.8% down half-on-half.
The agri impact, which Andrew referred to earlier, has resulted in slower overall volume growth, which was not sufficient to offset a five basis point margin decline. A pickup in business lending growth is expected in the second half of 2025, given that the June quarter is typically our strongest period and our pipeline is well above the prior comparative period. In our personal bank, underlying profit was 2.6% lower half-on-half.
Revenue was slightly weaker, with a decline in margins offsetting improved volume growth. Personal bank continued to demonstrate good cost control with expenses broadly flat as investment in proprietary lenders and frontline bankers were offset by productivity benefits. Underlying profit for New Zealand banking grew 0.5% half-on-half, another solid performance in what has continued to be a challenging economic environment. Turning to revenue set out on slide 21, this rose 1.7% over the half.
The key driver was markets and treasury income of AUD 1 billion this half, and this is a strong performance benefiting from favorable interest rate positioning and a AUD 54 million gain on subordinated loan notes issued by Insignia in 2021 as part of the disposal of our wealth business. Excluding markets and treasury, revenue was 1% lower.
Volumes contributed AUD 67 million, with good growth in business lending primarily relating to corporate and institutional. The decline from margins ex markets and treasury was AUD 117 million, which I'll discuss in more detail shortly. Fees and commissions were AUD 57 million lower, impacted by the sale of our New Zealand wealth businesses, the runoff of our asset servicing business, and higher customer remediation. Excluding these items, underlying fees and commissions reduced AUD 6 million. Moving to net interest margin, which is on slide 22.
Our NIM trends this period are fairly consistent with the considerations we highlighted in our FY24 investor presentation. Net interest margin is flat over the half, and excluding markets and treasury, net interest margin declined three basis points. Lending margin was one basis point lower. In common with the last half, there has been a series of small movements across the portfolio.
Overall, the impact of home lending was neutral this period, with a one basis point decrease from competition in Australia offset by a benefit in New Zealand relating to the impact of lower swap rates on our fixed rate lending. Business lending was a drag of one basis point driven by competitive pressures in business and private bank, which have continued at a fairly similar pace to the recent half years.
While we're seeing more activity from our competitors in the SME space over the past 6 to 12 months, we've been expecting this, and we are managing our margins well in this environment. Funding costs detracted two basis points. One basis point relates to expected higher term funding costs associated with the full period impact of refinancing the term funding facility, which was completed in the third quarter of 2024.
The remaining one basis point reflects higher short-term funding costs, primarily due to an increase in the bill's OIS spread, and we called this out as a potential swing factor for the first half of 2025 at the end of last year. Deposits were two basis points lower. Excluding two basis points of benefit from the deposit replicating portfolio, the underlying decline was four basis points, with fairly even impacts from both mix and costs.
Mix reflects the full period impact of an increased weighting to term deposits in the second half of 2024 and ongoing growth in the proportion of deposits in high interest rate savings. Higher deposit costs relate to both term deposits in New Zealand as customer repricing has lagged the rapid downward moves in swap rates, along with lower US interest rates impacting our foreign currency deposits.
The overall impact across deposits and capital from higher Australian replicating portfolio returns has been four basis points this half, with only a small impact from New Zealand. Approximately two basis points relates to our capital hedge, which is lower than recent half years as the benefit of higher rates in this three-year portfolio has started to fade. The remainder relates to our deposit hedge, which is a five-year portfolio, and hedge volumes were broadly stable over the period.
Our approach to managing these hedges remains unchanged, with a focus on providing earnings stability through the cycle. Looking forward, we've included a broad outline of some key considerations for margin outcomes in the second half of 2025. Further tailwinds from our deposit and capital replicating portfolios in Australia and New Zealand are estimated at approximately three to four basis points based on the 31st of March 2025 swap rates and volumes. While swap rates have been volatile, the long-term nature of these portfolios means any reduction in rates post-March will be felt most in the periods beyond the second half of 2025.
The impact of a 25 basis point RBA cash rate cut on Australian unhedged, low-rate sensitive deposits is estimated at approximately one basis point annualized, and this is consistent with the sensitivity analysis we provided in our FY24 investor presentation.
Bill's OIS spreads have remained fairly volatile since March, and how this plays out over the second half of 2025 will have an impact on funding costs, but it is difficult to predict. However, we have become slightly less sensitive to movements in Bill's OIS as a result of changes in our balance sheet, including the increase in outcall deposits. Every seven basis point move in this spread impacts our NIM by approximately one basis point annualized.
Now moving to operating expenses, which is on slide 23. These grew 1.4% over the first half of 2025. Salary-related cost growth was AUD 64 million, and this mainly reflects the past period impact of pay rises under our Australian Enterprise Agreement from January 2025 and associated costs like super and payroll tax. Volume-related costs rose AUD 24 million.
This includes investments in frontline capability and personal banking to support our mass affluent and proprietary channel strategies, along with additional staffing to assist customers impacted by frauds and scams. Tech and investment spend rose AUD 71 million, and this includes additional licensing and support costs, along with higher cloud usage plus vendor inflation.
The OPEX impact from investment spend was AUD 9 million. Total investment spend was lower over the half due to timing, but this was offset by an increase in the OPEX ratio from 34% to 40% in the first half of 2025, which is in line with our FY25 guidance. Other costs rose AUD 67 million, including the impact of higher financial crime-related costs.
Helping offset these headwinds are productivity savings of AUD 131 million, achieved through continued process improvement and simplification, including operational efficiencies and digitization, as well as synergies associated with Citi and the wind down of our asset servicing business. EU-related costs were also lower in this period, with the team having completed delivery of the required activities, as Andrew noted. Looking across FY25, we continue to expect a slower rate of cost growth compared with FY2024.
Our expectation for investment spend remains approximately AUD 1.8 billion, with an OPEX ratio of approximately 40%. Subject to AUSTRAC's final sign-off and cancellation of the Enforceable Undertaking, we do not expect any further EU costs in the second half of 2025, and we continue to target productivity benefits of greater than AUD 400 million. Now turning to asset quality on slide 24.
The ratio of non-performing loans to gross loans and acceptances continued to increase in the first half of 2025, up 10 basis points, albeit at a slower pace than the second half of 2024. The increase this period is mainly driven by business and private bank business lending, while Australian home lending arrears trends appear to be stabilizing.
While the total non-performing loan ratio remains dominated by default but not impaired exposures, we have seen a further increase in impaired assets this period and also higher watch lines, both driven by business lending across corporate and institutional and business and private bank. Credit impairment charges reduced over the half to AUD 348 million, representing 9 basis points of gross loans and acceptances. The individually assessed provision charge of AUD 390 million this period mainly relates to Australian business lending and unsecured retail.
The reduction in charge compared with the second half of 2024 reflects a lower level of charges in business and private banking, partly offset by the impairment of a small number of customers in corporate and institutional. Underlying collective charges of AUD 152 million reflect asset quality deterioration and volume growth. There has also been a net release of AUD 194 million from forward-looking collective provisions as anticipated asset quality deterioration has transitioned from the forward outlook to the current period.
This includes a partial release of the New Zealand agri forward-looking adjustment as conditions have improved in this sector. Turning to the key trends we are seeing in business and private banking asset quality, which are set out on slide 25. As we move through the economic cycle, our book continues to perform as we expected.
NAB's approach over a long period has been to work with our customers through difficulties. While this can take time, our experience is this achieves the best overall result for our customers and our shareholders. In the past six months, and not unexpectedly, the non-performing loan ratio for Business and Private Bank's business lending portfolio has been increasing.
In the first half of 2025, it rose 38 basis points, a similar pace to the second half of 2024. However, consistent with the group ratio, this remains dominated by default but not impaired exposures, where we do not expect to incur actual losses. As can be seen from the bottom chart, NPL increases remain broad-based by industries, consistent with general cash flow pressures felt across the economy.
Not unsurprisingly, we're experiencing the seasoning impact of lending originated in FY22 and FY23, which were relatively strong growth periods for BNPB. These vintages have seen a more pronounced impact from the sudden and rapid increase in interest rates, which occurred in FY23 and FY24, limiting the ability of some customers to build buffers for resilience. We're also seeing the results of a more challenging economic environment in Victoria on customer exposures in this state.
While business lending asset quality outcomes may soften further in the near term, we are well prepared for this situation. Our book is performing within our expectations and remains well diversified and highly secured with prudent provisioning. If we go now to provisions on slide 26, total provisions have increased modestly over the half and represent 1.7 times our base case.
General movements within the key components of total provisions are typical of what we would expect at this point in the cycle. Individually assessed provision balances have increased to AUD 920 million, up AUD 164 million from September. Collective provisions reduced slightly to AUD 5.1 billion at March, with AUD 194 million release from forward-looking provisions discussed earlier, partly offset by higher underlying collective provisions reflecting deteriorating asset quality and volume growth.
At AUD 5.1 billion, collective provisions represent 1.42% of credit risk-weighted assets, five basis points lower than September 2024. Forward-looking provisions within our collective provisions have been maintained at prudent levels at this point in the cycle, including a 42.5% weighting to the downside economic scenario given heightened global trade uncertainties. Now turning to capital on slide 27. Our group CET1 ratio stands at 12.01%, down 34 basis points from September. Our level one ratio is 11.84%.
Cash earnings added 86 basis points this half, partly offset by 63 basis points for payment of the FY2024 final dividend. Risk-weighted asset moves reduced the CET1 ratio by 30 basis points, mainly reflecting business lending volume growth, a capital floor adjustment, and the annual refresh of operational risk RWAs. Our credit risk-weighted asset growth in the first quarter of 2025 was amplified by the impact of FX moves on short-dated derivative positions, but this is unwound in the second quarter of 2025, as expected.
During the half, we completed our on-market share buyback with AUD 600 million bought back, reducing the CET1 ratio by 15 basis points. Other was a 12 basis point negative impact. This comprises a number of items, including FX impacts and non-cash expenses, which can be volatile from period to period.
Adjusting for the sale of MLC Life, pro forma CET1 ratio is 12.13% or 11.92% at level one. This is a strong capital position and comfortably above our revised capital target of greater than 11.25%, which Andrew has discussed. Liquidity and funding are set out on slide 28, and these have also remained strong during this period. Quarterly average liquidity coverage ratio is two percentage points higher over the half at 139% and well above the 100% minimum requirement.
Given the structure of our balance sheet, we continue to manage LCR prudently around liquidity and funding events, including current elevated levels of global instability. Consistent with the LCR outcome, our net stable funding ratio increased 2% to 119%. We issued AUD 20 billion of term wholesale funding during the first half of 2025, and this has supported repayment of our maturities along with continued balance sheet growth. We continue to expect issuance across FY20-FY25 to be at broadly similar levels to recent years. I'll now hand back to Andrew.
Thank you, Shaun. Okay, turning to the Australian economy, recent global trade tensions and policy uncertainty have caused significant market volatility and are expected to slow global growth. While the direct impact of new US tariffs on Australia is limited, we do expect the key risk to Australia will be through indirect impacts such as business and consumer sentiment.
However, Australia and NAB enter this uncertain period in good shape. Economic growth improved in the second half of 2024, driven by a rebound in household consumption. Easing inflation, tax cuts, and declines in the cash rate are expected to support growth in household incomes over the balance of 2025.
A low unemployment rate and inflation within the RBA's target band of 2-3% provides further scope for the RBA to ease rates more quickly if required. This gives me confidence that Australia can successfully navigate these global challenges. Looking ahead, we will maintain a focus on improved customer advocacy to deliver better and more consistent customer and colleague experiences.
In the second half, we will roll out new frontline disciplines, building on the initial success we've seen in our business contact center teams. This will also support our three business priorities of driving momentum in business banking and growing our deposits and proprietary home lending. As I've noted, our environment remains challenging, and there is significant uncertainty in the global economic outlook. For these reasons, retaining prudent balance sheet settings remains a priority as it allows us to continue to grow and to support our customers.
There is no change to our disciplined approach to managing costs. Our focus on productivity is important to provide headroom for the investment required to support the execution of our strategy, including the ongoing modernization of our tech platforms. This includes the build of our modern unsecured lending platform for the Citi consumer business. In March of this year, we successfully migrated our first Citi white label customer onto the platform.
Building out this platform functionality to support the migration of the remaining Citi customers is a key priority in the second half. This is currently on track to be completed by December. Talent is an important foundation in every business, and I'm very proud of the talent we have across our top 100 leaders and indeed right across our bank. In March, I announced the appointment of Andrew Orbach to lead our Business and Private Bank.
Andrew is an experienced business and wealth executive, and I'm looking forward to him joining us in June. Our search for a new Chief Financial Officer is progressing well with both strong internal and external candidates, and we look forward to sharing the outcome of that process with you in due course. I am confident in the outlook for NAB. We have a strong balance sheet, the right business mix, and the right priorities to support delivery of strong, sustainable returns over time. Thank you again for joining today, and I'll now hand back to Sally for Q&A.
Thank you, Andrew. We'll now take questions from analysts and investors. When it's your turn, the operator will introduce you. Please limit yourselves to no more than two questions to give others an opportunity. Please go ahead, operator.
Thank you. Your first question comes from Victor German from Macquarie. Please go ahead.
Thank you. Two questions, if I may. I think first, given that I was so critical about this issue for some time and raised this on previous calls, I think it would be only fair for me to acknowledge that for the first time since I think 2018, you achieved growth in your proprietary channel. Congratulations on that. Are you able to maybe share with us some of the initiatives that worked for you and if you think you can sustain that improved momentum and trend from here? That is question number one on personal bank.
Secondly, a question on dividend. If I could, Shaun, maybe ask you to just confirm with respect to your capital target, 11.25 effectively implies 11.6-11.7 on balance date, given that you usually would drop 30-40 basis points when you pay the dividend.
If you look at your capital surplus, particularly in level one terms, it's not quite as large. In that context, maybe you can comment on the dividend. Maybe, Andrew, you want to comment on that in broader terms, given that your capital position on an underlying basis has deteriorated in the half. If you can provide some considerations for potential capital tailwinds that we may not be seeing at the moment, because as we're looking at it now, it looks like it's going to be difficult to sustain that dividend. It would be interesting to hear your considerations and whether the board, if the time comes, would look to cut the dividend or potentially issue shares like it has done historically. Thank you.
Yeah, thanks, Victor. Look, I'll take the home loan question and maybe provide a top-line comment on the dividend and then hand it over to Shaun. On home lending, we're pleased with our progress, but I would say it's early days. There's a lot of interventions that we've done in both our personal bank and our business and private bank to be better. Things like we've actually created a specialist team focused on proprietary home lending, whereas in the past, that team was embedded in our branch network.
It's giving distinct and clear leadership for those bankers. I think we've lifted our ambition and aspiration in terms of the quality of bankers that we want to hire onto our platform. We've worked on our operating rhythms. We've worked on our processes and policies. Look, we're really leaning in.
I'm confident that you're going to see us continue to do what we said we would do here over the coming months and years. Hopefully, we'll be able to look back at this and see a really significantly improved mix of origination going forward. We want our proprietary originations to be as high as they possibly can be because it also aligns very strongly with our customer ambition.
When we have direct relationships with our customers, we can look after them better than when we are intermediated with a broker. You're going to see us continue to focus on this space very, very heavily. It's why it's one of our three key business priorities. If I turn to the dividend, and Shaun, I'll hand over to you in a moment. Look, we're very comfortable with the dividend. It's well within our target payout ratio.
We see opportunities in the business to continue to grow revenue and sustain that dividend as we go forward. Ultimately, what we pay out is a matter for the board, but we're comfortable with where we're at there and how we're tracking. Maybe, Shaun, you could answer anything more detailed for Victor.
Yeah, thanks, Victor. Firstly, I'd say the board sets the dividend policy, and they set the dividend. We certainly think about, as an organization, the dividend as being a sustainable dividend through the cycle. Clearly, what we've tried to do with the capital target is to simplify the way that we talk about our capital management. We've moved away from a range to having a sort of target above 11.25%.
I think the way that you describe those numbers is probably the right way to sort of think about the volatility in that capital ratio, taking into account the build-up of profit before we pay the dividend out and then the timing of the dividend. I think that makes sense. We aim to really look at it through the cycle. There will be periods when we expect higher capital growth, sorry, higher asset growth to appear.
Certainly, the primary focus of our capital is to be able to support our customers and to enable us to support growth in our client base. As we have also demonstrated over time, we are also very disciplined around our capital management, and we have had a strategy over time to reduce the share count and really drive higher earnings per share. I think that is playing out.
As Andrew said, we're well within our range, 65-75% payout ratio. We've paid out 72.7%. That's down on the payout ratio in the prior half. I think that's, again, a proof point of good capital management.
Anything inorganic that you can maybe allude to that potentially may support the capital position in the next couple of periods in terms of model optimizations and things like that?
We'll continue to always look at the optimization of our risk-weighted assets. We continue to refine our data. We continue to look at our methodology to ensure that our models reflect what's going on in our client base and what we're seeing. We'll have some periods where you'll see those moves come through. What I'd say in the last half is it's been pretty consistent with a number of halves over time. Certainly, in the second quarter of 2024, we saw a much larger influence of those factors in our capital ratio. That was really driven by, I think, three significant things.
I think they'll just be consistent going forward, but there's still more to come.
Thank you.
Thanks, Victor.
Thank you. Your next question comes from Jonathan Mott from Barrenjoey. Please go ahead.
Thank you. A question, if I could. It's quite a long line to the presentation. If you can click to slide 91, which just goes to the Australian Business and Private Bank Asset Quality. If you look at the top right quarter here, and you talked about this a bit earlier on, you can see a pickup in the non-housing, non-performing exposures up to AUD 4.8 billion, which is about now hit 3% of the non-housing book.
If you then flick a couple of pages forward when you go through the sector exposures, it looks very broad-based. Nearly every sector is seeing some deterioration in asset quality in this book. The question I've got is, the expense has gone up, but why are you seeing this when your peers do not appear to be seeing the same level of deterioration in this book? I have a follow-up question too.
Maybe I will just go at the top with our approach to dealing with our customers through the cycle is that when they are having trouble, we stand by them. We have done that throughout our time at NAB. It is something we are very proud of. We take a going concern approach with these customers, and we work with them rather than seeking to have them refinance out.
To give you a specific example, when we look at our watch loans and non-performing loans, we have a history of repatriating 70% of those customers back to the business. One of the reasons we're such a strong relationship bank is that when we do that, it's probably one of the defining characteristics for business owners when they think about their relationship with us.
We stand by our customers, and we're confident that they will get through this, and we'll get through this with them together. We will not incur losses in this book, consistent with prior performance where we've repatriated 70%. That's just how we do things in our bank. I hear that from customers all the time when I talk to them. That's our approach. Maybe, Shaun, if you wanted to.
Yeah. Thanks, John. Look, what I would say is that the trends in asset quality are behaving as we expect them to behave. They're in the sort of range of long-run loss rates. Clearly, we're coming off lows sort of post-COVID, and they're moving up. I think what you've seen is a pretty steady rate of deterioration or increase in non-performing loans in the second half of 2024 into 2025.
As I said in my earlier comments, we expect softer conditions to continue. I think that's to be expected given where we've come from, of one, a very low base, and two, I think some of the challenging economic conditions that we've had. To reiterate the point, it's behaving as we expect it to behave.
Yeah. Thank you. Just a second question. Business credit growth has always been very strong, running 7-8%. As you alluded to, and if you go on the upper stats, there's been a big slowdown in small and medium-sized credit growth and a sizable pickup in large credit. I think SME is running 2% half on half. You talked about a stronger pipeline, and I know we've just got through a federal election, and hopefully, that gives a bit of certainty. Is sort of 4% growth in business and private bank or business bank in this segment, the SME side of it, around what they're expecting, or do you think that will pick up from these levels?
Yeah, thanks, John. I'll take that one. Our sense is it will pick up in the second half in SME. One driver is agri, which I alluded to. Agri at a system level is down, I think, 3% or 4% in terms of growth as farmers paid down loans due to a very successful harvest. In the past, we've seen them then re-leverage at a later part in the year to get ready for the upcoming season.
We expect our agri book to move back into growth in the back half of this year. As you mentioned and highlight, we have a record pipeline. While it's at a record, we have seen some slowness in terms of how that pipeline has moved through to settlement, which probably makes sense as business owners are just watching and waiting to see how both the domestic election played out as well as how the geopolitical environment globally might play out.
As they get more confidence and conviction, I think we'll start to see that pipeline start to move through to settlement as we have done at the same pace in the past. Our view is that SME will grow a little bit faster in the back half of the year, although it's also likely to be the case that large will continue to outperform on the margin. That's where we're just being judicious on where we play. We're seeing in the large segment pretty significant growth in mining, in energy, and in utilities. Some of that debt is at incredibly low returns, and we've just been thoughtful on where we play and where we don't play.
Thank you.
Thank you. Your next question comes from Andrew Triggs from JPMorgan. Please go ahead.
Thank you. A couple of questions, please. The first one, a lot has been written about SME competition lately. Interested in, Andrew, what you're seeing on the ground in terms of the efforts you're having to make to protect market share. Note that in the NIM slide, the NIM walk, there was a basis point of headwind from business lending combined, but that does include CIB.
That was the first time such a headwind was called out in the NIM walk. Just keen on some of the thoughts there. The second question is just around the margin piece. Deposit mix shifts seem to be slowing. There was a slowing impact on the NIM in the period, and it looks lower than one of your competitors. Can you unpack sort of what you're seeing in terms of the change in the book mix, noting that some of that appeared to be New Zealand rather than Australia?
Yeah, sure, Andrew. I'll talk a little bit about competition, and then Shaun, I'll hand over to you on NIM and the NIM walk. Competition in the business bank in market across the country is high. It's always been pretty high because it's a good market to be in. We have seen, I think it's fair to say, a reemergence of one competitor who's a stronger competitor today than maybe they were a year or two ago. We are out there looking after our customers and playing our own game. It is competitive out there. It's competitive for bankers. It's competitive for customers.
What we do know is that when you have deep long-term relationships with customers and you look after them, they tend not to be in the market looking at alternatives. When these long-term relationships do go to market, it's often because there's been an event of some sort. There's been a service failure. There's been a decline in credit, or maybe there's been a change in banker. They're the types of things that might cause a client to look at potentially moving their banking.
When those things haven't happened, most of these customers are very long-term relationships, as I mentioned, in terms the median client is over a 10-year relationship with us. That's something we're going to continue to foster, and we're going to be a really tough competitor. We don't want to just defend this business. We want to grow it.
Despite all the headlines, our market share in SME is broadly similar to where it was when I came to Australia in September of 2020. We are holding our own. What is really, really encouraging is that we have done well in deposits. We were the third largest deposit gatherer in business banking four years ago, and we are now first. That has been a really significant effort by our teams and something, again, that we are going to continue to do because it drives the quality of the franchise and also helps with NIM in the long term. Maybe, Shaun, I will hand over to you more specifically on the NIM question.
Thanks, Andrew. I will make a couple of comments, but I want to make sure I sort of help answer the question that you have asked. What I would say is that in terms of the NIM overall, it is playing out as we said it would at the investor presentation at the end of FY24. There are no real surprises in what you are seeing in the NIM walk, and each of the movements is relatively small.
Directing specifically to the lending margin, which I think was the main part of your question, we saw a number of sort of component parts of that. Housing was about one basis point drag this half, and I think that reflects the competitive environment that we have seen in business. The business lending margin is broadly consistent with, in terms of the trend, what we have been seeing in more recent halves.
That has come off a little bit, and you made the point on competitors, and you can see our NIM details in the pack. The margin in CIB has been pretty stable this half. In fact, in the prior half, it was a benefit. Overall, I think that explains the moving parts in our NIM. It is only one basis point overall in respect of lending margin.
On deposit mix? Deposit mix. Are you seeing a slowing of the deterioration?
Yeah. What I would say about deposits, overall, deposits were down two basis points across NIM. I will break it into mix and then cost if you want. I guess the main driver of the two basis points was the mix of TDs, which was a pull-through from the prior half of last year. The TD mix has stabilized this half, and that is consistent with our expectations in a declining rate environment.
Yeah.
We are also expecting to see an ongoing mix impact from savings accounts. Growth in household deposits is showing up in our savings accounts. As Andrew said, the real focus on deposits is coming through in these numbers. Certainly, from my perspective, the focus and effort over the last four or five years around deposits is really starting to deliver benefits. We are very, very pleased with that. They are probably the main things on mix that I would say on costs.
Clearly, the main considerations that you should be thinking about is just the impact of rate cuts on our unhedged low-rate deposits. We have provided some sensitivity around that piece. Given the timing of our expectation on those cuts, they are more likely to play out in FY26 than what you would see in the back half of this year. I will just pause at that point.
Yes. Thank you.
Thank you. Your next question comes from Andrew Lyons from Jefferies.
Please go ahead. Thanks for good morning. Just a first question on expenses. You've delivered a good cost performance in the first half and reiterated your four-year cost guidance for 2025, growth being below the 4.5% from FY2024.
Consensus is consistent with that at about 4% for 2025 at the moment, which does imply 3.5% half over half growth in the second half versus the 1.5% you delivered in the first half. Now, just thinking about the moving parts, clearly, investment spend will tick up in the second half. Is it realistic to think half over half growth is going to increase by that much in the second half? Can you maybe just talk to some of the moving parts?
Shaun can talk to the moving parts, but we're not changing our expense guidance. The expense guidance stays. We have a well-performing technology business right now, and we're expecting to spend the investment slate that we've allocated. I think the guidance is the guidance.
Thank you, Andrew. It's Shaun here. Just to extend what Andrew was saying, you shouldn't think about the first half extrapolating into the second half. They're quite different in terms of timing. As I said in my speaking points, you've had the impact of the salary increases, which really happened from the January period.
You're only getting part of that roll-through in the first quarter, and you'll see all of that in the first half. You'll see all of that in the second half. There are timing differences occurring across our spend, which includes our investment spend. As we've called out in our pack, we spent about AUD 780 million in the first half. We continue to target AUD 1.8 billion across the full year. That has impacts on the mix as well. We are not changing our guidance. I guess how you then sort of digest that is up to you, I guess. Happy to try and help.
Yep. No, that is helpful. Thank you. Just a second question related to one of the earlier ones just around the capital position. Risk-weighted optimization has been a bit of a capital tailwind for NAB really over the last decade. Against that, you have noted that your RWAs are now hitting their capital floors.
I would have expected that that means it is going to be pretty difficult to see further optimization sort of supporting capital generation from here. Shaun, it did sound like you think that there is still some opportunity for further optimization despite the fact that you have hit your capital floor. Can you maybe just talk about that just in a little bit more detail, just how we should be thinking about that, please?
Yeah. A couple of points I'd make is the advanced calculation is more sensitive than the standardized calculation, and it's influenced by a couple of things. Certain loan types, such as loans to high-quality unrated corporates, and FIs have a sort of bigger impact on the standardized—sorry, on the advanced calculation than they have on the standardized.
You will see a bit more of movement around that. It remains ongoing work for us to continue to look at the data and refine our data, and that will have impacts on both the advanced calc and also the standardized calc. It is behaving as we'd expect it to behave. I would not necessarily conclude that there's not more optimization. I think there is ongoing optimization. When I talk about optimization, it's making sure we've got our data right, we've got our methodology right, we've got our models right, and that we continue to satisfy the regulatory scrutiny that comes with all of those as well.
Great. Thank you. Appreciate it.
Thanks, Andrew.
Thank you. Your next question comes from John Storey from UBS. Please go ahead.
Morning, guys. I've got two questions just on the business and private bank. The first one is just around the growth in other operating income. You referenced it this morning that there's reasonable momentum in the franchise with regards to clients and deposit growth. Just want to get an understanding of why you aren't seeing a commensurate increase in other operating income.
Did some of our remediation go in there, Shaun?
Yeah. I think if we talk about fees and commissions, a couple of things I'd call out. One, we've seen a bit of a headwind from some of the disposals of our businesses. As you say, customer remediation is coming into that. Some of those disposals, both in terms of the New Zealand wealth business, but also the wind down of the asset servicing business, is coming through. There's probably a lot of small parts in that underlying sort of number, which is only down about AUD 6 million, half on half.
Okay. That's useful. Just on the second question, Andy, more directed at you. I mean, there's obviously been a lot of focus just around business banking and the increased intensity of competition, certainly over the last 12-18 months. Just want to get a sense from your side with the benefit of hindsight. What would you have done differently in your time running business banking, knowing what you know now in terms of how competition has played out?
Look, I think we're continuing to hire good bankers and look after customers. I am happy with where things are in the business bank and the growth we have there. We have strong market positions across a range of sectors, and it is very well diversified regionally and sectorally. That is, I think, pleasing. As I said, the biggest area of management intensity has been on transaction accounts and deposits. We had an underweight position in liabilities and, if anything, an overweight position on assets. We were not funding our loan book in the business bank to the extent we should have been.
That has been a very significant change over the last five years that maybe we do not get sufficient credit for. We were the third biggest deposit gatherer four or five years ago, and now we are the largest. There is still more work to do here, but that is an area of real focus. When you have that day-to-day strength in your franchise, that provides greater opportunities for stickiness and greater opportunities to drive loans. I am really happy.
There is still more to do. We have to continue to make it easier for our bankers so they can have more time with their customers. We want to continue to increase the number of bankers on our platform. One area that I am really happy with is how well we are managing our mix of proprietary versus broker in the business bank.
We could easily have grown much faster in business banking through the broker channel, but that may have caught up with us over time. That is an area we've been really judicious, and I think that will hold us in good stead. We're being really thoughtful. This is a business we know extremely well, and I'm comfortable and confident in the business that it will continue to show well over the months and years to come.
Thank you. Your next question comes from Matt Dunger from Bank of America. Please go ahead.
Yes. Thank you for taking my questions. If I could just ask a first question on the Citi acquisition. Andrew mentioned the platform migration in December. You had some spending below the line in the period, and you've talked previously about AUD 130 million of synergies over three years at the time of the acquisition. How much will Citi contribute to the over AUD 400 million of productivity in FY25? How much in FY26? Any material change to your expectations here?
Yeah. Maybe again, I'll have a crack, and then Shaun, you can sweep up after me if needed. Look, first of all, we're really happy that we migrated our first white-label customer onto our new platform. That gives us confidence that the new platform is working and today is taking transactions for customers.
We have further waves of customers migrating to the NAB platform over the course of the back half of this year. Right now, our aspiration is to be out of the Citi TSA by December. When we did that acquisition, we said that we expected those costs to come down about AUD 125 million, give or take, and we're about three-quarters of the way through that, which is good.
Remember, we've migrated our wealth, mortgage, and deposit customers as well as diners onto NAB platforms. The last one is our unsecured business. There is still more productivity to be had when we come off the TSA. Once we're on NAB platforms, I think there'll be further opportunities to drive productivity as we put our NAB customers onto the same new unsecured platform. Because remember, we'll have two platforms still once we're off the Citi TSA, and we've got to get the NAB clients then onto this platform, and that will drive further synergies and productivity.
I think you've covered it, Andrew. I think you've covered it, Andrew, in terms of that. I wouldn't say anything more.
Thank you very much, Andrew. That was comprehensive. Just on the bad debt side, Shaun talked to the provision buffers being prudent at this point of the cycle. You've maintained the scenario weight, but arguably the trade uncertainties deteriorated in this period. Can you just talk us through how you thought about that scenario weight and why no change?
Yeah. Again, Shaun, hand it to you in a moment. I think the point you allude to was the trade uncertainty. You do not have to go back five or six weeks to remember the world was a scary place. I was getting up every morning rushing to my phone to see what happened overnight. We are still not through that, and that has not fully played out. We just wanted to make sure that our settings were prudent going into the future with that level of uncertainty. That was pretty forefront in our minds.
Yeah. Thanks, Matt, for the question. If we look at the releases that you're referring to, I think there are two components to that. One is the New Zealand one, which is about NZD 30 million, and that relates to our assessment of improved conditions for the agri sector in New Zealand. We released about half of that provision.
We could have potentially built a case to release the whole amount, but given the uncertainty that is playing out, we were prudent in that regard. We've definitely seen conditions improve there where milk prices are already higher and expected to be higher this year than what they were in the prior year. With respect to Australia, we did have a good look at it, actually.
When you think about the timing of the tariff announcements were sort of post the half-year balance date, we did actually have a good look at it and look at the assumptions in our downside scenario. We were pretty comfortable that the downside scenario reflected what we think could play out in that downside if that was to transpire. We've kept our weighting at 42.5%, as I said. I think the other factor to take into account is the outlook for the rate environment in Australia had changed substantially in that sort of second week of April.
Our assessment is that will provide a sort of a counterbalancing buffer to any sort of significant impacts that might occur. Andrew talked earlier about the industries that might be impacted by tariffs. We looked at our exposure to those. It's relatively small in each of those sectors.
Clearly, what we'll continue to watch is the second-order impacts that will occur, and more particularly what it might do for global growth. Every day, there's a new update in terms of what's happening in tariff policy. We'll continue to watch that pretty closely. We're pretty comfortable with where we're at at the moment.
Brilliant. Thank you very much.
Thank you. Your next question comes from Richard Wiles from Morgan Stanley. Please go ahead.
Good morning. I've got a couple of questions. Andrew, you just mentioned that you're pleased with how you're managing the mix of broker versus proprietary in the business bank. I think on slide 15, you revealed that 70% of business lending is through your proprietary channel. How's that changed over time? Has it fallen in recent years?
That's a flow number. Our stock number would be higher than that. This year, it's been relatively stable. We probably could have grown faster in the SME book at a top line if we had done more broker. We like that kind of mix, and we were working to try and keep it stable and pushing into more proprietary sales. I would say that over the last four or five years, we've probably seen a little bit of degradation, if you could call it that, in terms of mix movement to broker. I'm pretty certain that our mix is off-industry settings and that we do significantly more proprietary business in our business than peers. We like that, and we're hoping that that continues.
Okay. My second question just relates to CIB or the institutional bank. Your former CEO, Frank Cicutto, famously turned pretty bearish and pulled back from large corporate lending in 2002. At the time, he was worried about the outlook for the global economy and what that could mean. With your stance in CIB at the moment, is it more a function of your view on sort of margin and returns, or is it driven by risk appetite? Is there the risk that you're pulling back from CIB when you shouldn't be? Does it mean your CIB revenues can be pretty difficult to sustain?
First of all, I see and I'm really happy with our CIB business. It's a significantly changed business from the time that you allude to in the Cicutto days. It's a much more focused business, focused on domestic corporates. Where we do global business, we're really clear on where we play with strong business in sponsors focused on infrastructure, renewables, and digitalization assets.
They' re all areas that we feel have strong long-term prospects. They are sectors that we like and will continue to lean into. We are really happy with it. The growth of sponsor dollars too has, I think, in some ways, changed the supply-demand economics of bank lending into larger businesses. There are opportunities to deploy capital at much more attractive returns than you would have seen 10 or 20 years ago.
You would have never expected an institutional franchise to be delivering the return on equity that we are now delivering. I think we are 200 basis points higher ROE in our institutional franchise than peers. That is something we are proud of. We are going to continue to deploy capital thoughtfully where we think we can get a good return for shareholders with customers who value the relationship with us. I think that the prospects in this business continue to be good, and we like how we're playing in it.
Yeah. The other point I'd make, Richard, is the portfolio is very different now than they were back in that period. Frank is the CEO at the time, but the organization was making, I guess, a view around the outlook for the economy post the September 11 terrorist attacks. That's essentially what was driving it. We had some pretty significant defaults that occurred around that time when you sort of go back in sort of history, and you can point to some of those spikes. We're actually in our long-run loss charts. You can see those. It was a different business. As Andrew said, we're very happy with our portfolio in CIB.
It sounds like from your answers that the sort of discipline around volume growth in CIB more reflects a view on whether you can make a return rather than specific concerns about risks.
Yeah. Correct. There are lots of opportunities where we could have lent money to safe borrowers, but at returns below our cost of capital, and we chose not to.
Yeah. Okay. Thank you.
Thank you. Your next question comes from Ed Henning from CLSA. Please go ahead.
Thank you for taking my questions. Just circling back on a couple of things that we've touched on before. Just on your fee income and note no number of one-offs in a period. If you look at the credit growth, it was really, really strong in a period. Can you just talk about fee income going forward? Is it decoupling from credit growth? How should we think about fee income going forward from here?
Yeah. Okay. I guess if I think about fee income overall, clearly, we're developing more products and services to try and drive fee income higher. If we think about merchant payments and some of the other opportunities, we do see opportunities to continue to probably address the mix of fees. Certainly, as I described earlier, we've seen some run-off in some of our businesses.
There will be a period where we'll stabilize. We're investing in capability around transactional banking and other products and services for our customers, particularly our business customers, which you should see flow through to OOI.
Okay. Going forward, should we think about it more tracking in line with credit growth, or how should we think about the growth?
I think it's hard to think about going forward.
Or the headwinds still to go maybe coming through the book. Maybe that's a better way of asking it.
Yeah. I don't know if I'd have fee income entirely tracking with credit growth. I think they're different drivers. And you'd really need to decompose the various elements of fees and commissions into what was credit-related and what was service and product-related.
Yeah. That's exactly right.
Okay. All right. Second question. Just circling back to the bits on the margin you haven't touched on. Can you just touch if you look at New Zealand, it was up one basis point in the half. I imagine that was just the movement around the fixed rates and the swaps. Can you talk about what you're seeing there currently?
Also, the term funding part of your funding costs you talked about, that was the impact of the TFF. Can you just talk about what you're seeing there in wholesale funding markets at the moment? Do you still see that as a headwind going forward?
Yeah. I might start with the funding costs if I can, and then I'll come back to New Zealand. I guess we've seen term funding spreads were relatively low over the course of the first half. Clearly, we saw some recent increases in those post the announcements around tariffs. It does take a while for changes in spreads to flow through to NIM, given the size of the book. I think you need to take that into account. Certainly, Bill's OIS, we've talked about that. That's expected to be a bit more volatile.
As we said earlier, we're probably less sensitive to Bill's OIS than what we were last year. Nathan gave you guidance last year about six basis points. Bill's OIS would relate to about one basis point annualized in NIM. This year, we're about seven. That would be the comments I'd make on funding costs overall. In terms of New Zealand, I think New Zealand's managing the impact of rate cuts on both sides of the balance sheet.
We've seen the OCR come off, of course. I think the point to make also on New Zealand is the difference in the balance sheet structure in New Zealand relative to Australia. They've got a much greater exposure to swap curves. If you think about their sort of TD book, in New Zealand it is probably larger than what we're seeing in Australia.
A very significant proportion of their home lending book is fixed rates, about 86%. You will see a lag between fixed rate pricing and swap curves, and that will be reflected in NIM. In the first half, it has been a headwind on deposits. In the second half, we expect it to be a tailwind.
Thank you.
Thank you. Your next question comes from Tom Strong from Citi. Please go ahead.
Good morning, and thanks for taking my questions. I just wanted to follow up on some comments around the provisioning. Clearly, we have got some pretty considerable uncertainty post the 31st of March. You talked about how sort of rates might support the economic recovery. I mean, if I look at your economics forecast of a cash rate of 2.85%, it obviously implies quite a significant downturn. Is that the sort of policy support that you're factoring into your provisioning assumptions?
In our provisioning assumptions, we'll look at a range of different scenarios or different elements of both the base case and the downside case. Obviously, the weighting, I described that earlier. We're looking at not only cash rates, but we're looking at GDP growth. We're looking at unemployment. We're looking at commercial real estate prices and house prices and how they all sort of play together.
Yeah. We think the outlook for Australia and New Zealand is reasonably stable. Certainly, as I said earlier, we have to continue to assess what happens globally and the impact that could have on Australia. As Andrew said, Australia's probably better placed than many other countries. We need to see the second-order and third-order impacts. We're comfortable with the assumptions that we've used in our models today, and we're comfortable with the weighting.
Our base case for Australia is that we'll see good growth in the second half of the year. Household balance sheets will recover, as will businesses benefiting from the base rate cut. There is just too much uncertainty in the world for us to change the weightings of our base case assumption with our downside case assumption. It is just prudent for us to retain those settings given we just do not know what's around the corner.
Yeah. I'd also say, Andrew, we've maintained strong provisioning for some time, and it continues to be very strong. If you look at our ratios over time and relative to peers, they're very strong.
It's very clear. Just a second question, if I may, just around invest and spend going to AUD 1.8 billion this year. Just in terms of the buckets, I mean, we look at the customer experience and revenue-focused spend. It's been flat for a few halves now. Are you going to have to lift that given the competitive pressure you're seeing in the business bank? And would that be sort of additive to invest and spend, or would that sort of come at the expense of some of the other buckets within there?
Yeah. Look, I'll take a macro answer on that. That over time, we want to shift more of our expense base to change the bank and grow the bank spend versus run the bank spend. Now, to do that well, we've got to drive productivity in how we run the bank so that we're a more efficient and simpler bank to run every day so that we can drive more of our expenses into things that our customers want and value.
We're also very focused on modernizing the tech underpinnings of our bank. We may be doing that with a little bit less hula-baloo than some of our other competitors. Nevertheless, there's a lot of work going on to change the underlying platforms and modernize this bank. That's something that will continue. The outcomes that we're getting for our spend are also improving.
We've got a very metricated engineering factory where we look at the outcomes of our tech-related squads across all the different businesses that we have. We're really happy with how those teams are performing. There's still more opportunity there. As we continue to adopt AI and GenAI capabilities in those businesses and areas, I'm confident that we're going to deploy more and more capability that our customers will enjoy.
That's great. Thanks very much.
Thank you. Your next question comes from Matthew Wilson from Jarden. Please go ahead.
Good morning, Matthew Wilson. Jarden, thank you for taking my questions. I have two. If we analyse the risk-adjusted returns in the business bank, NAB sat above its peers for decades at about 2.6-2.7%. That's now completely reversed. The CBA is trenching itself at 2.7%. You're at 2.2%. So you're 50 basis points behind them. You responded partly to that in the presentation by admitting you've got a problem with deposits.
How can you close the gap and what really went wrong in the business bank? Secondly, capitalise software balances are up 16% year on year, AUD 3.2 billion. You are 62% or AUD 1.3 billion ahead of your peers. No one could argue that your cost base is probably AUD 250 million understated. Do you think you are being a bit aggressive with capitalisation of software expenses?
All right. I will take the first one. Then, Shaun, you can take the second one. How is that for a trade? We have not been a good deposit-gathering bank over decades. That is something that when Ross and I joined the bank, we wanted to address. It has been a multi-year journey. We are in one heck of a better place today than we were five years ago. I hope that in five years' time, we will be in a heck of a better place than we are today.
If you look at the difference between our ROE and CBA's ROE, I think you could put the entire delta down to deposits. We are extremely focused on being a much better transaction bank for our customers, not only in the business bank, but in our corporate and institutional bank in New Zealand and in our personal bank here in Australia. That has very, very significant management focus and attention.
We still do not have the loan-to-deposit mix of the competitor that you highlight in business banking. That is going to be the driver of why there is an ROE delta that you highlight. We are focused on it. We are doing much better now than we were before. We are going to continue to improve. This is a hard, long-term thing to change.
I was talking about risk-adjusted returns. The reality was NAB was far superior to its peers with the deposit issue aside. Something's changed more closer to where we are today.
I'm not necessarily familiar with the ratio that you talk about from yesteryear. How would you answer that?
I think maybe it's a probably longer discussion. Matt, I'm happy to sort of help you try and understand that in a bit more detail. We'll pick that up later, I think.
Capitalise Software?
Capitalise Software. Pull me up if I'm not answering the question that you've asked properly. I mean, we look at our Capitalise Software balance over time. It sort of reflects the mix of spend that we've got and where we're at in the investment cycle that we have. We're pretty comfortable with our current position. It's something we look at on a regular basis. I think that we're all different in terms of our own policies and our own timing. I think that's really playing out in the numbers.
No worries. Thanks, guys.
Thank you.
Thank you. Your next question comes from Brian Johnson from MST. Please go ahead.
Thank you. Thanks very much. And Shaun, fantastic clarity in your answers. Thanks for that. Two questions. Two really good jobs. Two questions, mate. The first one, perhaps, Andrew, is that if we have a look and I like really miserable blokes who are very, very conservative. If I have a look at your downside scenario back when everything was so glum on the ECL, in FY2020, it was AUD 7.7 billion. September 2024, it was AUD 8.3 billion. It's now AUD 8.9 billion. How can we wrap our head around the underlying factors?
It doesn't seem to have changed. You've had a little bit of growth come through. But how come your adverse scenario, which you've got a 42.5% weighting to, why does it keep on getting worse as your base case scenario gets better?
I think it's probably a function of the growth in the balance sheet as well, right? That's driving it. And that's probably the number one factor, to be honest.
So it's gone from AUD 8.3 billion to AUD 8.9 billion over the last six months. That's quite a bit more than the balance sheet growth.
Yeah. What I'd have to do is backsolve for the calculation on the percentage of that to the balance sheet. Maybe we can again pick that one up separately. Our point on the—
Look, I think it's a fair point. We are probably being prudent and conservative. That is the setting that we like, Brian, given the global uncertainty. It gives us the ability to change over time if we think it is safe and prudent to do so.
I would absolutely commend. I feel more comfortable personally paying a fee for that. The other one, Andrew, is just on slide 66. When we have a look at the, which is the housing slide, when we have a look at the proprietary balance, it has gone from 48% of the book to 47.1%. The actual proprietary book based on the numbers has declined from AUD 169.4 billion to AUD 169 billion. It is down a little. When we have a look at the ROE on this, this is a question I asked last time around. Other things being equal, it looks as though the front book ROE is still below the cost of capital across the sector. How c an you turn this around?
No longer. No longer in aggregate. Our front book housing returns are now at or better than cost of capital, which is good. Although, as you would expect, that skews to proprietary. It is still true that broker-generated front book home loans are challenged.
Andrew, if I kind of summarise where we are, we've got Commonwealth Bank saying we've got to hire in more people. Surprise, surprise, we've got Westpac saying we're going to hire in more people. We've got Westpac saying they're going to hire in more people. I look forward to hearing what Ann Sherry say on this incoming date. There are only so many people out there. Can you just talk to us about how easy it is to actually hire business mortgage bankers in when they're suddenly soon to be a hot commodity?
Yeah. No, it's a really good question. It's going to depend on how each player executes in the marketplace. Some of the bankers, and I've met them that we've been bringing onto our platform in the last six months, are just exceptional. It's really exciting.
We've delivered a 25% increase in drawdowns in a year. That was a metric that we couldn't move for Love Nor Money for the years prior. The job we've got to do now is to replicate that next half and the half after that and the half after that. I think Australian banking over decades outsourced mortgage origination and let a whole bunch of staff go, closed branches across the country, and allowed brokers to come in and do the job for them. I'm not sure it served us well. Under my leadership in both personal banking and business and private banking, we've set out a clear direction to change that. We've started. Now we've just got to keep going.
Andrew, if I could just push my luck with one final one. Just on the Capitalise Software, do you think there's any, because the historic messaging has been we don't need to do a big bang approach on refreshing the core and refreshing the IT. We see that now coming through at ANZ and Westpac. Can we still clarify that that is your thinking? There's no big bang need at some future point?
Our view here is that we're taking a very modular platform-by-platform approach to modernising our tech architecture. We have persistent domains that have persistent squads that work year in and year out to do that. We do not have big splashy projects and big things like that. We just go about our business slowly but surely. It is less risky when you do it in a componentised, modernised way. Patrick and the team are doing an excellent job there. We are really happy with our progress. It is less risky.
Thank you. Well done on the result. Thank you.
Thank you.
Thank you. There are no further questions at this time. I will now hand back for closing remarks.
Thank you, everyone, again for joining. The investor relations team will be available throughout the day if there is anything further we can help with. Thanks.