Thank you for standing by, and welcome to the National Australia Bank 2023 full year results conference call. Please go ahead.
Thank you, operator. Good morning, everyone, and thank you for joining us today for NAB's full year 2023 results. My name is Sally Mihell, and I'm the Head of Investor Relations. Before we start, I'd like to acknowledge the traditional owners of the land I'm calling in 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 Nathan Goonan, our Group CFO. We're also joined in the room by members of NAB's executive team. Ross and Nathan will provide an overview of our performance this half. Ross will also provide some comments on the outlook and our priorities for 2024. Following the presentation, there'll be an opportunity to ask questions.
Please note, you need to be on the phone line to ask a question. I'll now hand to Ross.
Thank you, Sally, and welcome to our full year results. It's nice to have Nathan here for his first set of results as our CFO. We have delivered a strong financial performance this year with positive contributions across each of our businesses. These results reflect the consistent execution of our long-term strategy, together with the benefits of higher interest rates. I've been pleased to see the steady, solid progress of our businesses over a period of years now. We did experience more challenging conditions in the second half that saw our financial results soften. This came as the impact of higher rates and inflation increasingly weighed on households and the broader economy, leading to a slowdown in credit growth and continued strong competition in home lending and in deposits. We expect our operating environment will remain challenging in 2024, reflecting continued slower economic growth and elevated inflation.
We are well prepared. Our balance sheet settings remain prudent, with capital above our target range and strong provisioning. We are seeing the benefits of the deliberate choices we're making about where to invest. In particular, our leading business and private banking division has continued to record its record of strong growth. This is a great business built on long-term relationships with customers, and we're determined to make it even better. In corporate and institutional and home lending, a focus on returns has seen us adopt a disciplined approach to growth. Cost of living pressures are impacting some customers more than others, and the RBA's decision to again increase the official cash rate this week, because of persistent inflation, will increase the pressure on households. Our message is: please call us as soon as you're feeling you're getting into difficulty.
Our focus is on managing NAB for the long term. Consistent, multi-year investment and strategic priorities is delivering better outcomes for our customers and colleagues. This will drive better returns to shareholders over time. We have delivered a strong financial performance over the 2023 financial year compared to 2022. Revenue grew 12.9%, benefiting primarily from higher margins, which peaked in the first half, and volume growth, together with improved markets and treasury income. Total costs were up 9.1% over the year, or 5.6% when you exclude the full 12-month impact of the Citi consumer business and costs related to the federal government's Compensation Scheme of Last Resort. The 5.6% increase mainly reflects higher staff-related costs.
It also reflects investment in technology and compliance, including ongoing investment in our financial crime environment, together with fraud prevention and cybersecurity. Cost headwinds were partially offset by productivity benefits, which were in line with our target this year of AUD 400 million. Underlying earnings increased 16.1%, and cash earnings rose 8% over the year. The final dividend AUD 0.84 brings our total dividend for the year to AUD 1.67. This is a AUD 0.16 increase on 2022 and represents 68% of cash earnings for the year. Over the year, we will return AUD 5.2 billion to our shareholders in dividends. All our businesses contributed to the growth in underlying earnings over the year, and I want to again highlight the strength of our business banking franchise as a key driver of this performance.
Our leading business and private banking division continues to grow and delivered a 21.6% increase in underlying profit. Corporate and institutional achieved a 19.5% increase in underlying profit. These two divisions accounted for almost 85% of the group's total growth and our underlying profit for the year. Personal banking, with increased underlying profit of 3%, and BNZ, up 10.9%, have delivered good results in challenging environments. Underlying profit in the first half benefited from the impact of higher interest rate environment. The decline in earnings in the second half largely reflects a more modest benefit from cash rate increases, together with elevated competition and cost headwinds. This impact was particularly pronounced in personal banking, where sector returns remained challenged by the low margin on home lending.
Nathan will spend some time shortly discussing the key drivers of the group's financial performance. We've delivered another improvement in annual cash ROE to 12.9%. This is the result of our strong financial performance, along with a focus on reducing share count while maintaining strong capital through the cycle. The long-term trend evident on this chart reflects our consistent focus on strategic execution over the past three years.... Prudent balance sheet settings are an important part of our strategy, which is focused on keeping customers and the bank safe through the cycle. Collective provisions to September 30th represent 1.4% of credit risk-weighted assets. This includes AUD 1.4 billion of forward-looking provisions added since September 2019. Both the liquidity coverage ratio and the net stable funding ratio are well above the minimum requirements.
Our capital remains strong, with a pro forma CET1 ratio of 11.94%, above the target range of 11%-11.5%. This includes 28 basis points impact of the remaining AUD 1.2 billion buyback. Our focus on generating organic capital will be important to future support future growth, while providing options for ongoing capital management. A stronger deposit franchise is a core part of our strategy and is an important driver of improving returns across our business. Over the past four years, we've grown our share of both business and our household deposits. This growth has driven our increase in the share of lending funded by customer deposits from 70%-82%. We have continued to invest to uplift our transactional banking capability across our businesses.
In corporate institutional banking, we have increased our lead bank market penetration from transaction banking to 26%. Across both our personal and SME customers, we've seen strong growth in new transaction account openings, an increasing share of these accounts is being opened digitally. You will have seen this slide before, and importantly, it remains unchanged. 3.5 years ago, we announced our refresh group strategy. This is a long-term strategy that is core to the actions we take every day across our business, as we consistently focus on delivering better outcomes for our customers and our colleagues, regardless of the environment. Investing in our colleagues is key to delivering a better customer experience and overall performance. Colleague engagement has improved slightly and is now just above our target of top quartile.
This is particularly pleasing outcome, recognizing the challenges faced by our colleagues as they transition to a new hybrid ways of working, which also deals with more challenging external environment. We are investing to improve the capability of our workforce. The talent we have built in our organizations, we can fill more vacancies from internal appointments, and across our senior management roles, 83% of vacancies in 2023 were filled with internal candidates. That's up from 70% in 2022. Delivering improved customer outcomes is a core pillar of our strategy. Our Net Promoter Scores are number one or two, relative to our major bank peers and our key customer segments. Our Consumer Net Promoter Score has stabilized and started to improve. Our Business Net Promoter Score has improved by 8 points this year to a positive five .
I am pleased with the actions we're taking to address customer feedback, but we are not where we want to be. There is more to do to achieve the scores we aspire to in both consumer and in business. For large Corporate and Institutional Net Promoter Score, we rank number two, based on the recent Peter Lee survey. Pleasingly, corporate institutional continues to rank first in relationship strength across a range of specialist focuses, including transactional banking and debt markets origination. We are the largest lender in Australian businesses, with a market share of 21.7%. This reflects the strength of our two business banking franchises. Our strategy makes clear where and how we will grow in business lending.
Business and Private Banking is the largest lender to the SME businesses in Australia, and it's grown business lending by AUD 33.9 billion or 31% over 3 years. Our focus and our investment is supporting growth at attractive returns, and we see more opportunities ahead, which we'll talk about on the next slide. The strategy for Corporate and Institutional Banking is based on improving returns through the cycle with disciplined balance sheet usage. This is underpinned by deep and long-standing relationships with our clients and targeted growth segments. This strategy has delivered an increase in return on equity of 560 basis points to 15.6% over 3 years. Business and Private Banking is our largest division and is a key differentiator for us at NAB.
Our ambition is to maintain clear market leadership by supporting our bankers, who are the best in the country, with enhanced digital data and analytics capability. This is a relationship-led business with over 6,000 customer-facing roles, over 150 business banking centers, and 450 branches. Our scale means we can offer customers deep sector specialty, including agriculture, where we have over 33% market share. Our high net worth offering helps SME customers build and maintain wealth outside their business by delivering banking, investment, and advice through an integrated approach. Our SME specialization and leadership over many years means we have deep expertise in the way we originate credit and manage risk through the cycle. We continue to see good opportunities to grow at attractive returns. This includes transaction banking and small business lending, where we are underweight...
Together with merchant acquiring and higher net worth segments. To support this, we've invested more than AUD 1.3 billion and added over 600 net customer-facing roles over the past three years. Our investment and focus is delivering better outcomes for shareholders, with 30% growth in total lending and 36% growth in deposits over three years, driving a 38% increase in underlying profit. We continue to navigate a very challenging home lending market. Over the past 15 months, the rapid increase in net interest or interest rates, together with the expiry of a substantial volume of fixed-rate loans, has seen intense competition reflected in pricing. This competition has been a key driver of a 15 basis points decline in our group lending margin this year. Home lending is an important product for NAB and our customers.
Our objective at home lending is to offer customers, bankers, and brokers a strong service proposition while seeking to maintain our long-term returns through a disciplined approach to growth. We grew above system when returns were stronger, and we've slowed our growth when returns were more challenged. Over a two-year timeframe, we've grown in line with the system, excluding the impact of the Citi acquisition. While it's been pleasing to see front book pricing stabilize and improve slightly over recent months, it remains well below historic levels, as you can see in the data published by the Reserve Bank. Further improvement is required for returns to become more attractive. We expect housing credit growth will slow, and refi rates will remain elevated as a substantial portion of fixed-rate loans expire.
We will monitor the changing dynamic, dynamics in this market and maintain our disciplined approach to return balanced returns and volumes. As part of our focus on enhancing the customer, banker, and broker experience, we are investing in our simple and digital home loan proposition. In 2023, we've progressed the rollout of this platform to our business and private bankers and the broker channels. Approximately 50% of all loans submitted via this platform receive same-day unconditional approval. While households overall have been resilient in this more challenging environment, the impact has been uneven, and we are here to support customers who need our help. This includes additional resources in NAB Assist to support a 25% increase in accounts receiving hardship assistance and a 61% increase in calls over 2023.
I also want to provide an update on the actions we've taken to help customers impacted by the huge increases in scams and fraud activity. Defending against criminals remains a key priority for us. This year, we've added a further 70 FTE to our investigations and fraud team, taking the total size of the team now to over 470. We have a significant pipeline of improvements to make our customers safer, and along those already delivered are stopping the use of links in texts and partnering with telcos to limit spoofing scams. Scams and fraud are an epidemic. We're working with others across government, corporates, and community to educate customers and implement tools that can help keep our customers safe. In the current environment, it's important that we manage our business for the long term.
Our investment spend in 2024 is expected to be approximately AUD 1.4 billion. This consistent level of spend on core strategic priorities is supporting safe, long-term growth in our business, together with sustainable cost efficiencies. Maintaining cost discipline is critical in this inflationary environment. In 2024, we are again targeting approximately AUD 400 million of productivity benefits, which will help offset cost headwinds while providing capacity for further investment. I'll now pass over to Nathan, who will take you through the results in more detail.
Thanks, Ross, and good morning, everyone. It's a privilege to be here presenting my first NAB results as CFO. I'll take about 20 minutes and keep this pretty consistent with what you've become used to from NAB in the last few years. Excuse me. When you look at our high-level overview of the financials, as Ross has said, this is a strong set of results year on year, noting the second half is softer relative to a very strong first-half performance. To summarize, underlying profit rose 16.1% over the year, with strong revenue growth outpacing cost increases. Trends in the second half reversed. Slowing growth, the impact of increasing competition, and lower end markets and treasury income impacted revenue, which declined 3.8%. At the same time, cost increased 4.1%, driving a 9.6% decline in half-on-half underlying profit.
The change in cash earnings of 8.8% over the year and down 10% over the half is softer than underlying profit, reflecting a higher credit impairment charge as asset quality has deteriorated off a low base. Statutory profit rose 7.6% over the year and declined 13.1% over the half, with the gap to cash earnings in both periods reflecting volatility in some of our economic hedges and expected increases in acquisition and integration costs, primarily related to the Citi consumer business.... Over the year, the statutory profit has also been impacted by the non-repeat of gain on sale of BNZ Life, which was partially offset by lower customer remediation relating to the discontinued wealth business. Taking a closer look at revenues, in the second half, you can see the impact of lower margins.
Over the half, revenue declined 3.8% or 2.7%, excluding markets and treasury income. Volumes contributed AUD 94 million, which is less than prior periods. This reflects strong growth in average lending balances in business and private banking, offset by lower average volumes in corporate and institutional. In personal bank, volumes were fairly stable, reflecting our disciplined approach to growth in home lending, and it was a similar story in New Zealand, given weaker market conditions there. Margins, ex markets and treasury, have been the main drag on revenue this period, representing a 313 million decline, compared with a very strong first half performance. Fees and commissions dropped AUD 22 million, reflecting a range of factors, including seasonally lower transaction volumes for payments and cards, and higher loyalty costs and card scheme fees.
Markets and treasury income declined AUD 149 million, following a very strong first half performance. The key driver was trading income, reflecting a revision from highly favorable trading conditions in first half 2023. We'll spend a bit of time on this next slide, given the importance of margins. NIM declined 6 basis points, representing the biggest impact on revenue over the half. Markets and treasury was a benefit of 1 basis point, primarily related to economically hedged positions, offset in other operating income. Excluding markets and treasury, NIM fell 7 basis points. A key driver has been lending margin, down 7 basis points, consistent with first half 2023. With again, almost wholly reflects competitive pressures in Australian home lending, with more than half of the impact this period related to discounting in prior periods.
Back book repricing has remained a key driver, and while volumes have continued to moderate from their peaks, they remained elevated for the half. Front book pressure was also a contributor. As Ross has said previously, we made a conscious decision to moderate volume growth in this market, and this, together with some recent improvements in market pricing, has limited the impact on front book margins. If I turn now to deposits, this was a 4 basis points drag on margins for the half. The key impacts relate to term deposits. Term deposit costs are increasing from their lows of September 2022, which has translated into a 3 basis points decline in NIM this half. At the same time, we've seen faster relative growth in term deposits, with mix contributing a further 2 basis points NIM decline.
The benefit of cash rate increases on unhedged at-call deposits has been fairly neutral this period, as higher rates have been passed on to customers. The overall impact across deposits and capital from higher Australian replicating portfolio returns has been approximately 4 basis points this half, with a further 1 basis point relating to New Zealand replicating portfolios. Funding costs were neutral in the half, with higher volumes and spreads for term funding offset by lower short-term funding costs. I am conscious that in the recent past, we've provided quarterly NIMs during a period of rapidly changing cash rates to help give a sense of more recent trends and trajectory. Given the more stable cash rate environment now, we think a focus on half-yearly NIMs is more appropriate to understand underlying trends, particularly given the inherent volatility of NIM movements over shorter periods.
Looking forward, we have included a broad outline of the key trends we see impacting NIM in the first half 2024. Headwinds from the impact of home lending competition are likely to continue, albeit at a slower rate. It's also likely term deposit costs will continue to normalize from September 2022 lows. Deposit mix trends are harder to predict, although we have observed a slowing in mix changes in recent months. However, the NIM impact of mix changes for FY 2023 is still to flow through the averages. Funding costs will include the impact of TFF refinancing, estimated at approximately 1 basis point in the first half, but the overall impact on funding costs on NIM will be very dependent on short-term rates. Against these headwinds, we see the main tailwind as further upside from higher interest rates on our deposit and capital replicating portfolios.
This benefit is estimated at approximately 4 basis points for Australian and New Zealand portfolios in the first half, based on the September 30th swap rates and volumes. Another important area of focus for us is costs. These rose 9.1% over the year or 5.6%, excluding the impact of Citi and the provision for the federal government's Compensation Scheme of Last Resort. There are a number of key contributors to call out here. Firstly, salary related costs increased AUD 359 million this year. A material portion of this relates to the Australian salary increases, including the increase between 3%-5% from January 1st 2023, and AUD 30 million of one-off costs under the Australian Enterprise Agreement. Also included are pay increases in New Zealand, higher superannuation, and higher payroll tax....
Secondly, volume and new business-related costs increased AUD 172 million. This includes the full period impact of FY 2022 hires in business and private bank to support growth. We also put on extra colleagues supporting customers in our call centers and NAB Assist, and incurred additional costs associated with the establishment of new businesses, including our India and Vietnam centers and the Paris office. Thirdly, tech and investment spend increased to AUD 146 million. This reflects additional licensing and support costs, along with higher cloud and mainframe usage, plus technology resilience spend. Investment spend impacting the P&L was lower in FY 2023, given a higher capitalization rate on projects undertaken in the second half. D&A charges rose AUD 88 million, less than we foreshadowed at the end of last year, given mix and timing of deployments.
Other costs increased to AUD 169 million over the period, a material portion of this, which is financial crime-related. Helping offset these headwinds are productivity savings of AUD 398 million as we work to simplify and improve our processes. In addition, remediation costs are lower, reflecting the non-repeat of payroll remediation in FY 2022 and lower customer-related remediation charges. Looking ahead to FY 2024, we expect cost growth will be lower than FY 2023 levels of five point six percent. Growth in salaries is expected to slow, with the non-repeat of the one-off EA payment. Our new enterprise agreement framework means we expect to see more stable salary-related cost impacts in FY 2024.
Costs associated with volumes and new business initiatives are also expected to moderate in FY 2024, including a lower impact from the setup costs mentioned earlier, together with a more stable environment for our customers. As Ross noted earlier, we expect to maintain investment spend at approximately AUD 1.4 billion and deliver productivity savings of approximately AUD 400 million in FY 2024. The next three slides all relate to credit impairment charges, asset quality, and what we're seeing in our lending books. Credit impairment charges of AUD 409 million increased again over the half. This includes underlying charges of AUD 559 million, reflecting asset quality deterioration, volume growth in business and private banking, and higher specific charges, although they remain at low levels.
CICs this half also include a net AUD 150 million release from forward-looking provisions, given asset quality deterioration is now being reflected in underlying charges, and our economic outlook has modestly improved since the first half. The ratio of 90 days past due and gross impaired assets to GLAs increased 9 basis points- 75 basis points, with a fairly broad-based deterioration across the group's mortgage portfolio and the business lending portfolios in B&PB and New Zealand from low levels. The bulk of this uplift relates to arrears, and we are seeing little conversion to impairment, given strong security positions and current asset valuations. The flow of new and impaired assets this half includes a further AUD 73 million of restructured loans relating to customers affected by severe weather events in New Zealand in the first half.
These loans have essentially all returned to performing in recent times, but remain in the restructured category. Excluding these loans, underlying new impaired assets increased only modestly and remain at low levels. Watch loans increased 2 basis points in the period. As the economic environment has become more challenging, there has been an expected deterioration in asset quality in our Australian housing portfolio. That comes as households face higher costs of living and interest costs. But the key message here is that customers are adapting, finding ways to manage their finances, and remain resilient. Average offsets and redraw balances continued to rise and are now 17% higher than March 2022 levels. While there has been some natural erosion in repayment buffers, given the increase in mortgage repayments, on average, customers' repayments remain well covered, with offsets and redraws currently equivalent to almost 38 months of mortgage repayments.
Not unexpectedly, arrears have started increasing from low levels. This is most evident in the 30-day past due ratio, which is up 19 basis points since March. Drivers of the increase are fairly broad-based on, by loan and loan type, and region. We have previously highlighted a portion of the book we thought could be higher risk, relating to loans originated during August 2019- July 2022, when interest rates were very low and serviceability was tested at less than 6%. This represented AUD 145 billion of our total housing GLAs. At this stage, the contribution from this book to the uplift of 30-day arrears appears broadly in line with normal seasoning. Despite higher arrears, we are not seeing this translate into higher impairments, with the ratio of gross impaired assets to GLA remaining low and stable at 6 basis points.
This reflects a strong security position of the book and house price improvements. Average dynamic LVR has reduced over the half to 41%. Negative equity now represents just 0.4% of balances. We do expect arrears to rise further as the economy continues to slow. While the cohort of loans originated during the low interest rate period remain of interest, at this stage, our housing book is showing fairly balanced characteristics. Our expectation is that from here, outcomes will likely be tied to more generally to the economic environment. Unemployment and house prices will be key factors to watch. Similar to the Australian housing story, and not unexpected from where we are in the cycle, we have seen an increase in BNZ business lending arrears in the second half 2023. Key drivers include inflationary pressures and higher interest rates.
The arrears deterioration is broad, is broad-based, although we continue to see higher absolute levels of arrears in sectors with FLAs in place, such as construction, retail trade, tourism, hospitality, and entertainment, and parts of the credit book. Consistent with this, we have seen a small increase with in exposures with probability of default greater than 2%. This is not unexpected and follows several periods of improvements despite strong volume growth. Unsurprisingly, this portfolio also includes some bias to sectors where we have FLAs in place. Similar to our housing book, the higher arrears are not necessarily translating to losses. This reflects the highly secured nature of our book, even after applying material discount to market valuations. Only 6% of loans are unsecured.
Given the more challenging outlook, it's likely we'll see SME arrears increase further, but we are pleased with the position of this book. Most of our customers enter this period in a strong position. Gearing remains low, with loan facility utilization rates below pre-COVID levels, and BNZ deposits are up again in the half and 36% higher than September 2020 levels. While we are pleased with the performance of the portfolio, strong provisions have been a feature of this bank for a while now and continue to be. Collective provisions increased by AUD 158 million in the half to AUD 5.2 billion. CP coverage to credit risk-weighted assets is well above pre-COVID levels at 1.47% and higher over the half.
Provision for total expected credit loss increased to AUD 176 million from March to AUD 5.8 billion. The increase reflects deterioration in asset quality this period, partially offset by modest improvements in the economic outlook. Scenario weightings remain unchanged from March levels. We have increased target sectors FLAs this period by a net AUD 43 million, primarily due to the addition of a New Zealand agri provision, given more challenges in the outlook for that sector. Total sector-specific FLAs stand at AUD 543 million. Another more recent feature of NAB's performance has been our capital position, and we remain in a strong place. Our group CET1 ratio stands at 12.22%, broadly stable with March. Over this period, we've generated organic capital of 29 basis points.
Credit risk weighted asset growth accounted for 4 basis points of capital in the second half, excluding the impact of FX. Volume growth and deterioration in asset quality during the period have been mostly offset by model and methodology impacts. Other was a drag of 21 basis points, comprising of a number of items, including FX impacts and non-cash expenses relating to Citi integration, along with higher deductions for software and capitalized expenses. Some of these items can be volatile period to period. During the period, our on-market share buyback accounted for 7 basis points of CET1, allowing for completion of the buyback. Pro forma CET1 is 11.94%, compared with our target range of 11%-11.5%. Liquidity and funding have also remained strong during this period, which included the first tranche of TFF refinancing.
LCR increased to 100% during the period, while NSFR declined 1%- 116%. Both ratios showed large buffers to the 100% minimum requirements, ensuring we're able to navigate any market volatility. NSFR is expected to normalize to pre-COVID levels over time, including the impact of removing favorable treatment of TFF collateral. Excluding TFF collateral treatment, our NSFR would be approximately 114%. Despite some volatility in funding markets, we issued AUD 17 billion of term wholesale funding during the period or 40 billion over the year. This was broadly consistent with maturities and includes refinancing the first tranche of TFF of AUD 15 billion. Our balance sheet settings mean we are well placed to manage the remaining AUD 18 billion of TFF maturing in FY 2024, while continuing to support the growth in our franchise.
I'll now hand back to Ross.
Thanks very much, Nathan. The ongoing impact of higher rates and inflation on households is reflecting a slower activity level in Australian economy. We expect real GDP growth to slow from 2.7% over 2022 to a below-trend rate of less than 2% over 2023 and 2024. Consistent with the slowdown, both housing and business credit growth are forecast to decline in 2024, and our most recent quarterly business survey to September indicates that while business conditions are robust and above long-term averages, business confidence is relatively soft, particularly in retail. Despite slower growth, these forecasts reflect a view that as the Australian economy will remain resilient, supported by strong population growth and the high likelihood that the cash rate is now at or near peak levels, given some moderation in inflation.
Risks to this view include the impact of elevated geopolitical tensions and the extent to which household spending slows together with the pace in which inflation moderates. We are well-placed to navigate a challenging environment while continuing to grow. For three and a half years, we've been executing a clear and consistent strategy with discipline and focus. This includes making deliberate choices about where we want to invest and grow, and where we may pull back a little to focus on returns. While all of our businesses are performing well, our consistent investment in business and private banking has delivered strong asset growth while maintaining high returns. This is now our largest division by GLAs and is a key driver of our improved return on equity. Supporting our customers and colleagues remains a key priority again in 2024.
For those who need our help, we are ready to help where needed. We have a strong balance sheet to support growth. Our prudent risk settings position us well for any future market volatility. Although our cost base is being challenged by short-term headwinds, we will maintain our disciplined approach to managing our costs with a focus on productivity to provide headroom for investment. We will get right the work that we have agreed with AUSTRAC to keep our bank and customers safe. And finally, we are progressing the integration of the Citibank consumer business to ensure we deliver the benefits of this transaction. I'm confident in the outlook for NAB and the Australian economy. We see good opportunities for growth ahead. Thank you for your time, and I'll hand back to you, Sally, for Q&A.
Thank you, Ross. We'll now pass to the Q&A. Can I remind you to please limit yourselves to no more than two questions? Please go ahead, operator.
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 speakerphone, please pick up the handset to ask your question. Your first question comes from Andrew Triggs from JP Morgan. Please go ahead.
Thank you. Good morning, all. A question firstly on the business banking, please. I wonder if perhaps Nathan, you could unpack the compression you saw in the half between the home loan... the spread compression on the home loan book and what you were seeing on deposit costs.
Yeah. Hi, Andrew. I think the best way to think about the divisional NIMs is probably just to go back to the commentary that we've made on the group NIM, and then your divisional NIM performance is really disproportionate to your exposure to those drivers. So, you know, what we've said and called out there is some compression in home lending on the 7 basis points. We said that was sort of predominantly everything we were seeing in the home lending side, and then we've called out the term deposits. I guess, sort of conspicuous in its absence there, is we haven't called out anything on, on business lending. So to answer that question directly, we haven't really seen any compression at all in the half on business lending NIM.
Yeah, so in terms of deposit costs, you're seeing within the business bank that that must be an area of pressure, given the extent of the NIM decline in the half in the business bank?
Yeah. So and I think when you go back to the, again, back to the sort of top of house here at the group level, we've called out the impact of term deposits. I think when you get into the disclosure there, you'll see that predominantly our increase in term deposits over the period has been in the business bank, so that would see, you know, a lion's share of that impact flowing through into that division.
Thank you, and just on that, a follow-up on that. You've shown good growth over the last, I think it was three years, the number you gave on the business deposit growth. Has that been quality business deposit growth, or it's been more driven at the term deposit end of the market?
Yeah, I think there's probably just three things on deposits, and maybe Ross would like to make a comment as well. I think, you know, the first of all has been, you know, the strategic question of wanting to do more with our customers, in particular in the business bank, where we've had, you know, traditionally a stronger market share on the asset side than we have on the liability side. And, you know, we've been delighted with the performance there to do more with our customers in that part of the franchise, and so we see, you know, that growth being core franchise growth. I think the stats on that are that, you know, about 90% of those customers are customers who have got another product with us.
I think about 85% of them are customers who have got another deposit product with us. So I think on the core strategy of wanting to do more with our customers, we're delighted with that performance. And then you just get to the customer preference piece, which is, you know, I think in that part of the market, we've seen a customer preference which has been more weighted in the recent period towards TDs. And then you've got the NIM impact of that, which we've talked about.
The other strategic issue here, Andrew, is this franchise for probably a, you know, decade or more, has been weak on transaction accounts, savings accounts, and term deposits. Across all of our franchises, that's been a big focus for us for the last three to four years. We're seeing growth across all of these in our personal bank, our business bank, and our very strong focus in our corporate institutional. I'm very pleased with that. That will continue, and we're looking at both sides of the balance sheet now rather than just being an asset accumulator. You've seen that in some of the stats we've given you today, of 70%-82% self-funding, which is huge for this bank. We'll keep that going, and the focus is absolutely there.
Thank you. Your next question comes from Jonathan Mott from Barrenjoey. Please go ahead.
... Thank you. Two questions, if I could. Just following on from the last question, I just want to get a feel again. In the business and private bank, Ross, you talked a lot about, you know, you've improved the quality of your bankers in the franchise. But when we see the margin pressure coming through, a lot of it is on the home loan side. And I'm surprised to hear you comment that it's, that, as you said, it's proportional. Shouldn't we be seeing a better margin performance in the private bank home loans than you are in the retail bank? And, you know, now 64% of all home loan flow going through brokers, even though the majority of that's coming through the private bank. So shouldn't you be doing better in private bank mortgages NIM than was shown today?
I've got a follow-up question, too.
Yeah, look, that is, that is right, and we are doing pretty well across there. The biggest portion of our own proprietary work comes through our business and private bank. That's where the vast majority of it is, and a much bigger skewing in our personal bank towards the broker community. It's not surprising if you flick onto the deposit side of it, though, and the move to term deposit. I don't think it's a surprise that, that business customers are moving more towards term deposit. We're still not back to where we were, Nathan, what? Probably four or five years ago-
Yeah
on the portion of term deposits held. But there has been a bigger move by businesses, and I suspect they're getting the feel that they're getting to, to closer to the top of the cycle on interest rates and, thinking they'll move into term deposits at this point in time. I'd think that's where their, their thinking is. But look, we're, Now, I, I, as Nathan said, across the book, we're seeing the contraction most in home lending, secondly in term deposits and next to nothing going through in our business, lending. It's been very, very happy with that.
Can I ask a follow-up question on cost, and the outlook? You know, Ross, we've been watching you across many banks for many years, and you've always... I won't use the term frugal, but you've always been a very prudent cost manager. And in the last couple of years, we've seen costs, you know, in 2023 and into 2024, the cost base is growing pretty substantially, and, you know, we understand the drivers of why. But if we're in an environment where rates are higher for longer, customers are gonna be doing it tougher, and the revenue environment is gonna be very, very subdued, how much flexibility do you have to really get that cost down? Can you pull back on discretionary costs? Can you really work on that AUD 400 million of productivity?
Does cost focus have to become an even bigger focus in management, just given the revenue environment looks pretty subdued?
You're absolutely right. In a high inflationary environment where income is getting harder to get to improve, costs do need to become a much bigger focus for any bank, not just us. A comment I'd make, though, is we are looking to get... Costs won't come down. In absolute terms, they won't come down. It's the slowing of the growth and costs that we're looking for, because we do want to keep investing in this franchise. Right across the board, we've got some really good opportunities. That's why we're holding our investment spend at AUD 1.4 billion for the 2024 year. But I've got 100 leaders now who are absolutely focused on not spending money on things that aren't gonna get them a return, and that's quite a difference for this bank.
That, it's not a cost program we have. It's we've got 100 of our leaders that we run the bank with, who are focused on running their parts of the business or their enabling unit to actually do a better job, and that's something I think that will be a competitive advantage for this bank. Because otherwise, you run through a cost program per se, all you do is get a downward pressure, and then it bounces back up again because nobody took accountability for it, really, and that's a significant change I'm seeing in our 100 leaders. But it's a major focus for us, but we've got to be a bit careful. We've got an amazingly good franchise here that we want to invest in. In our business bank, there are areas that we're seeing some really good opportunities in.
We've invested heavily in the health sector, for example. We've done a small purchase there. Some really good opportunities to push into that market, across professional services, across a lot of areas, we're seeing really good opportunities. So we're going to balance out cost with long-term growth in the business. And the personal bank, where the pressure is, Rachel and the team have probably done the best job on cost management in a very, very difficult time. But if you have a look at the cost, you know, the revenue decrease in that business, and it will be reflected, I suspect, across every bank in Australia. Don't think anyone's going to defy this logic, that the margin's down on home mortgages, and therefore the revenue's down.
You know, you take 20%-25% of your revenue out, there's an absolute focus on the cost, but the right pieces of cost. Look, you're absolutely right. We've got to focus on cost, but I do want to see that the right parts of our business continue to grow for the long term. Thus, the investment we'll keep making.
Thank you. Your next question comes from-
Mate, just one other comment, if I may. I think we've got to think about this in a slightly longer term than what you may have done in the past, because we've had an interesting year, and I'll call it an interesting year in 2023. I've never seen an environment where you've had effectively 11 interest rate rises in about 11 months, which has given you a lot of revenue for a very short period of time, and then it sort of disappears through competition, and it has in this marketplace. So I think we're looking at it from a look-through perspective of thinking about 2021, 2022, and 2024, and sort of this blip in the middle of it all was 2023.
If you take that sort of thinking, that's the way we're thinking about the bank as we head into 2024. It's nice to have had it, but it disappeared pretty quickly.
... Thank you. Your next question comes from Andrew Lyons from Goldman Sachs. Please go ahead.
Thanks, and good morning. Ross, on Slide 15, when you're on that slide, you'd noted that there had been some improvement in front book pricing, but further improvement was certainly required to sort of continue to see returns improve. I'd just be keen to sort of dig into those comments a little bit and just to hear your thoughts on the extent to which you think the deterioration in returns, which is, you know, close to 100 basis points from peak to trough on that chart, is cyclical versus structural change. And why, you know, why is there the potential for that discount that's currently embedded to continue to improve from here?
Yeah, look, a great one, Andrew, and we think about this pretty much every day. Is this a structural change, or is this sort of a cyclical piece going on? What we're seeing for the first time in Australia, and I don't think Australian market's seen this, pressure on a mortgage book. I don't think we've ever seen it to this extent. You see it in the New Zealand marketplace, where you've got a very fixed-rate market, and when the market slows down and fixed rates come up, everybody, every business chases around after the business, and the NIM gets compressed. That's what we're seeing in this marketplace, and that's why I'm of the view that we've got another 6 months-12 months of quite heavy competition in this mortgage business.
Because we've still got a reasonable chunk of our fixed rates to roll, and therefore, customers going from 2%- 6.5% are going: "I'm going to look where I can get the best offer," as they should do. And we're holding about 85% of that, those customers, but that's putting a lot of pressure on the market. Plus, you've got a couple of players who just want to grow market share, which is fine. That's their strategy, and that's the market we're competing in. So I think those two factors alone will say this—see this market remain competitive for another 6 months-12 months.
But, you know, players like us are saying we'll be in that market, but it's not going to be to the same extent we were 12 months ago when we were gaining market share and making money in that marketplace. We're a bit quieter in the market at the moment. We're running at about 0.8x system. Actually, in the last month or so, we've been at about one time system, shows we can grow it. But I, we're just a little bit more cautious about it because the returns aren't what we expect, and we've got lots of other opportunities across the bank. But I don't see this pressure coming off for the next 6 months-12 months. And then I think...
Well, I'm hoping, maybe it's more hope than anything, that you end up getting a bit, a bit better sensible pricing because it's capital and liquidity are the scarce resources of a bank.
Thanks, Ross. Appreciate that. And just on those other opportunities, just a question on your CIB strategy going forward. Slide 13 of your pack shows a significant improvement in the division's ROE over the last three years, I think from, like, 10% up to 15.5%, but against this growth in the business has been fairly anemic. To the extent that you've got returns to where they are, is there now an opportunity for the division to grow a little faster, just given that improvement in returns? Or is this still one where you see it, it's about harvesting returns as opposed to sort of aggressively growing the business?
Yeah, look, on our corporate institutional bank, I think David and his full team have done an amazing job here. You know, to see returns of that, I'd... You know, I'm not too sure you'd get any other business in banking that's got a return of 15.6%. Love to hold it. I'm not sure we can. But that's a great uplift, and that's what we've asked of that business, and they've been very disciplined. We would expect to see some growth in the GLAs in this business over the next 12 months-24 months, particularly in the corporate end of this marketplace, which butts up against Andrew's business, and I think those two work in unison.
We'd expect to see some growth in the GLAs in that business, which we'd see over the next 12 months-24 months, and we're starting to experience that now. But again, very strong discipline in that business, and you're seeing the results coming out. I'm very, very pleased with that business, and therefore, you give them a bit more to play with, and they've done a great job.
Thank you. Your next question comes from Victor German, from Macquarie. Please go ahead.
Thank you. I was hoping to actually follow up on business deposits as well, and I appreciate we already answered a few... You already answered a few questions. But it just be interesting to get your thoughts around differences in performance for your franchise versus peers. And one of your peers highlighted that the mix impact in their deposit franchise in the business bank has slowed in the June quarter. We obviously haven't heard from them since then. But are you seeing that the differences that you're observing in your deposit profitability are more driven by mix of business and you're more towards sort of middle markets as opposed to smaller markets?
Or do you feel like there's still differences in the quality of deposit franchise that you have, that you're still working on, that Ross mentioned earlier?
Yeah, I'll make an intro comment on that one from a strategic perspective, then pass to Nathan to see if he's got more detail on it. Just think what we're trying to do across the entire NAB franchise, including our business bank, personal bank, and corporate institutional, is we are taking a weakness and turning it into a strength, 'cause our weakness has been our deposit and transaction franchise. I mean, if we're brutally honest, that's been a weakness of this bank for a long period of time, and now you're starting to see this turn into quite a strength across all parts of our business. So that's strategically what we're endeavoring to do, and in this area, in business banking, we're up 200 basis points and, you know, self-funding ourselves in that business over the last three years. That's outstanding.
We should be. I mean, we should be the biggest deposit franchise in the business bank because we're the biggest business bank, you know. I won't say there's an inevitability about it, but at some point in time, you know, we are looking at both sides of the balance sheet here, and that's what a great business bank does. We also have a very good private bank, which is starting to find its straps again, and also it's tucked away in the JB Were, which I think is a business that's been hidden for a long period of time. So I think there's a real opportunity here, and then I'll pass to Nathan, you can give whatever detail you've got on how that works its way through. But I think it's important to understand strategically what we're trying to do and being successful at.
Yeah, I can just add a couple of points, Victor, hi. It probably just to say, I think in this term deposit, it does narrow down to the business bank and the focus there. I think you'll... You know, we've got some good disclosure in the back that just shows term deposit growth, you know, hasn't been a feature in corporate and institutional. And so that mix hasn't really been shifting. And then I think within the business and private bank, as Ross said, it's been, you know, strategically, we're delighted with what, what the team are doing there, and then you've just hit a point in the cycle where customer preference has been such that there's been more demand in the, in the term deposit piece.
I think we are seeing a slowdown of, sort of, call it internal churn, and so we've probably got a little bit where, you know, our incremental growth has meant that our mix has moved a little bit more than the internal churn, if that makes sense. So there's a little bit of growth, which has been, you know, higher in TDs than in other deposit products, I guess, which is also impacting it. And then underlying that, we're probably seeing, you know, a bit of a softening of the actual mix churn.
And are you seeing... I'm not sure if you have that detail. Are you seeing any meaningful differences between smaller customers and medium customers within the SME bank?
Not really. I think that we've. You know, I think we. You probably see the, it's just the timing of when people might take up the opportunity and where they see the rate cycle. So we typically see that in corporate and institutional have the mix shift first, and then it'll flow through to some of your more sophisticated customers, and bearing in mind, in business and private bank, we've got JB Were in our private bank, so they would be potentially more likely to be, you know, hitting those points on the curve and taking out TDs.
Understood. Thank you. And then, my second question on, on capital, if, if I may. I think Ross mentioned earlier that, you obviously have a buyback in place, and, and, and you're looking potential further capital management opportunities after that. I'm just interested in your thoughts around the trade-off between buybacks and dividends. I know that your level one capital is now, on a pro forma basis, 11.8%, and your earnings are likely, as, as the industry earnings are likely to decline in 2024. Are, are you sort of thinking that, you'll, you, you would prefer to stick to the payout ratio, or would you keep a little bit of extra surplus capital and make sure that your dividends are maintained? How, how, how do you think about the balancing those two items?
Maybe if I just give again just a headline, and then I'll pass to Nathan. We set a very clear policy on a payout ratio of 65%-75%, and we want to stay within that. Because the feeling was that the bank was always stretching itself to, you know, pay out a higher ratio, and then we'd be taking more, you know, taking on board more shares, and we got into a pretty cycle that probably wasn't that helpful long term. So a payout ratio 65%-75%, where we want to stay within that. We've been cautious about making sure we're looking forward several years to see that we can stay within that wherever possible. And that is why we've sort of dictated what we've done with our dividends per share.
I do like the idea of payback as long as, you know, buybacks, as long as we've got a good, strong position of the bank, and that's why we've, you know, we're in the middle of another one at the moment to get our share count down, which is a wee bit strange for NAB, because it's quite a different position to be in where we were again for about a decade or so when we were constantly getting more shares. And I'm well aware in my first year, I added to that. But the path is now, let's have less shares, get a good dividend stream for our shareholders, and create real value over time, but a long period of time. Nathan, any comment from you?
Nothing to add, really. I think our bias is towards reducing our share count, Victor, and to have progression in earnings per share and, you know, dividend per share in line in that, those sort of payout ratios.
That's why I like chart seven. It's my favorite.
Thank you. Your next question comes from Matt Dunger from Bank of America. Please go ahead.
Yeah, thank you, gentlemen. Follow up on Andrew's question on mortgage pricing, noting the lending margins down 7 basis points in the half. Nathan, you talked to the pressure primarily on mortgages and, and back book repricing having happened in the first half. Presumably, this back book repricing is flowing through, and the front book trajectory seems to be improving. So Ross, why can't you be more glass half full on first half 2024, margin trajectory?
Oh, I'm probably being pragmatic. We're facing into a very, still a reasonably aggressive, housing market, and, we're doing a pretty good job at it. But it's, you know, the, the pressure is still there. And as I said, I think the pressure's still gonna be there for probably another 6 months-12 months before it abates. So it's just a reality in the market we're playing in, and we've got—we're doing our best to balance that out for our customers and also our bankers and our brokers. At the same time, making sure that the capital and liquidity goes into, areas that we can get a better return out of. So it's a balancing act.
Love to be more optimistic for you, but the reality is, you know, we've still got a fair bit of fixed rates to get through on behalf of customers. They're looking for the best rate they can possibly find. You've got players in the market charging around, wanting to do more business, which is great, that's their strategy, and we're doing a big balancing act amongst it all. And I think doing a great job in that space as well. Compliments to our mortgage team. And we're playing a long game. If you have a look at the investment we've made in our mortgage business, we are still investing this year, again, as part of our AUD 1.4 billion. We're getting better and better every month we go through.
We're trying to play this game on a service basis, which is really important for customers and our bankers and our brokers, and it's working for us, but it's, you know, it's a long game.
Thank you. If I could just ask a second question on credit quality. In New Zealand, you've taken that New Zealand NZD 51 million FLA. Just wondering if you could talk through how you expect the workthrough is going to occur on over NZD 500 million of 90-day past due impaired and restructured loans?
Yeah, look, the New Zealand marketplace, incredibly resilient given what's going on, slower growth over there and. But it's been incredibly resilient, you know, particularly in the home loan market. If you have a look at the losses there, I think it's 0.00. And then you go to the next quarter, and it's 0.00. So it's a very resilient market, but maybe, Nathan, you can-
Yeah.
Probably talk us through what's happening in the market.
Matt, there's probably just two points there, I think, just to clarify, Just to separate the two. The FLA is a more broader provision that we've raised in relation to the agri outlook and not related to the restructured loans that we've called out there. So I think, as I said in my comments, those restructured loans, you know, really relate to that single weather event that happened right at the end of the first half. We had about 114 customers there that were impacted by that. We gave them interest rate holidays, which meant that they then needed to be classified as restructured. They're all through that window, so effectively, they're all, you know, performing, I think, all bar one.
So they're back in our book and performing, and we'd expect them to drop away from that category next half. That's separate to, then the FLA that we raised just for the broader outlook for agri in New Zealand.
Thank you. Your next question comes from John Storey from UBS. Please go ahead.
Great. Thanks so much, Ross. Thanks, Nathan, and I think you guys have done a really good job this morning just of setting expectations for FY 2024 and been some really good questions already that you've answered there. I think just the questions that I have on my side is just something that you said just around your funding mix, which has improved. If you go and have a look at your net lending margin at 118 basis points, that's pretty much the lowest that it's actually ever been in the history of the bank. Most of the margin actually coming obviously from your replicating portfolio and the unhedged component of net free funds.
I just wanted to get a sense, you know, we've obviously had a 25 basis point interest rate increase this week, possibly another one or two coming through next year. So just wanted to get a sense of how tactical NAB can actually get around the interest rate hedging, and also what the impact is of the last few parts of the interest rate increases, just on your margin and the guidance that you've provided.
Yeah, thanks, John. I'm happy to start-
Sure.
and then Ross will add if he wants to. I think, you know, we've called out there, John, that, you know, that we've had two rate rises in this half and, and that's effectively been no impact on NIM, in the half, or no material impact. We'd expect if we continue to get, interest rate rises on our, on our unhedged, we would continue to get a modest benefit, but it will be small and, you know, probably similar to, you know, similar to, to the, to what we experienced in this half, which is essentially not material at the group level. And, and as you've seen yesterday, we, you know, we've passed on, the, the interest rate rise both to mortgage customers and on our core savings products.
So, you know, that type of impact is modest at the group level. On the hedged and hedge portfolio and opportunities to be tactical, we probably don't see it like that. I think we've been very consistent in the way that we've approached that and that's giving us good, predictable earnings there. And I think, you know, to your benefit, you can see you'd be able to see that quite predictably come through our NIM, and we've stayed really constant on that. And I don't see that as something that's sort of good risk management to be doing.
Okay. That's, that's great. And, and maybe just then secondly, there's also been a lot of questions already just on the business bank. And clearly a very important part, component of the overall group. I think the one that I just had is, you did see a 25% increase just in the credit impairment charge. Just to get a sense on NAB's business bank and the risk of NAB's business bank relative to peers, would you kind of expect some of these trends? Obviously, CBA actually saw a decrease in their charge half-on-half. You know, how would you kinda characterize the riskiness, I would, I would think of the portfolio ex the home loan book? Relative to the peer group and, you know, the likelihood of these types of charges kind of rolling forward?
Thanks, John. I'll start again, and then maybe Ross might want to add. I think, you know, one of the really important features here to look at is just what we're seeing in impairments in that book. And so while we have seen arrears, we've really seen no pass-through into impairments. And I think if you actually go back over time and you look at it, it might be somewhat counterintuitive, but it's, it's actually not something that happens. You don't see arrears necessarily progress into impairments, and the, the reason for that is when you, when you get to that arrears position, that is the point where you, you test your security and you test for impairment.
You know, what I think you should take from the result in the half is, while we're seeing some customers get to that arrears point, you know, the quality of the book and the quality of the security is really coming through there, so we're not seeing that uptick in arrears. And so, you know, without answering your relative question, I think we'd be really comfortable with, you know, both the quality of the book and that, in particular, showing through in the quality of the security.
Yeah.
Thank you. Your next question comes from Carlos Cacho from Jarden. Please go ahead.
Thank you very much, for the opportunity to ask a question. I just wanted to ask again on the, on the business and private bank. You, you touched on kind of that, that focus on driving, increased deposit growth, particularly in transaction accounts. Do you think there's any kind of other specific investments or changes you need to make there, or it's really just a, a matter of time? Obviously, TDs have been driving the recent growth, but to drive up that MFI share and that, and that transaction deposit growth in the business bank, is there anything else you're looking to do?
Yeah, great question, Carlos. There are a number of initiatives that Andrew and the team have in that business banking space. We've had pretty consistent funding into the deposit space, as we've talked about. We've been doing a lot of work on our back office and systems to do with our just our core lending across a broad range of lending, not just lending into for the business, but some of the invoice financing and the likes. We've spent a lot of money, and we've got another year of big funding in our merchant space, which is starting to show some very good results coming through there. But the next 12 months, I think we'll put that business in probably best in class in this marketplace, and we own it. We haven't outsourced it.
We've said that that's a business we want to be part of. We've got some sectors that we've been weak at traditionally that we are now very focused on, given we've got the core of the bank going. So I would see good growth continuing to happen in this bank for some time yet. We've invested in our bankers, we've invested in banker support. As you said, you know, we've said we've put in, you know, another 600 customer-700 customer-facing people over the last few years. That's adding benefits to us. And we'll get some productivity movements out of the the work that we've been doing. So every time we look at it, the more opportunities we are. We've also got growth in our corporate space and David Gall area, which we're very pleased with.
We're seeing good growth in the transaction accounts at the big end of town. We're about 26% market share in that area. I'd like to see a bit more. We've partners with some really good players in the technology space that are having some real wins for us with bigger customers. Yeah, no, I'm pretty comfortable we've got plenty of growth left in that franchise. It's, it's hitting its straps. So, yeah, Dave, any other-
I was just probably going to add one thing, Carlos. I don't think it'd be right to take away from the call or our comments that we've been growing just in term deposits in the deposit franchise there. I think, you know, Ross has got the slide there on page nine, yeah, we've had a 50% increase in, you know, transactional account openings in that franchise over three years. And so, you know, we wouldn't want you to take away that it's been growth in TDs. And as I said, you know, that the TD customers there, you know, the vast, vast majority of those are good clients of the franchise, and we see it as core growth.
Yeah. And much more opening from a digital perspective, both in Andrew's world and business and in Rachel's world and personal. And that's probably got another two or three years of investment in it to really get it to where we need it to be.
Great. Thank you. My, my second question, kind of, also staying on the, on the business bank. Just wondering how you're seeing the, the competitive landscape there. We've had, until recently, kind of, two of your, your major peers were not particularly focused, or they were kind of dealing with other internal issues, and they weren't very focused on the, on the business bank. Now it seems that with returns in mortgages, you know, in some cases, below the cost of capital, everyone's focusing on business banking. You've obviously got the, kind of, pole position there, but how are you seeing that shape up, kind of, in, in competition on the ground? And, and is it, you know, is it perhaps going to get harder, or is there, is there...
I know, I know lending is much less commoditized in that segment, but are you seeing pressure coming through on lending margins at all? How's the competition shaping up?
Look, we've always expected all the big banks to be good competitors in this space. Obviously, some have been a wee bit distracted with other things, but we always thought they'd come back into this marketplace. It's inevitable. But while others have been distracted, we've been investing very, very heavily in this franchise, and those results are starting to come through. So, you know, competition makes us all a lot stronger, and we're becoming a lot stronger in this area. But I want to leave you with the fact we're going to continue to invest in this franchise, and we expect to see really good results to continue to come from it. Yeah, margin at some point will come under pressure, but I don't see it as coming under the same pressure as you do, with a home loan.
It's a very strong relationship franchise, and we should never forget that. I'm reminded, you know, very early in my tenure here by a customer being with us 150 years. Ross, it's a relationship business. I've been with you for six generations. That's why we're with you. It's called relationships, and we expect it to continue. You know, that's what it is. And you don't build that overnight. You don't build that with a changing price and business lending product. It just doesn't happen... but we have to be competitive. We are. We've got great bankers. That's a big advantage. We've got now systems and applications that are working for us, not against us. We're investing heavily in other things that will make our bankers even more powerful in the marketplace.
We're investing in our digital capability for our bankers, to make it easier for them to do business. Yeah, it's pretty hard to chase that within three months, to change everything. So we've been investing in this core franchise now for four years, and it's showing through. We love-
Thank you. Our next question comes from Matthew Wilson from Jefferies. Please go ahead.
Yeah, good morning, and, thank you, team. Two questions, if I may. The proactive engagement with the home loan customer base is clearly happening. A link to that, can you disclose what percentage of home loans have been restructured and are performing?
Well, the vast majority are performing. There's a very few that aren't. That's the reverse way of looking at that. There's probably, I think, and I'll have a look at Rach, about 10,000 home loan customers that we've changed their structure or done something with, but it's a small percentage of our book. It's a minute percentage of our book. So they're, and they're, as you see, they're performing very well. And I think if you look back at 2019, the book is still performing from an impairment perspective, better than it was in 2019. So whilst the things are getting a bit tighter, still the book is performing from that perspective. Rach, anything else that... I don't think. It's in pretty good shape. Matthew?
Yeah, and then on the second question on risk-weight inflation, you're starting to see that come through the home loan book. You know, you went from sort of 26% to 27%. Is that, is that model changes? Is it hardship? Have we seen the bottom in home loan risk weighting, and you're starting to get a bit of inflation come through with the cycle?
Yeah, hi, Matt, it's Nathan. We've got the bridge there on the capital, and you can see that there's been about, you know, AUD 3.3 billion, I think, of risk-weighted asset increase, just on the basis of what we're seeing come through in the impaired. So that will largely be model-driven, and, you know, we've actually, you know, inside the new capital framework, been able to offset that with some investment in, you know, risk-weighted assets, you know, some in models and some enhancements that we've been doing there.
So we've been able to find those offsets, but probably the best guide on that is just to take it back up to the top of house and say, "Well, for the asset quality deterioration we've seen across the whole portfolio, you know, inside the half, we've seen that AUD 3.3 billion of risk weights that have been commensurate with that.
Thank you. Your next question comes from Richard Wiles, from Morgan Stanley. Please go ahead.
Good morning, everyone. I have a couple of questions, one on margins and one on the mortgage market. Firstly, on the margins, Ross, group margins fell to 171 in the second half. It got to a low of 165 in FY 2022, when rates were zero. Are you confident you can keep margins above that previous FY 2022 low?
Well, I won't give you a prediction on where the margin goes, but it's... You know, if you look at it over the last probably 20 years, the trend is quietly down, and I think we're back onto that trend today. And there is pressure in the, particularly in the, home lending business, so you've got to be very efficient in that marketplace to make reasonably good money out of it. But, other than that, no predictions on where that one's going, but, it's, it's a pretty competitive marketplace we're playing in, in Australia.
Thank you. And then my second question relates to mortgages. Given we're in a low volume growth environment, and there's a lack of real diversification outside of retail and business banking amongst the four majors, is it optimistic to think the industry will price for satisfactory returns in mortgages once the refi and fixed-rate maturities come to an end? Won't the three banks, who all want to grow share, just start competing hard for the new lending rather than the refi loans?
Yeah, look, you, you may be right. The other scenario to that, of course, is we get through the refi, we get more into a new business market flow, and you start to, you know, stabilize the returns on this business. We've got to get much, much more efficient, as does everybody in this marketplace, so digital capacity in here is going to be really important. Yeah, so we, we do see a path, because otherwise, why would you allocate capital and liquidity to it? And over time, I think that becomes a sensible allocation, and I think the industry will do that.
Yeah. Yeah, Richard, it's Nathan. Maybe just to add one thing. I—we still think that there, as we get into, as Ross said, out of the refi market and into a new business, bit new home sale market in particular, you do get that opportunity where service matters more. And, you know, I think that we've invested in the franchise, and it probably links back to maybe Jonathan Mott's question around the business banking franchise as well. We think, you know, there's opportunities in our customer base where there will be value provided, you know, for, for service, and so we've got to continue to invest in that and make sure when that market turns around, we're getting an overshare of it again, because we think the economics in that will always be better.
Thank you. Your next question comes from Brian Johnson from MST. Please go ahead.
Good morning, and congratulations on great disclosures. Really good. Two questions, if I may. NAB is now the second bank where we've seen probably a little bit of a surprise growth in the mortgage offset accounts. I'd just be interested to know just where you think those offset accounts... So as you get the fixed rate reversion, loans turn into variable rate, the way that you offset that is by basically having a mortgage offset account. So clearly, people have been parking them elsewhere. I'd just be intrigued on two things. Where do you think the mortgage offsets account increase is coming from? Is it little banks, non-banks, big banks? And then the second one, the second subset of that question is: what is the impact of that on the NIM?
Because I would have thought they're probably the most expensive deposits there actually are.
Yeah. Brian, why don't I start, and then I can hand to Ross. I think you're right to call out that the fixed-rate expiry is a big driver of that. So as, you know, as people have rolled off fixed rate, what we've seen is that they've, you know, they've been bringing their offset balances in, as you did-- you've rightly categorised that, to then offset the impact. In terms of where that's coming from, you know, I think that's probably been broad-based. You know, it could be coming from anywhere. It could be a little bit of mix inside our deposit base, although, you know, at an overall total level, we haven't really seen that mix shifting too much.
Then, you know, it could be coming from other banks, it could be coming sort of more broadly in the market, but that has been a feature. In terms of just, you know, drag on NIM, you know, I think you're right to call out that it is, that is gonna be a more expensive, in a relative sense, a more expensive deposit. You know, we've got. You know, as we've made rate rises yesterday on our core deposit product, the Reward Saver now at 5%, and then you've got mortgage rates that will be in excess of that. It's just been a question of materiality of it on the NIM.
That impact hasn't really been material on the NIM?
It's not something that we've called out this half, Brian, so it could be something that becomes a feature as we go forward. But, you know, it's not something that we would see as being material at this point.
Fantastic. The second one is, there were some really great disclosures today on those loans that were originated when rates were at the very trough. But when we think the fixed-rate reversion quantum of the rate shock is actually highest, it will be the fixed-rate loans that were initiated after November 2020, which is when we had the biggest cut in the fixed rates. So we're only really just entering that. If, in fact, they were three-year loans, could you just comment on that quantum of the rate shock? 'Cause I know a lot of loans have already reverted, but they're ones where the fixed rate wasn't actually at the lowest point. Could we just get a feeling on how you're looking at that and thinking about that over this next six-month period?
Yeah, you're right, Brian, they were all two-year or three-year fixed rates, and I'm just trying to rack my brain as to what percentage was the two-year, 'cause they will have already converted over, and the three years. I think they were more two-year than three-year rates, weren't they? So a fair bit would have gone through. I think we've got about 30%-40% still to roll this year, Brian, which is why my comments around the competition—you know, the pressure will stay on for the next 6 months- 12 months. But I think, at that point in time, they'll have, they'll have all rolled through, and they're all rolling back onto a... Well, the vast majority are going back onto a standard variable.
So I think, I'm not too sure we'll expect anything different from this cohort to the last, the other cohorts that have already come through. But, Nath, have you got anything else on that? We haven't seen anything, experience that's different on the way they're rolling through.
No, I think we do have some disclosure, Brian, maybe it's going to your point on Page 75, where we've just got, you know, a profile of the forecast mortgage repayments at the 4.35 cash rate. So in the bottom there, we've got that 60% of that are going to experience a +50%. I sort of appreciate we're not answering the question directly, but that might give you a sense of it.
Thank you. Your next question comes from Ed Henning from CLSA. Please go ahead.
Thank you for taking my questions. I just had two as well. Just one quick follow-up, one on the business deposit franchise, just to clarify. You've talked a lot today about the mix. Now, is that starting to slow? And also, just given the competitive environment, do you, do you see any risk of deposit beta coming through on the business deposit side of the first question?
Yeah. Ed, we are seeing that start to moderate. So, you know, I think deposit mix in there has, in recent times, you know, started to plateau. It's a little bit hard to predict, and obviously, we had a rate rise yesterday and, you know, maybe a little bit more in the outlook now, so we might continue to see some fluctuation around that. But yes, it's right to say that we've seen, in recent times, we've seen that moderate.
... gone back to where originally deposit TD rates were, TD percentages of our deposit book were. So there's still a little bit to go, but it has moderated the pace it's moved there.
Yeah, I think in business bank, we're still... You know, I think TDs are about 31% of the deposit mix in business and private bank, and, you know, even in pre-COVID, we were at 36, Ross, yeah?
Yeah. And so I think there's a wee bit to go there, Ed, that probably about five, a move of 5% to TDs. So that, that move has started, but at what pace? It seems to have slowed down a wee bit.
Do you see any risk of competition just on the, on any deposit beta or catch-up of, of more cash rates or savings rates, other than TDs in the, in the business accounts?
... No, that, that hasn't been a feature of, of the market, Ed, and I think that actually, you know, the deposit market's been more broadly, has been, you know, really competitive for some time now, but it hasn't been sort of, there hasn't been any shocks in that competitive environment. And so, you know, I think it's, it's been competitive. The, the marginal deposit is obviously well bid, but I think by and large that, you know, it, it hasn't, we haven't seen any shocks in it, and we don't really... the products are not sort of structured like that, that we see, you know, that's not something that we're expecting. But, you know, you, you don't know. It's, you know, it's a competitive environment, and someone might, might look to do something different.
Certainly for us, I think we're happy with where we are, and we don't see any need to be doing things like that in the market.
Okay, that's great. And then just a second one, just on your markets and treasury, it looked, you know, quite soft in the fourth quarter. Did something happen around a position, or you did shrink some of your markets business? Did that have an impact, or was it just generally just weaker activity?
Yeah, it's probably the latter. There's nothing really to call out there, Ed. You know, I think we... You know, if you just took it in the half, I think, you know, client-driven, client-driven activity was actually pretty stable, and then it was all on the trading line. I think we are coming off. The first half was the best half, you know, we'd had in the trading business since, you know, in 2020, I think. So coming off a strong half, and we just saw really observable volatility was out of the market and, you know, less trading opportunities. So no big one-offs.
Thank you. Your next question comes from Brendan Sprou- sorry, Sproules from Citi. Please go ahead.
Good morning, Ross and Nathan. I just have a couple of questions. My first one's on the investment spend. Ross, you've been very disciplined around the investment spend, and again, you've indicated next year's around AUD 1.4 billion. That's well below sort of peer levels. How should we think about this heading into the medium term? You know, customer experience is around about a third of this investment spend, but is there more sort of spend in the medium term required here on digitization, particularly around your deposit franchise, to sort of reduce your reliance on term deposits?
Yeah, look, my team would laugh at that question. Laugh at me, not at you, on that question, 'cause everybody always wants to spend more money. And I'm sure it's in every bank as well, Brendan. What I've observed is at about AUD 1.4 billion, we know where every dollar goes, and we know what we're going to get out of it. It starts before us, and I'll talk about for us. For us, you start spending a lot more than that and just wonder, you know, did it actually add any value to the organization?
The discipline we've had for the last pretty much four years of consistent spending so that our business heads know that they're going to get the money this year and next year, as long as they deliver, is probably the most crucial thing for us, and has saved us a lot of money over the last four years. So it's the consistent spend, and we're seeing, you know, some pretty good benefits coming out of that. You raised the digital and data piece. We've got another 2-3 years of good spend in that area to get us into really good shape. So I'm pretty comfortable. I think as you go beyond AUD 1.4 billion, for us, it's like, did it get wasted? And I suspect a fair bit of it would.
So it's the discipline of it that I think we've really mastered at, and we have a very disciplined approach to making sure we're supporting the spend and getting the returns out of it. So I... Look, others may have much, much better capability of spending a hell of a lot more money, but I think over time we've proved that spending about this level, we get great returns out of it, and it makes a difference to our customers and colleagues. It's an-- You know, I could easily spend a hell of a lot more. I'm just not too sure we would have the capability of doing it wisely from a NAB perspective.
Okay, terrific. I just have a second question on your loan loss provisioning. A number of your other peers are kind of signaling that provisioning is actually starting to get to kind of peak levels with, you know, really significant provisions above the base case. I noticed in this result, yours are continuing to grow. I mean, as we look into 2024, if the economy plays out as you articulate in your base case, can we expect these provisionings to have largely peaked, or do you expect them to continue to grow as the economy deteriorates?
Yeah, look, a really good question. I think we'd rather just see out the next 6 months-12 months to see what does happen in the economy. We're comfortable with the levels we're at. We have been growing them slightly. I've been very reluctant to sort of reverse them out, because we just don't know. And again, it's given us absolute confidence to keep growing the franchise, particularly in the business bank, because we have got very good provisioning, good capital, good liquidity. It's just given us surety that we've got a great franchise. So from that end, I'd be a wee bit reluctant, but let's see how the next 6 months-12 months plays out. But yeah.
Yeah, and Brendan, obviously, just the way it works there is that, you know, if we continue to see arrears experience tick through, we'll just probably see the mix of that shift. So, you know, in absolute levels, it doesn't mean you need to go up. It just means we'll probably see a little bit come out of the forward-looking into the collectives.
Yep. But I think it's given us real confidence in continuing to work with customers and colleagues on the provisioning we've got, and we feel pretty good about it. But it's a debate and discussion we have with our board as well.
... Thank you. Your next question comes from Azib Khan from E&P. Please go ahead.
Thank you very much. Ross, when you were talking about mortgage competition dynamics earlier, you did mention there were a couple of big players out there that are happy to grow market share, and you said that makes sense. You're obviously not looking to do that. Is one of the big differences here that you have the option or the luxury, or you're well positioned to grow in SME lending, which is far less competitive and the lending margins there are holding up, whereas some of the other players don't? And the follow-up question to that would be: if you do start to see notable deterioration in business lending asset quality, will your thinking change such that you try to again grow mortgage market share?
Yeah, I suppose it goes back to a fundamental of running the business. And, you know, the two scarce resources in a bank are capital and liquidity. And if you've got options, put them to best resource work on behalf of both customers but your shareholders. And when I'm getting what I'd consider to be a suboptimal return out of a mortgage, you know, I don't need to grow market share in that thing if at a later time, I can quietly come back into the marketplace and get to one or one greater than one times system. So put the resource, which is scarce, into the best place, and that's the thing that drives myself and the team here. That doesn't mean we're out of the mortgage market.
We're in the mortgage market, we're just not growing as we used to do, and we'll grow when the most suitable time is. That's what's driving us, and I think it's, it's working pretty well. So that... There's nothing too much different to that in my mind, and, Nathan, you may-
No, I think that I, I probably just wouldn't link the two at all. I think that, you know, I think you make a, an economic decision about how we, how we want to participate in the home lending market. But I would say, you know, and Ross had it on his Slide 15, I think one of the things that we've been in the home lending market is incredibly consistent, and it, it is important that you're consistent in these markets, and you don't drop in and out of them, you know, as your question might suggest. And, you know, I think being able to, to, to be consistent for our brokers, consistent for our staff, you know, consistent for our customers is really important.
And then when you flip to the SME side, you know, yes, we may see more arrears, but actually, that's a point when your customers need you to be really active in the market and showing them that you've got their support. And I think one of the, you know, the really core strengths of the business banking franchise is the consistency of the relationship-led approach, and so you certainly wouldn't see, if we saw arrears, you wouldn't see us backing away from that market.
Can I just say, there's one other thing I think that's quite important when you're running a business like this, that the team plays as a team in this area, and we don't penalize people when we ask them to do the right thing by the shareholder and the customer. And I think that's really important as well. So there's no internal competition, I have to be bigger than or greater than or whatever. It's what's the right thing to do, and I think that's, pretty important in enabling us to make the right decisions as an executive team, to get the money in the right places and to support the customers, and that's working for us. So we are supporting our mortgage customers. There's a big rollover of fixed rates going on.
We'd rather look after that group, and make sure we're holding on to them, than chase after new stuff. But I think that's also something that's driving NAB at the moment as well, a good team of people who are working well together.
Thank you.
Thank you. That does conclude our conference for today. Thank you for participating.