Good morning, everyone. Welcome to Westpac's 2024 results. My name is Justin McCarthy, General Manager of Investor Relations. Before we begin today, I acknowledge the Gadigal people of the Eora Nation as the traditional custodians of the country we are meeting on today. I pay my respects to Elders past and present, and extend that respect to all First Nations people present today. The result will be presented by our CEO, Peter King, and CFO, Michael Rowland. At the end of the presentation, you'll have an opportunity to ask questions. As a reminder, to ask questions, please press star one. With that, over to you, Peter.
Thank you, Justin, and good morning, everyone. Overall, I'm very happy with the progress we've made this year. Financially, we were disciplined, with margin management a highlight, and the balance sheet is in a strong position. We've grown in all our key segments off the back of improving customer service. Business loans and consumer deposits grew 8%, while mortgages were up 5%. Our mortgage approval times were cut to less than 5 days, and importantly, service levels were more consistent throughout the year. In business, merchants and payments innovation, along with investment in bankers and simplification, has driven growth, and we've consolidated its leading position in markets and delivered strong balance sheet growth. The strength of the group's balance sheet, particularly the capital position, supported a further AUD 1 billion increase in the share buyback program. Starting with our financial performance, statutory net profit was AUD 7 billion this year.
That's down 3%, while our key return metric, return on tangible equity, was 11%. Excluding notables, which were only hedging volatility, net profit was AUD 7.1 billion. Revenue was up 1% from good loan growth across all key segments, while margins were well managed. Net interest margin, excluding notables, declined just one basis point, despite ongoing competition in the consumer segment. Non-interest income was lower, with the main drivers being the impact of businesses we sold last year, along with a softer performance in markets. We indicated costs will be higher this year, with expenses up 7%. Technology expenses have been a headwind, reflecting the previously flagged rise in software amortization, along with higher technology expenses. Cost to wind down RAMS have also been a headwind.
Impairment charges have reduced to 7 basis points alone, and this low level of impairments reflects a combination of prudent lending practices and resilience across household and business customers. Improving customer service underpinned our financial performance. In consumer, we are again improving our physical, digital, and virtual banking offerings. Across our digital channels, we continue to upgrade services, improve navigation, and enhance budgeting tools. The Westpac app was again rated the number one mobile banking app by Forrester, and we continue to reshape the branch network, and we now have 111 co-located branches. We also committed to keeping regional branches open until at least 2027. Everyday banking is at the heart of the customer relationship. We grew household deposits above system through the year, and our focus on behavioral saving products saw them rise to 85% of savings balances. And these deposits provide a very stable source of funding.
New prompts within the app helped over 190,000 customers earn, on average, an extra AUD 324 in annual interest, and this sees more than 80% of balances receive a bonus rate each month. A very competitive consumer banking environment did put pressure on margins. NIM was down 18 basis points over the year, but up one basis point in the second half. Consumer return on tangible equity is 9% this year, reflecting that intense competition in this segment. More consistent service has underpinned our growth in mortgages, and the chart on the top right shows the differential between Westpac's rate for new owner-occupied loans relative to the majors. We're priced above peers in the last 6 months, while holding share, excluding the impact of RAMS wind down. For us, lifting services improved the customer proposition.
Time to decision ended the year at less than 5 days, with almost 20% of applications this year approved within 2 days. The performance in broker and first-party channels is now similar, with broker average time to decision at 4.7 days in the month of September. We also improved our settlement process, recognizing it's a key moment for our customers. We improved our on-day settlement by 4 percentage points, and that sees us consistently towards the top of PEXA's ratings. In business, we have, and we will continue to invest in improving service, payments capabilities, and increasing banker numbers. Merchant points of presence grew strongly as payments innovation remained a focus. EFTPOS Air, which turns your phone into a merchant terminal, continues to grow, benefiting from our first mover advantage. We also launched EFTPOS Flex, a cost-effective merchant terminal that integrates to over 500 point of sale systems.
These capabilities help drive the 16% lift in transactional account openings. In line with the rising interest rates, there's been a shift in deposits away from call to term, with term deposits in the business bank now comprising over a third of total business deposits. In business lending, the BizEdge program is digitizing lending processes, and our processing times improved by 5 days. We've also approved more than AUD 1 billion in loans since the launch of our simplified pathway for loans up to AUD 3 million. And these initiatives, along with investment in bankers, supported lending growth of 9%, while growth was diversified, it was stronger in our target sectors, as you can see on the chart.
Turning to institutional, focus on client service has been the key to repositioning WIB as a leading domestic institutional bank. We delivered solid revenue growth and maintained a return on tangible equity of 14%.
Importantly, clients have recognised this, with customer advocacy up 5 points to 64, and this is the highest result since the survey commenced 7 years ago. 20% growth in average interest earning asset reflected higher lending and much higher trading inventory to facilitate client activity. Lending was up 9% for the year, mostly to existing customers, and we saw growth across property, infrastructure, and industrials. Growth has not come off the costs at the cost of either margin or risk, with margins ex-markets up 4 points to 2.10%. The average credit rating on new lending was also unchanged. On deposits, we have the number 1 position with government, and that's across both state and federal governments.
We're also applying a client-led approach to growth in financial markets, and we've been externally recognized with 9 KangaNews Awards, including the number 1 bond house in Australia and New Zealand, and that's for the first time in more than a decade. That translated into higher fixed income revenue across rates, credit, and bond fees. However, a negative DVA adjustment and softer FX revenue did weigh on total markets income this year. We're investing for the future in bankers, in their capability, and also our systems. In particular, the build-out of Westpac One, our digital transaction banking platform, is making good progress, and we expect the pilot to commence with customers in late 2025. In New Zealand, we've supported customers through a challenging economic environment. Modest balance sheet growth reflected tough operating conditions.
Core earnings rose 1% as revenue growth was partially offset by ongoing investment to strengthen the technology foundations. We delivered an improved second half with margins up and better cost control. From a credit perspective, mortgage customers are on average 11 months ahead on repayments, and we've been proactive and engaged early with those customers in stress. Stress in the business sector was lower than expected, and these dynamics drove a low credit impairment charge. Despite these headwinds, return on tangible equity was a solid 13%, aided by a resilient asset quality. Across all segments, we've delivered improved service in both supporting and keeping customers safe. Three areas have been a particular focus: hardship arrangements, access to cash, and scams. On hardship, we recognize households and businesses have displayed resilience. However, we also know some are doing it tough.
This year, we provided 47,500 tailored support packages to customers requiring assistance. The majority only required 3 months' support, with the peak in hardship in June. There's been some reduction in hardship in the last few months, which is encouraging. Access to cash remains important for many customers, and it costs Westpac approximately AUD 330 million a year to provide cash services. The economics of providing cash are getting worse as volumes decline, and so we're working with governments and industry to find a long-term solution. Helping customers avoid scams was also a major focus. We launched SaferPay in March, which asks customers questions about their payments and then alerts them to likely scams. AUD 150 million in payments have been abandoned based on SaferPay alerts.
Westpac Verify is another feature we added this year, and we're finding approximately 5% of payee details are wrong, and the number of business email compromise scams has reduced 19% off the back of Verify. In an Australian first, we will soon launch Westpac SafeCall in collaboration with Optus. It will provide customers with verified Westpac-branded in-app calls, and we're currently in pilot and expect the rollout to commence in the next few months. All up this year, we prevented customers losing AUD 237 million to scammers. Unite is our business-led technology-enabled simplification program, and it's underway. It has 3 objectives: a better experience for customers, making systems easier for bankers, and finally, increased shareholder return. It is important that I restate that we're not starting from scratch. It's about accelerating the level and pace of simplification through a program of coordinated initiatives.
In 2024, we focused on planning, ramping up resourcing, and commencing the first phase of projects. In the second half, we refined the plan, consolidating the number of initiatives from 85 to 61 to improve delivery sequencing. The only change to scope this half has been the decision to consolidate the 3 deposit systems to one rather than the previously advised two, and we're confident that one deposit system will be able to cope with the volume of data, and one system will reduce complexity and lower the project costs. We've now commenced 39 of the initiatives and have commenced 2 smaller initiatives, including decommissioning Midas, which was a 38-year-old system that supported New Zealand financial markets.
Just to recap on the financials of the program, having spent approximately AUD 150 million in 2024, we expect Unite to account for 35% to 40% of our estimated AUD 2 billion annual group investment envelope over 2025 to 2028. Unite is at its core, consolidating down to our best processes. An example that brings this to life is identity verification. We previously built a very good process in mortgages, and Unite is now driving the consolidation of 22 other verification processes to one. So far, we've consolidated 18 consumer processes, and this is a good example of the Unite outcomes that will deliver a better experience for customers, employees, and shareholders. For customers, it means a fast and easy digital verification process, and we have already seen an improvement in the success rate for new-to-bank customers using the process.
For employees, it means spending more time with customers, and for shareholders, this initiative is expected to cost AUD 25 million and expected to provide ongoing savings of AUD 15 million per annum, as well as achieving compliance with the ABA Scam Accord commitments. As I said at the opening, our balance sheet is strong, and it's worth reflecting on how much it has strengthened over the last 15 years. Capital levels have materially increased since 2009. Our position is strong with a CET1 ratio of 12.5%, placing us in the top quartile of banks globally.
The excess capital sees us well positioned to support growth, help customers, and for potential external shocks. Impairment provisions are AUD 1.5 billion above the base case scenario, and that includes a 42.5% weighting to the downside scenario. Liquidity also increased significantly over the years. Liquid assets, as a proportion of total assets, are now 19%.
Now, funding position is superior to that of both 10 and 15 years ago. Customer deposits have risen from 57% to 67% of total funding, while reliance on wholesale funding reduced from 35% to 26%. Moving to capital management, we've sought to balance the use of capital across investing for simplification, supporting growth, while also returning some of the surplus to shareholders. This half, we've increased the on-market share buyback by a further AUD 1 billion. With 77% of the previously announced share buybacks complete, around AUD 1.7 billion remains to be bought back, and buybacks have reduced the share count by 6% over the last 3 years. We believe the buyback supports dividend sustainability over the medium term, and the buybacks completed over the last 3 years would have added more than AUD 0.20 per share in dividends.
Four-year ordinary dividends were increased by 6% to AUD 1.51, including a final dividend of AUD 0.76 per share. The payout ratio was 73%, which is at the upper end of our medium-term range of 65%-75%. On a pro forma basis, that is, post the buybacks that have been announced but not completed, the CET1 ratio is 12.1%, which equates to AUD 2.7 billion of capital above the top end of the range. And we believe this provides sufficient capital support investment growth for and for potential external shocks. Thanks, and over to Michael to take you through the financials.
Thanks, Peter, and good morning, everyone. Core net interest margin incre basis points over the half to 1.83%. This compared to a decline of 3 basis points in the prior half. We continue to balance spreads on loans and deposits at a time when competitive pressures persist in home lending.
We also benefited from higher earnings on hedged capital and deposits. Moving to the drivers for the half. Loan spreads, notably in mortgages, subtracted one basis point. Customer retention, along with the averaging impact of competition in prior periods, had the largest impact during the half. This impact was largely offset by switching from lower-margin fixed-rate mortgages to higher-margin variable-rate mortgages. We are now through the high point of fixed-to-variable-rate mortgage switching. Business lending spreads tightened slightly. The release of business lending remediation provisions added one basis point to margin, equating to 2 basis points in the fourth quarter. Deposits were neutral in the half. A four-basis-point benefit from the replicating portfolio was offset by a mixed shift from at-call deposits to lower-spread term deposits and savings accounts. Wholesale funding costs were slightly higher as the final tranche of the Term Funding Facility rolled off.
We timed our funding well and took advantage of favorable credit markets, raising AUD 22 billion of new long-term wholesale funding in the period. Higher earnings on capital contributed 3 basis points, reflecting the higher replicating portfolio rate. Treasury and markets detracted one basis point, with the contribution falling from 14 to 13 basis points, still above the expected medium-term average contribution. Notable items added 6 basis points to margin, with a five-basis-point detraction in the first half moving to a benefit of one basis point in the period. Moving to non-interest income. Excluding the impact of notable items, non-interest income decreased 6% on the prior period. Fee income was down 1%, with lower underwriting fees in WIB. Wealth income was up 2%, with higher funds under administration driven by the strong equity market. Trading income in markets was down 4%, with lower income from both REITs and FX trading.
Turning to expenses. Expenses were up 3% in the half. Higher technology operating expenses saw total technology expenses rise by 9% due to higher software license, data, and storage costs and vendor inflation. We also increased the number of bankers in business and WIB. We worked hard to offset these cost headwinds, delivering AUD 391 million of savings through Cost Reset. This included the benefit of lower FTE from operating model simplification, automation, and reductions in the corporate head office space. Cost related to closing RAMS to new business in the half was similar to the first half, with full-year costs of approximately AUD 113 million. As Peter discussed, Unite is progressing well, with expenses higher in the half. Investments ex Unite increased largely due to the usual seasonality of investment spend.
We remain committed to Cost Reset, and our objective remains to close the cost-to-income ratio gap to peers over the medium term. Moving to investment spend. Total investment spend decreased 9% compared to the prior year following the completion of several large programs in 2023. Risk and regulatory spend, while 11% lower following the completion of the Basel III program and BS11 in New Zealand, remains the largest component, accounting for almost 60% of total investment. Growth and productivity initiatives continued, with digital investment to improve the customer experience, the cash management platform Westpac One in institutional, and BizEdge, our business lending and origination and simplification platform. Unite investment was up AUD 147 million, with the majority of the spend in the second half. The proportion of investment that was expensed increased to 56%. We expect the higher expensing trend to continue. Turning to credit quality.
Overall, the portfolio continues to show resilience across both the consumer and business books. Stressed exposures to total committed exposures increased 9 basis points to 1.45%. This reflects the lift in mortgage arrears and an increase in stress in some business segments. Most customers have adjusted to higher repayments, and many have also maintained buffers above their scheduled repayments. However, some customers have found the adjustment more difficult, with the 90-plus day arrears rate in Australian mortgages increasing to 1.12%. Importantly, the rise in arrears slowed during the half. In the first half, arrears increased at an average rate of 3 basis points a month, dropping to one-two basis points in the third quarter, and in the most recent quarter, arrears were stable. Unsecured lending delinquencies deteriorated slightly, driven by the cards and personal loans portfolios.
The increase in business stress was most pronounced in the manufacturing, services, and transport sectors, driven by single names. Other increases related to a small number of customers across a range of sectors, with no obvious systemic stress evident. Turning to credit provisions. Total impairment provisions declined AUD 39 million over the half, remaining just above AUD 5 billion. While there was little change in the overall balance, the composition shifted. Overall, overlays were lower. The Australian mortgages overlay is now largely captured in model outcomes in CAP. Stage 1 CAP increased mainly, reflecting growth in our business portfolio. Stage 2 CAP decreased largely due to the run-off of the auto finance portfolio and RAMS. Revisions to commercial property price and GDP forecasts, along with delays in rate cuts, partly offset the decline. Stage 3 CAP was little changed.
IAPs were AUD 75 million higher, reflecting some single names in manufacturing and transport, as I mentioned earlier. In total, our provision coverage remains appropriate for the risks in our portfolio. Collectively assessed provisions to credit risk-weighted assets decreased 6 basis points to 1.32%, mostly due to a 2% lift in credit risk-weighted assets. We did not make any changes to our scenario weights and continue to believe a 42.5% weight to the downside is the appropriate setting for what we know now. We will continue to assess this as economic conditions evolve. Total impairment provisions provide a buffer of AUD 1.5 billion above our base case scenario. Looking at the impairment charge in more detail. The charge of AUD 175 million was equivalent to 4 basis points of average loans, down from 9 basis points in the prior half. This remains well below the long-run average.
The IAP charge comprised new IAPs of AUD 210 million related to a number of small exposures, mostly in the manufacturing sector. Write-backs and recoveries increased, largely in credit cards and personal loans. The ECL charge of AUD 128 million was made up of write-offs of AUD 275 million and other changes in ECL of AUD 147 million. These other changes reflect movements in collective provisions outlined on the previous slide. Moving to capital. The CET1 capital ratio ended the half at 12.49%. Net profit added 83 basis points, while the payment of the interim dividend reduced capital by 60 basis points. Risk-weighted assets added one basis point, with non-credit risk-weighted assets lower, as interest rate risk in the banking book risk-weighted assets declined following data refinements and lower interest rates, driving a regulatory embedded gain.
Credit risk-weighted assets reduced capital by 19 basis points, with further benefits from data refinements more than offset by lending growth and a modest deterioration in credit quality. The ongoing share buyback reduced capital by 22 basis points this half, with AUD 1.8 billion of shares having been purchased over the year. Other items reduced capital by 14 basis points. This was mainly due to reserve movements and a higher deduction for deferred tax assets. With this result, we also announced an additional AUD 1 billion buyback to return capital to shareholders and further reduce our share count. The buyback takes the pro forma CET1 capital ratio to 12.11%. This is AUD 2.7 billion above the top end of our target operating range, and as Peter noted, provides flexibility and capacity to support growth and absorb any impact from potential external shocks.
Finally, looking to the first half of 2025, the strength of our balance sheet and financial performance positions us well to navigate domestic economic conditions and ongoing geopolitical uncertainty. On revenue, we expect system credit growth to be at similar levels to the second half of 2024, as we target growth in line with market in all our segments. We anticipate mortgage competition and the deposit trends we saw in the half to continue. Returns on hedged deposits and capital will contribute positively to margin, but the contribution is likely to be slightly lower. At the end of the second half, we increased our replicating portfolio deposit hedge by around AUD 10 billion. The outlook for NIM will also be sensitive to the timing of lower interest rates and movements in wholesale funding markets, which is difficult to predict in the current environment.
Expense growth is likely to continue at a similar pace into the first half, driven by higher technology costs, salary and wage growth, and Unite, partially offset by cost reset savings. Credit quality is sound, and while some further deterioration is likely, it's expected to be manageable. Across all metrics, we are well positioned to support customers, growth, and our Unite investment. With that, I'll hand back to Peter.
Thanks, Michael. The Australian economy has experienced an extended period of below-trend growth, particularly in per capita terms. The subdued activity has been reflected in the spending patterns of consumer and business customers. Encouragingly, our most recent data, which is to the middle of October, shows that card spending is recovering, with the quarterly growth pulse at 1.5%. However, on our estimates, most of the boost to income from tax cuts is being saved, not spent.
Australian businesses have navigated tougher conditions by managing costs, and you can see this on the chart, with commercial businesses having been outperforming, especially in those industries providing essential goods and services to the growing population. However, as you can also see in the chart, the data for smaller businesses, these have been struggling to do this, and this has been reflected in their cash flows, with some deteriorating. If we turn to the outlook, we expect the Australian economy to improve, with GDP growth increasing from 1.5% to 2.5% in 2025. Recent indicators suggest consumer pessimism has reduced, and we saw this in the Westpac Melbourne Institute Consumer Survey, which rose to a two-and-a-half-year high recently. These trends are expected to translate into the bank's key markets. In 2025, we expect credit growth of approximately 5% in housing and 7% in business.
To recap, it's been a very good year. We've been disciplined in growth and managing margins. Improvements in our customer franchise are reflected in improved service levels, higher customer advocacy, along with growth in all key segments. The balance sheet remains in the best shape it's been in my 30 years at the bank, and that has supported returning surplus capital to shareholders. Of course, today marks my final result as CEO, and I thank our people, customers, and shareholders for their support. My tenure as CEO has been about driving change and strengthening the franchise. We've exited 10 businesses, and this sees Westpac now a simpler and stronger bank. Over the past 4 years, we've significantly improved risk culture and governance through our CORE program, and we're now in the transition phase to demonstrate the sustainability and effectiveness of the core changes.
I've loved doing this job, and it's been an absolute privilege to lead our people. They consistently put our customers first and have worked hard to make the changes needed to help us deliver on our strategy for growth and return. Thanks also to Michael. He's been a great partner, and we've achieved a lot in refocusing the bank and returning it to growth. In May, Anthony Miller will hand down his first result. I know he'll be a great CEO, and I wish him all the best. Thank you, and over to Justin for questions.
Thanks, Peter, and we've loved you doing the job as well. As a reminder for those that are registered, if you'd like to ask a question, please press star one. That includes the media, so any media on the line, if you'd like to ask a question, please register.
Operator, we're ready when you are. Thank you. First question comes from Ed Henning from CLSA. Ed?
Thank you for taking my questions. Look, I'll start with a couple. Firstly, just on the margin, if you look on slide 61, where you look at the Australian mortgage portfolio. If you look at you're growing your investment property lending, you're growing your interest-only lending but the flows have stepped up quite a lot, and you've stepped down on your proprietary channel. Can you just talk about, is that just the impact of RAMS, and can you talk about the impact on margin going forward and what you're seeing in the mortgage market, please, there as a first question?
Yeah, thanks, Ed. Michael here. So, look, RAMS didn't have an enormous impact, as we said in the call. It's about a AUD 3.5 billion reduction in the half, not a big reduction.
The flows you're seeing is just the outcome of the flows we saw. On margin, as I indicated, we think that there are lots of moving parts in that. We expect slight contraction in mortgage margin, as we indicated, deposits to be at a similar level, and the replicating portfolio, while positive, to be slightly less in the first half.
Yeah, Ed, the only other thing I'd say is we have seen improved flow through our business channel, so mortgages sold through the business segment, and that naturally comes with higher investor property product mix and therefore interest-only as well. So that's the other feature that's coming through in this half.
Do you see that continuing, Peter, and is that going to give you a little bit of a tailwind on your margin? Definitely.
We want to do more business through the business segment, and that's across all products, including in mortgages. So Anthony's definitely had that as a focus this year, and certainly that will be an expectation as we move forward. And as you rightly put out, the investor product is a slightly higher margin product than owner-occupied.
Okay, thank you for that. And just one other question on costs. Can you just clarify the Unite headwind running into 2025 is kind of roughly around AUD 200 million? And then also, can you just touch on what you're seeing on your BAU expectations, and have you got any more amortization headwind coming through as well so we can just get a feeling of what we should expect for cost growth for next year at this point?
Yeah, as we stand back, Ed, into the first half, we're expecting cost growth to be similar in the first half to the second half 2024, and that includes the step up in the investment in Unite. As we indicated, investment in Unite will be 35%-40% of the total investment spend of $2 billion, and we had about $147 million for Unite in 2024. So you can expect that step up in total investment spend, of which about 75% will be expensed. So I think that probably gives you enough to do the calc.
No, that's great. Look, thank you very much, and look, all the best, Peter, and congratulations. Thanks, Ed.
Our next question comes from John Story from UBS. John?
Thanks very much. And Peter, congratulations on the last 5 years.
My question just follows on from Unite, just on page 24. Just wanted to reconcile some of those numbers there. You've got 114 spend on Unite, and you're suggesting in that slide that 57% has been expensed. I just wanted to reconcile that $34 million. Looks like it's 30%, maybe there's something else just in that number. That's the first one.
Yeah, so Michael here. So now that's just the movement half on half. So $147 million worth of spend for the year, $114 million in the second half, of which 57%. So that's just the delta half on half of the P&L impact.
There was already something in the base, Ed, in the first half.
Yep. The $34 million that you're calling out there is just in 57% expense. Obviously, they're not going to reconcile, right?
Just to make sure that.
Yeah, yeah, that's fine.
Yep, we're calling out the calc, so you don't have to do it.
Perfect. No, that's perfect. That's perfect. Peter, maybe just a second question, kind of a bigger picture question for you. Hypothetically, new incoming CEO of Westpac, where would you be spending the majority of your time in the business, and why?
Well, I'm not going to box Anthony in. I think that's for Anthony to set out his priorities next year, which he will do. But broadly, if I step back, we've got a simplified business now, so it's back to banking, and we've got to get the Unite program done. So that's obviously a priority, and that I think is critical for all aspects of the business, as you heard me say in the comments.
And then if I look at all our businesses, they're all above the cost of capital, but the consumer business is probably the piece that's not. So we need to do work there, and I'd be pretty happy to see Anthony grow in our business, in our institutional, our New Zealand portfolios. So I don't want to lock him in, Ed, but I think there's plenty for him to work on.
Great. Thanks so much, Peter, and once again, congratulations. Thanks.
Thanks. And then to our next question, sorry, Jonathan Mott from Barrenjoey. Jonathan?
Thank you. As you mentioned, your strongest balance sheet was probably ever seen from Westpac. And first half, we've got a special dividend. This half, we saw again strong capital positions expanded, AUD 3.5 billion of excess franking credits.
And I know you've topped up the buyback, but why no special dividend this half?
Yeah, well, I think first thing is we get to look at this every 6 months, and the board will do that again. When we look at the operating environment, as I said, the domestic economy, there's certainly more positive signs as we look into 2025, but we're very conscious of the global outlook at the moment. So we've obviously got conflict. We've got some big elections coming up. There's potential for supply chain disruptions and inflation. So we probably charted a more conservative path on capital, and that's why we've used the buyback as the mechanism to return surplus capital. Very conservative.
If I can ask a second question then, you mentioned in the period you're about in line with the system on pricing, but if you look at the last half, there were big swings in pricing in the housing market and also swings coming back on the volume. So you're pricing aggressively in Easter, you won volume in that June quarter, you pulled back on pricing around that sort of June period, and then volume slowed really aggressively through the September quarter, and now pricing's been more aggressive again. How do you get out of the cycle of turning price on, seeing volumes pulling back, seeing volumes slow? Because it does seem to be a bit almost bipolar.
Yeah, well, we tested the market these 6 months, and I think you've summed it up well that it remains a very price-competitive market, mortgages.
So in the period that we moved our prices above the market, we saw flow go to other organizations, and we've had to respond by coming back into the mix. So for me, it's just an interesting thing that the mortgage market is very competitive, and at this point, the price is pretty fixed at a low point from my perspective. And so that's just the market, and that's why we're okay to sort of test the market at certain points. But if I turn to the flip side, we've got good growth in the institutional bank and business bank, both of which are earning very good returns. So we've definitely switched our focus in terms of how we're going to grow and where we're going to grow.
Thank you. Jonathan's again.
Thanks, Jonathan. Our next question comes from Andrew Triggs from J.P. Morgan. Andrew.
Thanks, Justin. Good morning, everyone.
Peter, just extending my best wishes and thanks for your engagement over the last many years at Westpac. I had a couple of questions. First one, just on the margin. So especially looking at the exit NIM of 183, that was in line with the average of the half, but the half had a benefit from the remediation provision right back, which came through in Q4. That would suggest that maybe the exit NIM was slightly above the underlying Q4 level, but just interested in presumed liquidity was reducing throughout the period, including the spot balance benefited from, or the spot liquid asset balance was lower. Was that a tailwind to the spot exit NIM?
Yeah, so Andrew, Michael here. Yes, that's right. So you saw over the half, liquid asset reduction in liquid asset balances added about 2 basis points to NIM.
So that was a slight tailwind in the half, but we're only talking a point or two.
So just there to say that exit NIM's fairly flattish today on exiting out to one-off.
Yeah, probably what I'd say is, as you point out, there was a remediation release in the last quarter. There are remediation additions and releases, which we've had over many years now, as most banks do. So a point or two here is probably not one you want to spend too much time focusing on. We will see that volatility at that point. But yeah, I think we would say that overall in the half, the core net interest margin, as we call it, was sort of flat to up a bit.
Thank you.
Can you unpack the one basis point headwind from lower lending spreads in the period, especially with regards to the tailwind from fixed rate to variable rate rollovers during the period, which you said really did start to slow certainly next half? How sizable was that a benefit to the NIM?
Yeah, I think, look, there are 2 main drivers of the loan NIM movement in the half. There's obviously, as Pete pointed out, there continues to be strong competition in the mortgage market. So that's obviously a headwind to margin. But at the same time, we saw an increase in the fixed to variable rate switching, which is a tailwind. So net net, it balances out to one basis point.
As we indicated, we don't think we're through the most of the fixed to variable rate switching, and we've got some information in the IDP, which shows you that. But yeah, I think we'll see, as I indicated, we'll see continued mortgage compression, slight mortgage compression, and that'll have that slight decrease in margin in the first half of 2025.
Michael, you're able to quantify at all what the tailwinds from the fixed rate rollout is worth?
We don't. There's a lot of moving parts. If I sat here, there's probably 10 moving parts in lines. They're probably the two main ones. Okay.
Just to follow up on that strong business loan growth, or particularly in institutional, I mean, in the past, that is somewhat at odds with system growth, at odds with what we're seeing from some of the other major banks, which are prioritizing growth elsewhere, and also Westpac's history of being pretty disciplined in lending within WIB. Could you just talk a little bit more about that? I know returns look strong on a headline basis, but with rate cuts in the not too distant future, I presume you'll start to see some margin compression in institutional.
I think the first thing is we're growing deposits very strongly across the franchise at the moment. So that's giving us opportunities to support growth in all segments. And so that's sort of the macro. I'd actually point to the strength of the deposit franchise across all businesses.
And WIB has seen good opportunities in business that we like. So that's why one of the points I made is the average risk grade that we're writing is pretty consistent. The margin on the balance sheet actually is up a little bit. We look at that all the time. So that's the right settings for the business at the moment. If we get to a point that the returns on new business in WIB don't make sense because of whatever reason, then we'd have a look at it. But that's not where we're at the moment. We've got good opportunities to grow at a risk-adjusted return that we're happy with.
Excellent. Thanks very much, Peter.
And a reminder, try and limit your questions to 2, please, so we can get through everyone. Thank you. Our next question comes from Victor German from Macquarie. Victor.
Thank you, Justin.
Can you hear me? Yes. Great. Thank you. I was first hoping just to clarify about the margins and replicating portfolio changes. You increase your replicating portfolio balance by AUD 10 billion, and that should add about 4 basis points to the replicating portfolio with an offsetting impact on unhedged deposits. But I was hoping to just make sure I understand it correctly. Your guidance for slightly lower replicating portfolio benefit in 2025, does that include that additional benefit of about 4 basis points, or is it exclusive?
Sorry, Victor, Michael. Yeah, look, that impact on replicating portfolio in the first half includes the additional AUD 10 billion, which we added to the portfolio.
So including that benefit, you're guiding like a lower benefit at overall replicating portfolio versus FY24?
That's right. Look, the replicating portfolio will be positive for margin in the first half and for most of 2025.
It'll be just less positive than we saw in 2024 because we're past the peak of effectively the delta increase in the replicating portfolio rate. And we've got that chart in the IDP, which hopefully spells it out.
Right. Okay. Thank you. And then second question, just to be keen to hear your thoughts on capital management. I know you already had a question earlier and appreciated it's the board decision as well. But your dividend currently is at upper end of your payout ratio with your impairment charges, which are pretty much close to zero. And also your model adjustments have contributed to capital generation over the last 3 years. Now only have about AUD 1 billion until you reach the floor.
So when you balance this with a starting strong capital position and surplus franking credit, would your preference be to sustain the elevated dividends and try to grow into that over time, or would it be to be sort of quicker with respect to return of capital and do it via special dividends and ongoing buyback?
Yeah, well, it's a decision the board looks at every 6 months, Victor, but I would say if we think about the payout ratio as one of the key inputs into any discussion, we talk about it as a medium-term payout ratio, 65%-75%. So that would allow us to be below or above it because it's a medium-term ratio.
We'll always look at, as we have historically, you're always looking at the growth in your business, the return from that growth, where you are in the payout range, and then the way that we return capital. I'd just say this time when we steered into it, we were probably a little bit more conservative in what we did. We're just conscious that there's a lot going on in the globe at the moment, and we've had a little bit of powder up our sleeves, if you put it that way.
Okay. Thank you.
Thank you, Victor. Our next question comes from Richard Wiles of Morgan Stanley. Richard.
Thanks, Justin. Good morning, Peter. Good morning, Michael. My first question relates to the mortgage market. You said in the presentation that you're targeting volume growth in line with system in all your segments.
Can you be a little bit more specific about Australian mortgage growth? Does that comment include the impact from RAMS's runoff? And so does it mean you'd have to grow above system?
Yeah, no, no. I think around system, but I wouldn't be slavish to system in mortgages, Richard. I think we're thinking much harder now about different segments and growing faster. So the subsegmentation is where we're doing a lot of work and a lot of focus as opposed to the overall market. The comment is just generally we do want to grow in all our markets, but mortgages is the one where being below system, I wouldn't be upset depending on the market and competitive dynamics.
Okay. Thank you. And then just a question relating to Project Unite. You said you've commenced 39 projects.
How many do you expect to complete by the end of the first half and the end of full year 2025? And can you give us some indication of what cost savings Project Unite will generate in the 2025 year?
Yeah, no, I understand the question, but this is one where Anthony will set out his thinking next year. So I'm allowing him a little bit of time once he gets effectively his feet under the desk tomorrow to really think that through, and he'll give you an update next year, Richard.
So even though you've done the planning for Project Unite, you can't tell us how many of these 39 projects you'll expect to complete by March, by November?
I'm going to leave it to Anthony to set out his plans next year.
Richard, I understand that might not be the answer you like, but I think that's the right thing to do for Anthony.
Okay. We'll ask it in 6 months' time then, Peter. Thank you.
Thanks, Richard. Our next question comes from Brendan Sproules from Citi. Brendan.
Good morning. I just have a couple of questions around the business and wealth division, the institutional division. So in this half, you had 9 and 7% cost growth respectively. Can you maybe give us an outlook on that cost growth, given that you have got inflation pressures across those divisions, as you've called out in the commentary, and you're also expanding the distribution in both segments? Are we going to see that sort of trajectory in costs in 2025?
Yeah, I think look, just to give you a bit more background. So the cost growth in both divisions was a function of increased investment, and it's important to remember that institutional bank essentially undertakes all the payments build-out that we're doing and incurs the cost of that. So that's a group-level investment, and so that's been a big driver of it. Both WIB and business have increased bankers, and that's been a driver of that as well, and with the increase in investment in both BizEdge and business payments and Westpac One and institutional, they've been the recipient of a lot of that tech cost inflation that I talk about. So while we don't expect that necessarily to be as high in the first half of 2025 for either WIB or business, it will be elevated because those investments will continue.
My second question is just in terms of the timeline here. Obviously, re venue has lagged costs as you've had this additional costs upfront. What is a reasonable timeframe we can expect to see positive jaws across these 2 divisions?
Look, I think our view is, as we said, our focus is on improving the cost-to-income ratio for the overall group over the medium term. And as we've indicated before, Unite's a really big part of that. We expect to see the major benefits of Unite come through by FY28, and that's the medium term for us. So we think the focus is best on the overall cost-to-income ratio rather than individual jaws in divisions, and that's how we think about it.
Okay. Thank you.
Thanks, Brendan. Our next question comes from Brian Johnson from MST. Brian.
First of all, Peter, thank you very much for a valiant effort.
Peter, and just 2 questions if I may. The first one is, if we have a look at the slide at the front, you say that the return on tangible equity in the consumer business is 9%. And we know that struck off a low loan loss charge. When we have a look at slide 7, we can see that basically over the September year, you were pricing basically home loans at a premium to the peers. I just want to confirm when we actually have a look at the external channel checks at the moment, Westpac have gone from pricing at a premium to suddenly pricing actually at a discount and are losing share. Can we just get a feel on what's happening in the consumer business, this trade-off on the margin and the ROTE and the volume growth, what we're seeing in recent months? Yeah.
What that data is in the slide is the RBA data where we submit our pricing across the whole book, proprietary and third party. That's the outcome for the 6 months. But you're right, Brian, we were above the market significantly in the first part of the half, and then we've brought it back in. There will always be segments where we compete a little bit harder, but we're comfortable that the settings we've got at the moment are right. I see the anecdotes across the pricing channels internally, and there's always examples of people writing business where you look at it and go, "Does that make sense?" But for us at the moment, in the first part of the 6 months, we were above the market. Now we're better in line with the market, and we feel like that's the right setting for us.
Peter, from that, is it right to conclude that the 9% ROTE you got during the period, it takes a while for people to draw down loans? Is it implying that the ROTE that you're doing in the consumer business, as these loans get actually drawn down, that ROTE would actually fall?
No, because we've actually seen better ROTE business as we target different channels and mixes. So if you look at, in particular, some of the high versus low LVRs, some of the business versus broker channels, those type of things, we're actively managing the subsegments within the mortgage portfolio. It's one of the areas that Michael and I spend quite a bit of time on.
Thank you. Just the second question, if I may. Peter, what do you think the long-run loan loss charge is for Westpac now? We debate this quite a bit.
Somewhere between 10 and 20, and there's a bit off within that internally. Brian?
Yeah, I think what we'd say, Brian, is that the historical view on long-term loss rates, we would say we've had a step down, A, because of the quality of the portfolio that we now write, and that's a function of macroprudential settings, but also the nature of the business we have. We think that long-term loan loss rate, as Peter said, is closer to sort of mid-teens rather than the 25s that might have been in the olden days.
Sorry, Michael, just to clarify on that, we're saying 10 to 20? Yes. Then when you say mid-teens, what are you referring to there, sorry? It's the midpoint between 10 and 20.
Okay. Fantastic. Thank you very much, and good luck, Peter. Thank you.
Thanks, Brian. Our next question comes from Jeff Cai of Jarden. Jeff.
Good morning again. Thank you. A question on the outlook on slide 22. Just interested in your thoughts with deposit mix impact continuing rather than worse, but you're getting deposit price and competition seems to be easing. So to what extent can the deposit margin piece here be a small tailwind going forward, absent any sort of changes in cash rates?
Yeah, so the way we think about that is we expect to see the trends in switching from at-call to savings and TDs to continue, and the benefit you see on slide 22 from the replicating portfolio will still be there in the first half, but slightly lower. So we think it'll be a negative margin impact in the first half, only slight, but a negative. So it'll be a slight headwind in the first half is our expectation. Right. Okay.
And then just a question on the business segment. Very strong lending growth in Aussie SME lending growth this half. Can you talk through how front book lending spreads are tracking on a half-and-half basis and how you're seeing the lending pipeline going forward?
Yeah. So on the front book position, we're seeing that pretty stable, and as you saw from the overall margin, again, reasonably stable in the half. And the pipeline is very strong. As Peter indicated, the growth in the business segment is a real strategic focus for us. We're increasing bankers, we're increasing investment, and we're seeing that through the loan growth numbers, and we expect that to continue into 2025.
Okay. Thank you.
Thanks, Jeff. We've done with the analysts now. Just a reminder, other media, if you're on the line and would like to ask a question, please press star one.
Our next question comes from Andrew Cleary from Capital Brief. Andrew.
Thanks very much. And congratulations, Peter. Look, I get the sense that in a way, this is a bit of a holding statement, this result before Anthony takes over next week or so. So how much of a surprise are you expecting Anthony to should we prepare ourselves for with these first results? Is there a lot of moving parts he's got discretion on here?
Well, I'm still a big shareholder, so I would like Anthony to deliver a really good result. But no, I think the strategy is broadly set. One of the good things about an internal successor is they've been part of the strategy, but of course, he will put his own stamp on it.
So I wouldn't expect a major tilt in strategy, but Anthony will do what he wants to do in terms of being CEO. So I'll leave it for him to speak for himself next year.
And just another quick question on the investment spend. How much of that is the Consumer Data Right and work for the NPP? And with the Consumer Data Right, were you one of the banks that was instrumental in lobbying against it with the ABA?
I don't actually know the number on the Consumer Data Right, but it was probably the big spends behind us. For me, what we need to do on the Consumer Data Right is use what we've got. We built this asset. It's not actually being used, so it's underutilized. I'd actually like to see use cases that come forward that are used at scale.
I don't think we need to expand it from here until we can actually get value out of it. But the other thing, one of the things I think we also need for the industry is access to the ATO data. So think about payroll slips. Most payroll slips are digital now in the economy. We still ask for records. So having payroll information available digitally would be good for the economy as well. But for me, Andrew, it's about using what we've got. I think we should pause on expanding it and expanding capability, and particularly don't duplicate lots of payments capability that exists in multiple forms across the economy now.
Great. Thanks for that, and congratulations again. Thank you.
Thanks, Andrew. One analyst has snuck back in, Nathan. Nathan Lead from Morgans. If you'd like to go ahead, please, Nathan.
Yeah, thank you.
Just, I suppose, questions just around the CET1 . So just first up, obviously, APRA has a proposal to remove the AT1 hybrids. Can you just talk through whether that additional 0.25 on the CET1 will get absorbed within the 11%-11.5% target that you've got? And just secondly, I suppose, look, you've been running it well above that target for a number of periods now. How relevant is that target going forward?
Yeah, well, it's still a proposal from APRA, so we haven't adjusted the targets, and we haven't made any decisions to adjust the targets, so that'll be a future decision. The capital range is still very relevant, so it helps you understand our thinking on the range of capital outcomes. At the moment, we would say we have excess capital, so it's still very relevant.
But we haven't. We'll decide on what is it, a 2028 change or 2027? For AT1? Yeah. Yeah, 1st of January, 2027.
It's a 2027 change, so there's still a bit of time to go.
Okay, great. Thank you very much, and best of luck with your future endeavors, Peter. Thank you.
Thanks, Nathan. Back to the media. Peter Ryan from ABC. Peter.
Yes, hi there, and thank you, Peter, for always being accessible whenever you can. We're always good dealing with you. Now, you've been through a few times there, I guess, going back to the money laundering counts, but just putting that behind you. High inflation, 13 interest rate rises since May 2022, and your borrowers under a lot of stress, and you've mentioned today that some borrowers are facing difficult choices.
How high is that pressure, and are there some borrowers who are, I guess, collapsing or having to sell up their homes because of that pressure?
Well, Peter, the first thing I'd say is any customers that need help should call us. We've got plenty of options available, and the sooner you call us, the better would be the first thing I would say. What we've actually seen in the half is we provide, or in the year, we provided 47,500 tailored packages for people for assistance, and the vast majority of them were three-month packages. And so what that indicates to me is people were having issues that could be sorted out in time. And so that's, to me, what we're providing a lot of these packages is time to get yourself sorted out if you've got sick, if you've lost a job.
Divorce is still one of the big issues. So time's helping. And we did see hardship packages outstanding peak in June, and they're starting to come down. So that says to me a lot of people have got used to these higher levels of interest rates. So that's certainly the average and the experience. We have seen higher delinquencies, but as Michael said, they've stabilized in this period. So our economics team is forecasting an interest rate cut of 25 basis points in February. Hopefully, they're right because I think that would be good to give people a little bit of relief.
If I just do one quick follow-up, Peter, given that rates will fall maybe sometime in 2025, I mean, what's the pressure on borrowers to maintain those repayments so they actually have some chance of paying their loan off, or are we going to be seeing another cycle of people not repaying their loans or struggling under that?
Well, we're actually seeing more people paid ahead. I haven't got the exact stat, but it did increase in the half. We saw offset balances grow 10% this year to above AUD 60 billion. So in our book, our mortgage book, actually more people are paid ahead and there's more balances in offsets. So the vast bulk of the book is doing well, but that's not everyone. I acknowledge that, and that's why I say call us early if you need help.
But there's signs that things could be a little bit more positive next year.
Okay. Thanks again, Peter. All the best. Thank you.
Thanks, Peter. And our final question comes from Lucas Baird from the Australian Financial Review. Lucas?
Hey, guys, can you hear me okay? Yes. Yep. Cool. I just had 2 questions. I guess the first one following up on Peter's. Economists are pushing out sort of rate cut projections deep into 2025, and some are even saying that they may not come at all and we'll have to wait until 2026. I mean, how would that affect your customers' arrears levels and the overall economy if we had to wait that long for the first rate cut?
Well, I think we've, as I said before, I think the majority of customers are used to these higher levels of interest rates.
So hopefully we get a cut next year, but if we don't, then I think we'll actually see slower growth in the economy is what will really happen because people don't have as much discretionary income to spend. So it's probably more the growth will be slower than issues in the mortgage book. That assumes, of course, that unemployment remains very low because that's the biggest driver of issues in our mortgage book is actually unemployment.
Okay. Cool. And then just the second one. Recently, we've seen a sort of split in the banks over what should be done with lending rules to get more first-time buyers in the market. Why do you think that split has emerged between the big four, and does it threaten the lobbying power of the ABA?
Oh, no, I don't think it threatens the lobbying power of the ABA.
I think in a competitive market, you do get different views, and so that's what we've seen from a Westpac perspective. The issue in housing is supply of housing, not access to finance. If you increase finance into a market, it pushes prices up. The way that we need to help first-time buyers get in the market is to create affordable housing, and that's a supply issue. What we hear from developers is it's very hard to make the numbers work for affordable medium-cost housing. It's only premium housing that they're building at the moment because they know that they can sell it. So that's why we come back to supply. In a healthy competitive market, you will get differences, and we've seen that in that case.
Thanks, guys. Appreciate it, and congrats, Peter. Thank you.
Thanks, Lucas, and thank you, everyone, for joining the call.
Please reach out over the course of the day if we can be of further assistance. Thank you. Thank you.