Treasury markets rose from 12 to 13 basis points. Looking to first half 2026, we've included some key trends we expect to impact margin. We expect lending margins, excluding the timing impacts from rate cuts, to edge lower. Pressure on deposit spreads from the average impact of rate cuts and prior period switching to saving products is likely to continue. The replicating portfolio is expected to be a net benefit of one basis point. This includes a four basis point benefit from the total replicating portfolio, offset by a three basis point reduction in unhedged deposits. This reflects a decision to increase the deposit hedge by AUD 10 billion. This was executed in September and October to provide further earnings stability through the cycle. The benefit from improved term wholesale funding markets is expected to be a slight tailwind.
While mortgage margins appear relatively stable, lending competition remains difficult to predict, along with short-term funding costs and RBA rate cuts. To this end, we've provided two sensitivities to help understand the potential impact. The next 25 basis point rate cut, RBA rate cut, leads to an approximate one basis point contraction over the first 12 months, reflecting the impact on unhedged deposits and capital. Based on September balances, a five basis point move in the three-months Bill Swap rate equates to approximately one basis point of NIM. Quickly touching on non-interest income, which increased 10% for the half. Fee income was up 5%. Higher card fees reflected increased spending and fee changes, which are being phased in. Business and institutional lending fees increased due to strong balance sheet growth. Wealth income was up 3% with higher funds under administration.
Trading and other income increased 27% from higher sales and risk management income, including foreign rates and foreign exchange, and favorable DVA. Moving to investment spend, which increased 9% over the year. UNITE investment was AUD 660 million as the project continued to step up through the period. The proportion of investment spend that was expensed increased to 60%. UNITE was the main driver, with this work expensed at 74%. Notwithstanding the acceleration of UNITE, spend on growth and productivity initiatives was in line with that of FY 2024. This includes BizEdge and Westpac One. Risk and regulatory spend declined substantially after the completion of several projects, including the core program. Into FY 2026, investment spend is expected to be approximately AUD 2 billion, with UNITE accounting for just under half the total spend at AUD 850 million-AUD 950 million.
This is in line with the fourth quarter run rate, where UNITE spend was AUD 225 million. Both risk and regulatory and growth and productivity investment will decline to allow the UNITE investment to accelerate within the expected AUD 2 billion total investment spend. Moving to expenses. This slide has changed in presentation to better reflect the underlying drivers. My comments relate to movements over the year, which we believe provides a better guide to key trends. Staff costs increased AUD 397 million as the new EBA began, superannuation rates increased, and we invested in more bankers in business, WIB, and consumer. Technology costs increased AUD 146 million, reflecting vendor inflation, increased demand to support growth, and more cyber protection. Volume and other rose AUD 199 million. Drivers include the important investment in our brand and marketing and higher operations-related expenses to support customers and prevent fraud and scams.
This was offset by AUD 402 million of structural productivity savings. This included the benefit of a simpler operating model, more automation, and reductions in branch space. The ramp-up in UNITE added AUD 399 million over the year. Looking to FY 2026, staff costs will rise as we continue to invest in bankers, and eligible employees receive a 3%-4% pay rise under the EBA. The averaging impact of bankers hired from this year, and higher superannuation rates will also flow through. Technology expenses are expected to remain a headwind. The expense contribution from investments will be driven by the mix shift towards UNITE, with the increased cash spend expensed at approximately 75%. Assuming the midpoint of our guidance, this will translate to a AUD 190 million increase in operating expenses. This will be partially offset by the decrease in other investment.
Amortization expense will continue to be a headwind in FY 2026, although to a much lower extent. We remain focused on closing the cost-to-income ratio gap to peers over the medium term, and we need to structurally lower our expense base. Total productivity is expected to be at least AUD 500 million in FY 2026. This revised view of productivity will give us a consistent way to demonstrate the benefits from both UNITE and fit-for-growth initiatives. Overall, credit quality remains sound and with consumer and business portfolios performing well. Stressed exposures to total committed exposures decreased eight basis points. This reflects a decline in mortgage arrears and reduced stress across most of our business segments. This half, we have continued to see improvement in 90 day+ Australian mortgage arrears.
These have reduced from a peak of 112 basis points in September last year to 73 basis points, reflecting a combination of customer resilience and an adjustment to the reporting of loans when customers complete their hardship period. In New Zealand, mortgage arrears fell by eight basis points to 46 basis points as rate relief began to feed through to customers, rolling off higher-rate fixed mortgages. We have provided the chart by industry for our non-retail portfolio. As you can see, business customers are managing conditions well, with stress reducing across most sectors. Our portfolio remains well diversified across sectors and geographies. Looking forward, the two key drivers of asset quality outcomes are likely to remain the unemployment rate and asset prices. Total credit provisions were 2% lower at almost AUD 5 billion.
This reflects a AUD 72 million decrease in individually assessed provisions and a reduction in modeled collectively assessed provisions driven by improvements in underlying credit metrics and the economic outlook. Offsetting the model-driven outcomes were two main items of management judgment. The weighting to the downside scenario was increased by 2.5 percentage points to 47.5% at the third quarter. The base case reduced by the same amount. In addition, we increased overlays by AUD 108 million, with overlays as a percentage of total provisions increasing from 3% - 5% in the period. As a result, overall coverage reduced by one basis point, with total provisions now AUD 1.9 billion above our base case. An improvement in the composition and funding of liquidity adds to our competitive positioning and helps provide medium-term earnings stability. The deposit-to-loan ratio has reached an all-time high of just under 85%.
A more stable source of funds from household and business transaction accounts has reduced the reliance on term funding, with issuance in FY 2025 the lowest in 10 years. Our liquidity and funding metrics are above our normal operating ranges, which we believe is appropriate given the market backdrop. The strength of the capital position is a key feature of this result and provides us with flexibility and opportunities over the medium term. The set-one capital ratio ended the half at 12.5%. Net profit added 80 basis points, while the payment of the half-year dividend reduced capital by 58 basis points. Risk-weighted assets detracted seven basis points, with higher lending balances more than offsetting data refinements, improvements in delinquencies, and a reduction in IRRBB risk-weighted assets. Other movements added 16 basis points, largely reflecting lower capitalized software balances and movements in reserves.
There are several adjustments to consider for first half 2026. These include the removal of the AUD 500 million operational risk overlay in October adds 17 basis points of set-one capital. The new IRRBB standard came into effect on 1 October, and the extension of our non-rate-sensitive deposit hedge has now been allowed for regulatory purposes. These two items add 39 basis points of capital. Offsetting this, the remaining AUD 1 billion of the previously announced share buyback will reduce set-one by 23 basis points. Following these adjustments, the standardized capital floor was met in October. Importantly, there are opportunities for us to manage the standardized floor, and we expect the impact on the set-one ratio at the half to be modest. We've implemented a new capital target of 11.25% following APRA's changes to AT1.
We have approximately AUD 3.1 billion of capital above the new target after the payment of the second half dividend. The payout ratio, excluding notable items, was 75%, which is at the top end of our target range of 65%-75%. This balances our strong financial and capital position while maintaining capacity to both invest and support customers. We have AUD 1 billion of the previously announced buyback outstanding. We see value in the flexibility provided by this form of capital management. With that, I'll hand back to Anthony.
The Australian economy is showing signs of improvement following a sustained period of below-trend growth. Household purchasing power is rising as real disposable incomes grow. Businesses are emerging from a period of subdued activity, partially supported by lower rates, easing input costs, and some productivity gains. Westpac DataX Insights highlight an improvement in card spend growth at 6.5%, the strongest we've seen since April 2023. For business, commercial customers are faring better, but it's still challenging for our SME customers. However, we've just started to see an improvement in cash flows off the back of firmer household spending. Underlying inflation is at the top of the RBA's target range. This will put pressure on the RBA to hold rates tomorrow. We are starting to see more growth driven by private rather than public investment. However, this transition has been slower than anyone expected.
A smarter balance calls for bold, coordinated action across government, regulators, and the private sector. It has been pleasing to see the focus on the productivity agenda in the national debate. Targeted action is key to unlocking Australia's long-term prosperity and resilience. An area we're focused on is addressing the housing affordability challenge. We need to tackle the structural undersupply of housing and efficiently deliver more houses in the AUD 500,000 price range. More broadly, the global outlook is not without risk, with ongoing trade and geopolitical tensions a constant threat. Our strong financial position helps us navigate that uncertainty while being there to support our customers. It's pleasing to see business credit is expected to grow 7%, driving private investment. We're building on the strong foundations, and it is all now about execution. We have 13 million customers.
However, to realize the advantage of that scale, we must drive more efficiency, we must complete our transformation agenda, and we must enhance our service proposition. Each business has a clear direction, has the right leadership team in place, and must now deliver. I'm pleased with our progress and energized by the opportunities ahead. With disciplined execution driving momentum, we're deepening customer relationships and investing in our businesses to support sustainable returns for shareholders. Thank you.
Thanks, Anthony. We'll move to Q&A now. If you'd like to ask a question, the dial-in details were provided in the invitation. As a reminder, please press star one. Our first question comes from Tom Strong from Citi. Tom.
Thanks, Justin. Good morning, Anthony and Nathan. Just a question around the productivity benefits into 2026. I mean, you took 400-odd in this year and you've guided to 526, but you've got the benefit of, I guess, incrementally AUD 270 million from the fit-for-growth, which you took the restructuring charge for. Is that AUD 500 million conservative, you think, in terms of the fiscal year 2026 opportunity?
Yeah, why don't I start? Yeah, so thanks for that. I think you've sort of read it the right way. That's a line item in terms of just showing on a consistent basis where we think the benefits of the restructuring charge. And then in the future, as UNITE becomes a more material piece of it, we'll continue to show our productivity benefits on a like-for-like basis through that line. As it relates to the greater than 500, you know, I think that's the guidance that we've given. The benefits from the AUD 273 million, we had actually had a little bit in this year. So there's probably about, we had 402 productivity for FY 2025. There's about AUD 40 million of that will be benefits from the restructuring charge this year.
I think when we made the pre-release, we just made comments that we thought the rest of that will be phased reasonably evenly during FY 2026, and then there'll be a little bit of benefit to flow into FY 2027. Yeah, we're expecting to do AUD 500 million. We've got to wake up every day and strive to do better than that, but you know, our guidance today is in excess of AUD 500 million.
Okay, thanks for that. That is very clear. Just a second question around UNITE. It was 35%-40% of the investment envelope, and you have clarified that today at 40%. You have kept the AUD 2 billion per annum consistent over the next few years. Just given the reallocation towards UNITE and, I guess, the decline in purchasing power over that time, do you think that AUD 2 billion per annum is still appropriate as a view to FY 2028, FY 2029?
Look, I mean, that's a very good question, and you're right. We'll continue to ask ourselves, have we got that right? I mean, in framing up AUD 2 billion per year, it's really anchored around what can we do effectively and deliver, if you will, cost-effectively and substantively. It is really about the capacity of the company to deliver the change we need to undertake. If it's the case that we can prove certainly in what we deliver over the next 12 months that we can do more, then we'll remain open-minded about that. At the same time, it's about balancing the capacity of the company to execute the change cost-effectively and also balancing, making sure we deliver a return to shareholders. It is a balance that we'll have to navigate over the next 36 months.
Thanks, Tom, for limiting to two. I did not mention that. If everyone else can respect that, that would be appreciated. Next question comes from Andrew Lyons from Jefferies. Andrew.
Thanks, Justin. Good morning. Good morning, everyone. Nathan, a question for you. I just want to try and flesh out how everything you've mentioned on expenses will ultimately impact growth in FY 2026. So perhaps just referencing the various FY 2026 considerations that you have provided us, can you perhaps talk in a bit more detail as to how you expect this to translate to the various moving parts that you have in your expense waterfall slide on slide 27, please.
Yeah, thanks, Andrew. Good to hear from you. I guess I'm just going to try and find the slide. Just give me two seconds. Oh, it's up on the screen now. I guess, you know, I did walk through these and maybe just happy just to go through them again and try and give a little bit more flavor as we go. I think we've looked at it on a, the first thing is just to sort of look at it on an annual basis, Andrew, and that's what we've tried to do. I think on people costs, we do continue to think that that will be an increase in expenses next year. You know, we probably expect if you break that down a little bit, we've got some pull-through of things like the investment in bankers that we had this year.
There's a pull-through of the superannuation guarantee coming through. So there's a few of those things. We probably expect that we'll have lower absolute wage growth. You know, the EBA is into its second year, so it's a lower number year on year. But we do expect to continue to invest in bankers. I think that number will continue to be a big feature as we look at FY 2026. On tech, you know, I guess my comment was just similar, you know, that we continue to think that that will be a headwind.
On volume and other, maybe just to break that one down a little bit and try and give a little flavor, we did probably the one thing that's a little bit of feature of FY 2025 was a, you know, a reasonably material investment in the brand, which we're really pleased about and is important in investing in the business. That was about AUD 60 million in the year, AUD 45 million in the half. We'll have some of that flow through into next year, but maybe not as much. We gave the disclosure on UNITE that clearly that investment bucket is just going to be determined by how much skews towards UNITE and then it's expensed at a higher ratio than the other. We tried to give a bit of guidance there. Amortization was about AUD 100 million for the year.
We expect that to be a, you know, a significantly lower number. You know, we've had the conversation about productivity. They're the moving parts. Andrew, happy to try and sort of be helpful or answer a follow-up on any one of those, but hopefully in sort of laying it out that way, you get a picture of the moving buckets.
Yeah, no, that's great. I appreciate that detail. I might just move on to my second one just around volumes. You mentioned that mortgage growth, ex-RAMS, was 0.8 x system over the year. You put that down to being a function of just focusing more on returns. To be honest, when we continue to speak to mortgage brokers and the like, we do still hear that even though the gap between the two bookends has closed, Westpac is still pretty aggressive on front book discounting. I'm just keen to sort of understand how you recognize those or reconcile those two opposing views around, you know, pricing for growth versus, you know, still being pretty competitive from the perspective of brokers.
Yeah. So, Andrew, it's Anthony here. Definitely, you know, we have to be competitive. And, you know, this product that is a mortgage today is a highly commoditized and very price-sensitive offering. We just need to acknowledge that. The second thing is, yes, in certain areas where we felt it made real sense for us and the returns were right and reflected the customer base we have and want to get more of. Such as investor loans, we were sharp on price. We deliberately were because we saw the return and we felt it aligned with what we wanted to achieve. In terms of other parts of the portfolio, we were above market. I know there's always lots of observations and commentary from participants outside the bank. Those were the two disciplines we set ourselves, which is we wanted to be sharp.
We wanted to be very price competitive in investor. And then a couple of other segments that we were keen. We were very happy to be above market on owner-occupied, just given the shape of our book and the returns that we're going after.
Thanks, Andrew. Next question comes from Ed Henning from CLSA. Ed.
Thank you. Thank you for taking my questions. I just want to go back to Project UNITE and just dig into that a little bit more. You've told us today that you're investing more in 2026 than you've previously announced, and also the program is going to go longer. The investment you're spending is more than you've previously flagged. Can you just give us a little bit more on what it's going to deliver in terms of financial outcomes and the timing of that? How much is actually during the program and then how much is beyond the program? Or are you planning to give that at a later date?
Certainly what we'll be doing each year in March is giving you a comprehensive update on UNITE and giving you an opportunity to work and go through the detailed work streams with our team. We'll definitely continue to provide that detail and that access to you. I mean, in terms of the investment next year or this financial year of AUD 850 million-AUD 950 million, it's a deliberate range because it will be, if we can invest that and deliver the outcomes we need to deliver, then we'll take that opportunity. Point number one. The second is in the construct of doing all of the planning that we've done and landing on the decision to go with One Ledger, that necessitated us changing some of the investment profile of the program.
Therefore, we had to bring a bit more investment forward, which is why next year is a bit lumpier than we might otherwise have planned because with the decision to go to One Ledger, we had to do more work upfront to be able to facilitate that migration in 24 months' time. That's the reason why it's a little bit lumpy thereafter. The second is that we are keeping that investment envelope in as disciplined ways at AUD 2 billion because, as I described earlier to the previous question, it's about the capacity of the company to execute. If we can deliver value, and if we can in fact do more, then we will be open-minded to doing more. The other thing I would say is that in terms of the project itself being longer, just sort of want to sort of put some context in that for you.
When we spoke to the market six months ago, we were completing and finalizing the investment and plan for a One Ledger. We landed at the One Ledger decision and we had to replan accordingly. Previously, we'd had 30 September 2028 as the finish date, and that was just arbitrary, that we wanted to have this program completed by the end of financial year 2028. Now, as a result of that replanning, reflecting the decision to go to One Ledger, it's just worked out that we won't have all of the benefits accruing by 30 September 2028. It's likely to be a few months into financial year 2029. That's why there's a bit of an extension. There's just more accuracy that we can provide as a result of the planning we've undertaken.
The last thing I'd sort of say to the spot-on question you've raised, which is, yes, the nature of the program is that much more of the benefits do accrue later in the program. There's nevertheless still, if you will, benefits being realized now, whether it be, you know, for example, the small movement and consolidation into one private bank that's already delivering us some cost. September 2028 is likely to be a few months into financial year 2029. That is why there is a bit of an extension. There is just more accuracy that we can provide as a result of the planning we have undertaken. The last thing I would sort of say to the spot-on question you have raised, which is, yes, the nature of the program is that much more of the benefits do accrue later in the program.
There is nevertheless still, if you will, benefits being realized now, whether it be, you know, for example, the small movement and consolidation into one private bank that is already delivering us some cost savings. There are a number of other initiatives where we are already seeing benefits accrue. The nature of this program is that what we are doing is we are taking all of these customers on two other tech systems and platforms and migrating them onto one tech platform. Only when you switch those two off and you eliminate all the products and processes that, if you will, have to be executed on those two platforms, do you start to fully realize the benefits, the cost to run that follows from that, the cost to change that follows from that. It is tapered to the back end in terms of the benefits that will be realized.
The premise that we have with UNITE, its key feature is that it helps set us up in a way that we have structurally lowered our cost base so that we can really start to achieve our aspiration, which is a cost-to-income ratio that is better than the average of our peers.
Thank you for that. Just following on from that, you know, in March coming up next year, are we going to be able to get at that point what you think the savings will be through the period and at the end of the period? Or are you not, are you not ready to tell us that?
Look, we have absolutely clear in our mind as to what we want to achieve as a result of the investment we're undertaking, which represents UNITE. What I'd rather do is make sure we're delivering and we're executing before we start talking about outcomes. Rest assured, the whole focus here about UNITE is if we can consolidate the myriad of bank processes and systems onto one bank process on one system, then we would expect that that sets us up to be able to drive to a cost-to-income ratio that's very competitive as compared to our peer.
Maybe just add one thing here. I think it might be different than some other programs, but I do not think it is necessarily a program where you take total spend and total benefit sort of narrowed in on just the UNITE benefits and sort of try and make sense of it that way. You know, this is sort of large. Structural opportunity for us to then get our cost-to-income ratio much better than where it is today. You know, I think in some ways it is a critical enabler of what we have got to do on productivity, but it cannot be the only thing. What we are committing to do is just try in a transparent way as we go through the program, highlight the benefits that we have got from our spend as we go.
You will also hear us continuing to talk about that productivity bar that I have already had one question on because, you know, we want to be held accountable for making the organization more efficient as we go, significantly enabled by UNITE. It is going to be more than just the UNITE productivity that you will hear from us.
Thanks, Ed. Our next question comes from Matthew Wilson from Jarden. Matthew.
Yes, thanks, Justin. Good morning, team. Matt Wilson, Jarden. Two questions, if I may. Firstly, we've seen a nice pickup in your business banking volumes, you're winning share there, which has been really good. However, it's taken 50 basis points or so off the net interest margin.
The whole of customer and how we're getting the balance right. We've recognized that in that area in particular, we weren't getting the balance right, and we've addressed that accordingly and are much more focused on how we grow and support those customers and obviously, you know, graduate the MFI. Pleasingly, as it relates to the Westpac offering, the MFI there has started to improve, and we're certainly pleased with the outlook and the momentum that we've got in that. I would say that the others, if I think about it, also MFI in the space of, you know, 12 months in business banking, they've been able to lift it by well over a percentage point. It does highlight that we do have the offering, we do have the product, we just simply got to make sure it's a priority across the organization, which it now is.
Maybe I could just add a little bit on the current flows, John, just to take your second question. I would say that we've, and Anthony mentioned this in his pre-prepared remarks, we've probably seen, well, one, I think the market is in particular, your question goes to home lending, then I think that mortgage market has, you know, has been accelerating, and I think that's been sort of well covered in the market, and you can see it in the system stats. We're certainly feeling that, or seeing that. We've had increases in pretty much every channel. We've seen increased applications. Front of funnel activity, as Anthony said in his pre-prepared, is probably a little bit higher than where we've been trending on a market share basis over the second half. We're probably at or around system.
It wouldn't surprise us if our front of funnel actually meant that we had a couple of months here where we're a little bit above system. That has been growth in all channels. Pleasingly, we think October we're going to see a little bit of volume growth in proprietary. The team are very cautious when we talk about green shoots there, and Anthony said it, sort of years, not months, but as we've seen proportional increases in applications, the proprietary channel has been performing better than it was in prior periods in that period on a proportional basis. That continues to be good.
Maybe the other thing just to add that may be of interest, John, I think the first home buyers guarantee scheme has certainly stimulated some interest, whether it was some pent-up demand there, but we saw applications in the first couple of weeks when the changes were made almost went to two and a half times what they were for the first home buyers guarantee. It's moderated a little bit. Last week it was about two times what they were, so it's still double. How much of that pulls through? We're seeing a lot of that volume. How much of that actually fulfills is a bit of a wait and see, but it's certainly still a small portion of the bank, but it's certainly stimulated some demand.
Thanks, John.
Our next question comes from Brian Johnson from MST. Brian.
Thank you very much for the opportunity to ask a question, and welcome, Nathan.
Yeah, hey, Brian.
I had two questions, if I may. The first one is, I'd just like to understand, you've got a bucket load of surplus capital.
Yeah.
You're trading at, I don't know, about 1.8 x book. I just want to understand the strategic rationale behind selling RAMS when a buyback, for example, is not as accretive. If we could understand any kind of litigation risk or warranties that you've made to the buyers in respect of this business. I had another question, if I may.
Okay. Why don't I? I'll just start on a couple of the specifics, and then Anthony can jump in. I think one of the important features of the transaction, Brian, is that it's an asset sale. So, you know, just by virtue of that structure means that we're retaining the entities. And then the assets, it's a loan sale, so effectively the assets transfer to the buyer. You know, as part of that, we've given sort of customary reps and warrants, you know, and other protections for the buyer so that they know that the asset they're buying is, you know, effectively going to perform in a way that it says on the tin. That's things like title and, you know, the enforceability of title and things like that. All customary things.
In particular, as it relates to things like indemnities, you just don't need to, given the structure of the sale, that all just stays with the existing entity that we retain. Maybe just to give a little bit of a picture as to the financial impact of it, Brian, because I think prima facie, I would agree, it does, you sort of, you know, every day we wake up and compete really hard on household mortgages, and it's a core product of the bank. And so, you know, prima facie, you've got to scratch your head a little bit when you're then willing to sell a portfolio of home lending. There's a couple of important points here. It is on a completely standalone set of technology. It's a business that runs, you know, almost independently from the rest of the business.
And so, you know, you've got a cost base here that by the time that we get to completion, will be almost equal, it's revenue based. It doesn't necessarily give you the type of scale that you might intuitively think in your mortgage business is sort of, you know, one of the key features of this relative to, say, just seeding a little bit of share. Maybe Anthony, you can touch on it. The other key point is, you know, we've made quite a few statements today just about the inherent strength of the deposit franchise, the ability for us to go after transaction accounts in terms of being, you know, a strategic advantage for us as we think about our balance sheet structure. This is a business that has, you know, if not zero, very close to zero crossover in terms of deposits into the mothership.
Yeah. I'll just probably just develop a little bit more one point, which is our current mortgage book, Brian, is, you know, let's call it 21% market share. Essentially, we've got three different systems upon which it's spread. In effect, I've got three small banks, three small bank cost challenges, three small bank compliance, three small bank risk challenges in managing the mortgage book. UNITE was about moving all of those onto one way of doing things on one target tech stack. We were always going to have to spend quite a lot of money, and we're going to have to spend a lot of effort and consume a lot of resource to move the RAMS mortgages onto the target tech stack.
Therefore, if there was an opportunity to do that much faster and more efficiently, which this asset sale represents, then we were open-minded to it because essentially I have one percentage point less market share. Now, instead of it being spread across three regional bank cost bases, it's spread across two, and we're on our way to getting one. Importantly, if we complete this as we target in 2026, I'm accruing that run cost saving, operational complexity reduction, risk reduction two years earlier than was otherwise planned. Therefore, that's an attractive outcome for the bank. As I say, 21% or 20%, my scale is wasted on three systems. I've got to get to the one system to really enjoy the benefits of that scale. That's why this opportunity made sense.
That's why when, you know, we found the right parties who would be the right owners of these assets, it just made a lot of sense for us to get after it.
Nathan, just as a subset of that, can I just clarify? There was a story in one of the media reports talking about ASIC and AUSTRAC talking about this. I think subsequently we've seen a very, very small ASIC fine. Can I just confirm that as far as you're aware, within the RAMS business that you're effectively retaining the risk?
Correct. To the extent that we've engaged with the regulators and it's well documented on a whole range of issues and concerns they had with the way the RAMS businesses were led, managed, and prosecuted. We've now, obviously, we retained that. We've just simply sold the assets. More importantly, it allows us, as I say, to switch off or get off one of those bank systems. Nothing's changed in terms of the risk profile we had as a result of the ownership of that business. It's just simply much cheaper to run from here.
Thanks, Brian.
Can I just add to a question though? There is no AUSTRAC issue.
Nothing that has been brought to my attention, Brian. Nothing has been brought to my attention. I do not, you'll have to send me the article or reference and sort of what context in which it sits. In the context of AUSTRAC matters vis-à-vis RAMS, I do not have anything in front of me on that front. I am looking across at my General Counsel and my Chief Risk Officer, and they equally are acknowledging that we have no such issues at this point.
Thanks, Brian. Our next question comes from Jonathan Mott from Barrenjoey . Jonathan.
Thank you. Just a question on UNITE, back to the stuff that we've been talking about before. Can you give us a kind of a traffic light scheme on how the business is going? There has been a bit of a change in the disclosure. At the first half, you had sort of the green, amber, red, and now you have got in scope. If you look at slide 15 here, you have got another classification, in scope. You have had an increase in the number of amber and a small change in red. Can you give us an update on what that means, why you are now saying this is, you know, scope confirmed? And, you know, if you are looking at 18 of the 38 are actually already in the amber and red.
Yeah. Thanks for the question, Jonathan. I just sort of, let me break it down for you. Those, as a result of all of the planning undertaken, we now have a plan in front of us, and we know what we need to do in what sequence we have to do it. Those 13 scopes confirmed are essentially 13 initiatives that we now have a plan for. At some point over the course of the next 36 months, those, if you will, initiatives will have to be worked on. At the moment, not all of those 13 have commenced. Therefore, to characterize it as green, red, or amber is slightly redundant. Therefore, the others, which we're now moving on, because it's a real program of sequence, it's about what we do and how we follow up on each particular completion of work. These 13 initiatives will be done.
To the extent, once they start work on them, we'll then obviously recognize whether they're meeting the standards we've set, meeting the timeline we've set, meeting the costs we've set, and that'll then determine whether they're characterized as green, amber, or red. When we were talking back in May results, we had seven of the initiatives at that point were red. It's now down to five. What's happened is, four of those seven have now moved into amber, green. One, in fact, has been completed or effectively exited. That's behind us. We've also had two new, or two initiatives being recharacterized as red. That's why there's that change from seven to five over the course of the last six months.
What we'll keep doing, and Jonathan, is to the extent that there's some confusion there, we'll get sharper in how we set it out for you because I do want everyone at all times to see that this is a large, this is a challenging, complex program of work. We're absolutely committed to it, most importantly committed to making sure that there are no surprises as we go through it. If we can do better in sharing with you where we're at, we will look to tidy that up as we go forward.
Thank you. A second question, if I could. If you're looking, I'm looking at slide around 22, 23, I think it is, which just shows the growth in deposits and consumers pretty strong at AUD 15 billion and then 12 in mortgages if you exclude RAMS. But including in that number is very strong growth again in offset accounts. I think it was up another AUD 5 billion. It's now got to AUD 73 billion in offset accounts. Two things about that. Firstly, are you comfortable with the growth in net of offset accounts? Because it really is lagging the system. I know you said you want to get your service proposition right, but are you comfortable with that?
Also, given the offset accounts are nearly all against owner-occupied property, it actually means your investor book as a percentage of the total excluding offsets, which is really just deposits sitting there, is a lot larger. Can you answer sort of that considering this net of the offset?
I'll make a couple of comments and invite Nathan to jump in. I mean, certainly you're right to call out that the deposit agenda, the idea that we grow deposits and more importantly get the shape of that right, Jon, is absolutely not where we want it to be. Albeit, we're really pleased with the progress we've made, but we would like a lot more in terms of the shape of deposits. We were disappointed and acknowledge that we didn't catch what was happening in the regional brands as fast as we perhaps should have. That's on myself. We're very much focused on now addressing that. I think we've, you know, we've got that properly, if you will, tackled. It's just about how we get after that over the next 12 months.
I'm just really pleased though that the Westpac side of the portfolio is continuing to improve and is obviously a really critical part of our portfolio there on transactional and savings accounts. I suppose, you know, there's definitely, there's things that, you know, if I think about our service proposition, you know, one of the areas that I reflect on is making sure that transactional accounts, deposit services, and servicing on that front is front and center for every banker in the company. We've done a lot of work to recalibrate, for example, scorecards and incentives to make sure that all of our bankers in consumer, in business bank understand the priority we attach to that. Pleasingly, you know, we've got a good enough product suite, which means we can be very competitive. I do feel like we're after that in the right way.
Yeah.
I missed the second, was the second part of the question?
No, I think you have covered it well. Maybe Jon, just to add two points, I think you are right to call it out. There is about, as you said, 7% growth in offsets in the half, but, importantly, 6% in savings as well. We have seen strong growth in both those items. I think, and you are right to call it out in the way you did. The growth in savings accounts is about attracting customers on the liability side. The offset is much more about the business that you do on the asset side. There is a strong customer preference towards those. They have been growing, as you know, quite strongly as you move from a fixed rate portfolio into a variable rate portfolio. We are pretty much exclusively there now. As we grow that side of the book, we will continue to see growth in the offsets.
Whether you are trying to target a certain amount of offsets or whether you are happy with it or not, I think it is a key feature of the mortgage product, and there is a strong customer appetite for it.
Yeah. Probably the other point you did raise was about investor loans. You know, we're very keen to continue to be competitive in the investor loan segment. That demographic, that audience is an attractive customer base for us. We see a real value in being very supportive there on investor loans and, more importantly, then converting and making sure it's a whole of bank, whole of customer relationship that follows from that.
Thanks, Jon. Thanks everyone for bearing with us. We've still got a few to get through. We might be going for a record today, but we'll keep pushing through.
Sharpen it up.
Our next question comes from Carlos Cacho from Macquarie. Carlos.
Thanks, Justin. First, I just want to ask about on your margins, your replicating portfolio benefit is expected to diminish from three basis points to one basis point. I was just wondering if there's any other potential tailwinds that are worth calling out as you head into FY 2026 because it's mostly negatives that you mentioned as you walked through the waterfall, Nathan.
Yeah. Hey, Carlos. And Justin has given me the signal for one-word answers. Maybe I'll jump straight into it. I think we did just try and lay out, you know, as helpfully as we can, Carlos. Happy to sort of pick it up later in the afternoon to the extent helpful. You know, I guess the other point that we made, if you'd narrow in on things where we could get a tailwind, I think, you know, term wholesale funding markets have been better. We do expect a tailwind there. We do expect to continue to get, you know, some replicating portfolio benefits. We called out a basis point there, which is sort of net. Net across the replicating portfolio and then the unhedged deposit. There's a little bit of support there.
You know, I think maybe the other one is just to say on liquids, I think that has been a bit of a volatile item for us quarter- on- quarter. We did expect to sort of increase in investment securities at the third quarter that maybe did not flow through to the same extent we thought. I do suspect as we go forward into the first half, you know, just where the customer balance sheets are up to and how growth is going, we probably expect liquids to be down a little bit in the first half. You know, while neutral to earnings, there may be a little bit of a benefit that flows through there.
Thank you. And then just secondly, you know, you've spoken about, you know, wanting to do better at proprietary mortgages. And obviously, it's a long-term strategy. But where are you expecting to win or where are you seeing wins come from? Like, presumably, if they've got to be a new customer who's a first home buyer, or they're coming from other banks where they're proprietary, or they're coming from brokers, like, do you track that? Is there particular targets you're hoping to do better in?
Look, I mean, good question. I mean, what we've got to do is just get the basics right in terms of how we go after proprietary. We've got to get the service proposition right. We've made real progress. We've got to get the product right. And we've seen improvement in product NPS. Time to decision down inside five days. You know, we're operating and executing mortgages more efficiently than we have in the past. Our hygiene and data is in a much better place. The returns are much more, if you will, better reflected in that. I think the things for us, though, is we just got to get, for example, more bankers. We lost too many home finance managers. We're catching up on that. That takes 6-12 months for a good home finance manager to really get into their straps. We've started to get that resource allocation right.
We've certainly got to get a better compensation and incentive arrangement around for our home finance managers. We've now got that right. We've got their scorecards right. We're also, at last, really taking the full power of the company in terms of the range of data and, if you will, insights that come from all of what we have across the entire company to help get behind the home finance managers and give them, you know, real leads, which represent real insights and allow us to be much more proactive. You heard Nathan talk about, you know, investing in the brand. We spent a lot more money to get the brand profile up. We're just putting in place all of the basics to really get after this area. I'll be very candid with you.
There's nothing more dramatic than just getting all those basics in place to allow us to get after it. It took us a number of years to get to this point. It's going to take a little bit of time to get out of this particular position. I think we've got what we need to execute. I was really pleased with some of the actions we took in private wealth last year, which we've already seen a really improved turnaround in first party in private wealth, which tells us that if we get after this as we have in private wealth in consumer, we can deliver that same turnaround. It'll just be, I think, a reasonable period of time of effort to get there.
Thanks, Carlos. Our next question comes from Andrew Triggs from JP Morgan. Andrew.
Thank you. Good morning. I might just ask one question. Deposit mix shift. Should we expect that to slow significantly next year? Maybe, Nathan, if you could break that down, please, between, you know, the percentage of deposits in behavioral savings versus the percentage of those products themselves where the customers are qualifying for the bonus rate.
Yeah. Yeah. Hey, Andrew, how are you? Yeah. I think on the deposit mix spreads, you've probably rightfully called it out. It's probably just really a story for us around the growth that we've seen in that consumer savings product. I think, you know, at an overall book level, we've had, you know, decreases in proportion to term lending. I think the bigger determinant of going forward margins, which is really where you're going, is going to be on the savings product. I would say, you know, a couple of things here. I think certainly this is one of the areas where fourth quarter was a little bit, showed a few different signs in the third quarter. We saw, you know, I think savings, the savings balances in the fourth quarter grew AUD 5 billion. They grew AUD 2 billion in the third quarter.
We've said there that we've got about 84%. I think we've given you an annual number there that are the people that are qualifying or achieving the bonus rate. You know, that was actually probably a little bit lower through a couple of months in the middle of the year and then picked up a little bit in the fourth quarter. I think those two main things are things that I'm expecting will flow through. Into the. Into the second half. It's probably, into the first half, it's probably not so much a mix shift into these products, Andrew. It's much more that's where we're seeing the growth.
Thanks, Andrew. Our next question comes from Richard Wiles from Morgan Stanley. Richard.
Good morning. I'll just ask one question too. It's following on from Matt Wilson's question around the business bank margin. In your business and wealth update a few months ago, slide 17 showed the composition of the underlying margin decline. It was 22 basis points and it was split across portfolio mix, deposits, and lending. The decline in this half, Nathan, was 18 basis points. So actually pretty similar to the first half in terms of underlying trends. Could you give us some commentary around the mix between portfolio, deposits, and lending? Were the trends pretty similar or did they start to skew?
Yeah. Thanks, Richard. Yeah. I think my comments earlier to Matt, and sorry if that was confusing, was just really around the business lending part of that equation. I think in the second half or in the more current period, we've seen a more moderation of the impact on the lending side. You would have seen, you know, for all the reasons we've been speaking about on the deposit side, you would have seen a bigger, you know, a proportionally higher impact in the more recent period from deposits.
Okay. Lending was seven in the first half and deposits was nine. Lending went down, deposits went up as a headwind for margins.
Yeah. As headwinds, yes. Yep.
Yeah. Okay. Thank you.
Thanks, Richard. Our next question comes from Brendan Sproules from Goldman Sachs. Brendan.
Yeah. Good morning. I just have a couple of questions. Firstly, on the markets and treasury contribution for this half, it looks like it's running at a run rate of sort of at AUD 2.2 billion. Can you maybe talk about some of the benefits that were achieved this half and will those sort of repeat into 2026? How does the AUD 2.2 billion relate to what you would think is a normalized level of earnings from these two divisions?
Yeah. Maybe we can break it down a little bit, Brendan. And then, you know, Anthony knows that business well. I think, you know, it is very challenging in these businesses to grab one quarter and annualize that and sort of expect that that's where your run rating. Yeah. Sorry, it is where your run rating, but to expect that that sustains over four quarters. You know, I think with these, you know, certainly the markets business is a pretty mature business now. It's got a really strong FX, fixed income capability, and it's a pretty mature business now that would be, you know, should, you know, all market conditions being equal, just growing more in line with the underlying activity of our clients and the loan book growth.
And then, you know, Nell and the team have got ambition and are doing things to grow out a few more strategies that can build income, you know, sustainably in that franchise over time. But I think I would just think about that as more, you know, it should be producing pretty stable performance on the FX and the fixed income, and it'll be more determined by underlying activity. In treasury, I think similar, you know, we've got good disclosure on that over a long period of time. I think, you know, that number in and around a billion for the treasury has been a pretty consistent number. I think a couple of years ago we might have had a 600, but I think, you know, in and around that area is about right. We're probably issuing a bit less wholesale funding, which gives them a few less opportunities.
You know, even with the RAMS sale, we expect to do a little bit less in that space. Maybe it comes off a little bit, but there's a few comments, Anthony.
Yeah. Look, I mean, definitely the financial markets business, you know, it's, I think, the leading franchise in the market now. A couple of just extra comments. I think there's real upside for us in the FX product suite and the penetration into consumer and business bank at Westpac is less than what it should be given the quality of the FX franchise we have. So there's real upside there in servicing our existing customers in consumer and business bank. Likewise, I think we're underweight in a few aspects like commodities and aspects of that business, which we see as a real positive for us. Perhaps the real sort of interesting jewel in the crown in FM is just the credit business, the credit trading, the credit market making.
Now that Australia, with its savings pool, is actually a genuine capital exporter and we have a lot of kangaroo bond issuance into this market. The franchise that we have there in terms of, you know, credit market making, origination and, if you will, distribution into this capital market is pretty impressive. It's the best in the street. So we're quite excited about, you know, how much more we will see in that business as Australia's position with its superannuation funds makes it a real destination for people to raise capital.
Thank you. That's very helpful. My second question is just on slide 29 around the impairment provisions. I mean, in this presentation, you've talked, Anthony, about the improving operating environment for the bank. You've also showed some lead indicators on asset quality where you're seeing impaired assets, for example, fall. I'm just wondering what the thought process was around increasing the overlays and specifically the downside scenario weight and actually growing your excess provisions above base case in this period.
I'll just let Nathan make a comment, but it was a robust process. Because clearly the settings and outlook continues to be surprisingly benign. But, you know, we need to be constantly vigilant and, if you will, balanced about what is going on and what may come our way. That's been a very, you know, contested and well-developed discussion inside the company with Nathan and I about what's the right outcome here. Nathan, there's one.
Probably just to add, I think, Brendan, you know, I think just take it as an indicator that we, you know, we put a high value on medium-term earnings stability. You know, I think when we think about this, we, you know, it's similar to, you know, increases in hedge balances and then the management judgments around that. We've tried to just err on the side of a little bit more stability over time.
Okay. Thank you.
Thanks, Brendan. Our next question comes from Samantha Kontrobarsky from HESTA, Sam.
Good morning. Thank you for taking my question. I'll just skip it to one. So you've recently appointed a Chief Data, Digital, and AI Officer, which is a new step for the business. As you bring these areas together, how do you see this changing how Westpac competes? Is it mainly about efficiency and cost, or could it fundamentally reshape the customer experience and growth?
Thanks for the question. That is what I work on every day in terms of how do we get that right. There is no doubt that, you know, there is a lot of hype and a lot of, if you will, excitement around the AI revolution or evolution, depending on who you speak to. We certainly think that, you know, its capacity to help us be more efficient, help our employees get their job done better, safer, more consistent is a really big and important opportunity that comes from having the right AI program.
That was one of the key sort of drivers, to get, you know, a global thought leader working for and with me in terms of how do we look at the way we do things in the company and how can we do things better. It is a wonderful tool in the hands of employees, but you need to therefore invest in your employees and make sure they understand how to use this tool and how they can make it or can help them be more efficient. That is definitely one emphasis. There are definitely, you know, really interesting ways in which it will help us serve customers and provide a more attractive service proposition to our customers.
We are sort of already taking some of the model capability with this Westpac intelligence layer, taking all of the data and all the signals that are coming into this company and using that to make better, faster decisions, which allow us to get back in front of our customer more proactively. We are seeing it, Samantha, also help us in terms of being really good with our customers with the view that that obviously drives engagement, connection, and revenue ultimately.
Thanks, Sam. We'll move to some questions now from the media. Our first question comes from Luca Ittimani from The Guardian. Luca.
Hi, team . Sorry. Can you hear me all right?
We've got you, Luca.
We've got you perfectly.
Awesome. Yeah. Just wanted to check. In the wake of the Fair Work Commission decision, do you intend to change your work-from-home policies at all? Have you seen more applications or requests from staff for new or, you know, more flexible work-from-home requests?
We have one of the most flexible work-from-home policies positions in the marketplace. I think what we are going after, which is finding that balance for our people, I think we've got that right. I don't need or feel a need to change that particular setting. We're also just reflecting on what we might do in response to that recent work-from-home decision by the Fair Work Commission, and we'll land on a decision as to what we will do later this week or the next. What I would also say is that, you know, we've got a tremendous level of engagement from our people.
If I look at some of the OHI scores and other engagement measures that are just highlighting, people are really engaged and really excited about what we're trying to go after and what we're trying to achieve as a company in terms of for our customers and in terms of how we work together as a team. I feel really encouraged by just where we're at and motivated to go further with what we've got.
Thanks, Luca. Next question comes from James Eyers from the AFR. James.
Hi, Anthony. Look, you've spoken about this deliberate pricing to attract investors in the residential property market. You can see on slide 66 that your investor loans and interest-only loans, sort of the second half flow, there's, you know, tracking well above the averages of the book. There's sort of house price data out, you know, today showing house prices sort of growing at the fastest pace in a couple of years. We saw that APRA data on Friday showing investor lending is pretty strong, like sort of 7% annualized, I think. You just said in response to Jon Mott's question, you know, there's an attractive customer base. Could you just talk a little bit more about that? Like, why are you targeting more investors? Are they sort of a better credit risk than owner-occupiers? Is there a cross-sell opportunity for you?
You know, do you foresee a little bit of a squeeze on the first-time owner buyers as a result of this investor growth that we're seeing come through?
I think we're seeing a squeeze on the entire market because of the demand, whether it's first-time buyer or investor. There's just a lot of demand. You know, the key challenge of the day is we've got to get more houses built at the right price point, James. You know, every aspect of demand is being supported and is going fast, which is only driving the challenge and making it harder. In terms of the investor segment, I mean, yeah, it's an attractive segment in terms of from a credit risk perspective. Yes, you're right in terms of, I don't like the term cross-sell, but the idea that these are people who are investing in property who therefore may need incremental services and support, and how do we therefore bring this entire bank to them is something that I'm really drawn to.
We see it as a real opportunity for us. We just got to, I suppose, go about it thoughtfully and be careful about, you know, the outlook and the risks that come from sort of going too far, too fast in a particular segment. We think we've got the balance right. It's interesting that, you know, we're forecasting a sort of 9%, almost 10% increase in residential house prices over the next 12 months. It's certainly a positive outlook for people who can access the property market.
Just a really quick supplementary on that risk point. Go on, go on, sir.
No, you're right, James. Keep going. Sorry.
Just a really quick supplementary on that risk point, Anthony, that we saw John Lonsdale making some comments in July that he'd begin sort of engaging with banks on, you know, implementation aspects around macro-prudential tools just to make sure that could be, you know, activated in a timely manner if needed. Like back in 2015, I think you sort of had the investor loan growth that sort of kept going above 10% and brought back to that number. Then there was an interest-only element in 2017, you know, where they were sort of looking at that being about 30%. You're at 20% now, I think. So it's well under that. How much sort of hotter do you think this investor lending growth trend sort of would need to get before you're in that territory again?
Look, I don't have that answer, James, but, you know, we are very much, or very cognizant of the balance we need to find. You know, we engage with the regulator. APRA is a terrific partner to us. You know, we engage actively, often, deeply with them about all of these particular issues. You know, we'll be making sure there is no risk or issue there vis-à-vis the regulator. Equally, you know, it's an opportunity that we've been pursuing over the course of the last six months. We will continue to pursue it, but it'll be balanced, you know, around the return. It'll be balanced around the risk. It'll be balanced around is it that we're converting these opportunities into broader, more substantive customer relationships and not just simply a lend-alone.
Yeah. Look, thank you.
Our last question comes from Stephen Johnston from Seven West Media. Stephen.
Yes. Good morning. Stephen Johnston here from the Nightly news website. Anthony, earlier in your presentation, you said that you want to see more housing around the available for the AUD 500,000 mark. Would you be able to explain why you want more housing available for AUD 500,000? And what your typical debt-to-income ratio limit would be now considering the cash rate at 3.6%?
The thesis around just sort of promoting the idea that AUD 500,000 is the right price point is really sort of predicated on the following. Median income in Australia is approximately AUD 90,000. When we finance someone in the acquisition of a house, we will lend in the order of five to six times their income subject to expense verification and the like. Therefore, you know, you have got something anywhere between AUD 450,000-AUD 550,000 of mortgage capacity. Then, of course, just assume, say, a 10% deposit. All of a sudden, you can see median AUD 500,000 as a house, AUD 500,000-AUD 600,000 is just really critical if we are going to solve for, you know, call it average Australia or the median position in Australia.
The challenge is that, you know, properties are being built in major capital cities, and the median house price of houses in capital cities in Australia is over AUD 1 million. I am drawn to the fact that median house prices in regional Australia are closer to sort of AUD 500,000-AUD 550,000. I feel like regional Australia is part of the solution potentially here. I would say that, you know, the key is, is let's build more properties at the right price point to allow people to get access to the market. When we talk about building more properties, it just cannot be building more properties, that does not solve the actual challenge. How do we ensure the average Australian gets a chance to buy a property and live in their home of their dream?
Basically, it's also a social issue that if too many houses are at AUD 1 million, the average full-time worker can't afford that. Are there going to be some societal challenges?
I think.
Around some aspects that would hurt Westpac lending?
I think, you know, our success as a company is inextricably linked to the success of this country. One of the challenges for this country is to get more housing, have more Australians being able to own their own property. Therefore, I think it's very important. You know, the challenge is that when you think about the cost to construct, you think about the time and cost and process for approval, all of those features contribute to it being very hard to be able to build a house at that price point. Therefore, I think, you know, it's not sort of dependent upon developers and contractors, but it's really important that the entire community, government, regulators, and all of us work out how can we create an environment where it's cost-effective, it's rational, and it's reasonable to expect you can build a house for AUD 500,000-AUD 600,000 in Australia.
All right. Thank you.
Thank you, Stephen. Thank you, everyone, for dialing in. We will be available over the course of the day. Thank you very much.