Good morning, everyone. Welcome to Westpac's 2023 full-year results. My name is Justin McCarthy, GM of investor relations. Before we begin today, I'd like to acknowledge the Gadigal people of the Eora Nation as the traditional custodians of the country we are meeting on today. I recognize their continuing connection to the land and waters, and thank them for caring for this land and its ecosystems since time immemorial. I pay my respects to elders past and present, and extend that respect to all First Nations people present today. The results will be presented by our CEO, Peter King, and CFO, Michael Rowland. At the end of the presentation, you'll have the opportunity to ask questions. As a reminder, to ask a question, please, please press star one on your phone. With that, over to you, Peter.
Well, thanks, Justin, and good morning, everyone. Overall, I'm pleased with our progress and financial result this year. We've strengthened the franchise in consumer, business, and institutional banking. We also completed portfolio simplification, exiting another three businesses this year. And the uplift in financial performance, in particular, our return on equity, is reflected in higher returns to shareholders through dividend growth and the upcoming share buyback. This was also achieved while strengthening the balance sheet. And while we've made progress, there's more work to improve performance and the efficiency of this bank. With the foundations in place, we have even more capacity to focus on the future, and this started with the separation of the consumer and business segments. We've also established a standalone function to focus on technology. Technology simplification is a significant undertaking.
It's part of our plan to improve service to customers, grow our business, and deliver a cost-to-income ratio close to the peers. Before turning to the result, I'll say a few words about how customers are faring through a challenging period. The Australian economy has slowed, with headwinds from high inflation and higher interest rates. Consumers are being squeezed by cost-of-living pressures, meaning many have no choice but to adjust their spending. While there has been an increase in hardship, the vast majority of consumers have displayed resilience. For business, the slowdown in growth and higher costs is affecting demand and profitability, and we have seen a small rise in stress across business customers, although at this stage it's been isolated. Our results were up strongly, with net profit 26% higher and EPS 28% higher.
Return on equity rose 2 percentage points to 10.1%, and this reflects solid growth in income, which exceeded expense growth. Higher provisions for loan losses were a drag on NPAT growth this year. Notable items had a far smaller impact on this result, and they were 80% lower at AUD 173 million. Net profit, excluding notables, was up 12%, and we see this as a better measure of the business performance. Revenue drove this result and was up 10%, with 5% growth in loans and 2 basis point increase in net interest margins. Lending was up across all segments, with growth in mortgages, business, and institutional banking, and margins were supported by widening of deposit spreads and earnings on capital, which more than offset the impact of mortgage competition.
Expenses, excluding notables, were up 1%, with inflationary pressures from wages, third-party vendor costs, and software amortization, largely mitigated by the benefits of our Cost Reset actions. Cost growth was higher in the second half, and we've taken action to limit expense growth, reducing FTE by 6%, and we remain committed to addressing the cost base relative to our peers. The credit quality of our portfolio is closely monitored, and we've seen some increase in stress. This was reflected in the impairment charge of 9 basis points alone, which was up from 5. But stepping back from the detail, the portfolio is demonstrating resilience, with most customers being able to respond to economic pressures. We're pleased with our capital position at the end of the year. The adoption of Basel and higher profit saw the CET1 ratio, the strongest I've seen in my career.
At 12.4%, we are one of the top banks globally. With AUD 4 billion of capital above the target range and a resilient economy, we are returning capital through a AUD 1.5 billion on-market buyback. On a pro forma basis, that's post the buyback, the Common Equity Tier 1 ratio remains 12%, with this excess capital available to support growth and returns to shareholders. On dividends, the board determined a final dividend of AUD 0.72 per share, and that sees the total dividends for the year at AUD 1.42 per share, which is up 14% year-on-year. When determining the dividend, we considered this year's performance and the outlook, and we felt this is the right balance for FY 2023. Turning to our business, it's been a big year as we've completed portfolio simplification, exiting another 3 businesses.
This takes the number of businesses exited to 10, which has released 58 basis points of capital. We are retaining BT Platforms and Pacific Banking, and these businesses are now part of Business & Wealth under Anthony Miller's leadership. Completing portfolio simplification provides more capacity to grow and simplify our banking businesses. The recent employee reduction sees close to delivering the goal we set in 2020, of reducing head office staff by more than 20%. Branch network consolidation continued, and the highlight being the ability for customers to now make cash transactions at any of our branches, regardless of which brand they use. We also progressed branch co-locations, bringing multiple brands together under one roof. We're now up to 82 branches that are co-located. We're also investing in our digital capability for both consumer and business customers.
This includes the Westpac app, which is now the number one banking app in Australia, EFTPOS Air, our digital mortgage, and a range of digital deposit offers. Technology underpins the customer offer, and the consolidation of infrastructure has resulted in significant improvement in system stability and resilience. More than 70% of our infrastructure is now evergreen, and that means it's continuously current and available to build on. Importantly, it has created the foundation to accelerate our technology simplification, which I'll come back to later. We've reduced the number of products we offer by 37% over the last 3 years, including a further reduction of 8% this year. Our strong balance sheet provides the capacity to grow and invest.
We're also well-provisioned, having increased impairment provisions by AUD 300 million - AUD 4.9 billion at the end of the year, and that's AUD 1.5 billion above the base case scenario for expected credit losses. The group's liquidity and funding positions are very healthy, as reflected in both the LCR and NSFR being well above regulatory minimums, and we have managed the TFF roll-off well, with a modest AUD 12 billion TFF outstanding. I'm pleased with the improvement in the health of our franchise across consumer, business, and institutional banking. If we start with consumer on slide 7, customers are increasingly adopting digital banking, and we're working hard to improve our service and offers by making banking easier, expanding digital access, and giving customers greater visibility of their finances.
The Westpac app is used over 5 million times a day, and Forrester rated the app number 1, and our NPS improved to number 2. The app gives customers control of their everyday banking, and new features include budgeting tools, carbon tracking, and voice search functionality. Everyday banking is at the heart of our customer relationship, and this year we've grown household deposits ahead of system, and the number of my everyday banking customers is up 4%. We attribute this success to focusing on deposits, which has driven sustainable growth and deeper customer relationships. Competition in home lending was fierce during the first half of the year, with intensity easing in the second half. We worked hard to give customers every reason to stay with us while attracting new customers. In mortgages, we improved our service by investing in systems and process.
This year, we rolled out the single mortgage origination platform, with 95% of mortgages processed on the platform in the second half. Our time to write for first-party loans was consistently 5-6 days, and as we bedded down the new process for brokers, time to write improved from 10 days in March to 7 days in September. Given competition in the first half, we were disciplined and ceded some market share. We did have a stronger second half, growing at 1.2 x system. And while we were more competitive on price, actions were taken to restore the front book profitability by reducing discounts. We're also later than some peers to remove or reduce cash backs. And finally, we've done well on retention. Following the introduction of process improvements, retention on expiring fixed-rate loans improved from 82%- 90%.
In business, we are investing to support customers. Improving payment and deposit offerings are critical in this segment. Earlier in the year, we launched EFTPOS Air, which turns your mobile phone into a merchant terminal, helping businesses get paid easily while on the go. The simple online setup process for both iPhone and Android allows customers to be up and running in as little as 15 minutes. The new digital process now sees customers opening a business transaction account in less than 10 minutes, and this will continue to support our deposit franchise. We've also added capability in the payment space, and this includes the acquisition of HealthPoint, which provides real-time private healthcare claiming services. Through our partnership with mx51, we're also delivering innovative merchant payment solutions to compete in the market.
Business lending has consistently grown for the past 2 years, with the book diversified across sectors, and the streamlining of the application process has resulted in customers saving 2 hours per deal. This and other improvements have reduced our average time to decision by over 30% to less than 10 days. We believe this has contributed to improved momentum, with the number of applications across small and medium-sized businesses up 37% in the second half. Turning to the Institutional Bank, our goal is to reclaim our position as the leading domestic bank. During a 3-year period, we've consistently simplified our product and service offerings, consolidated our geographic footprint, and focused on building deeper relationships with existing customers. The financial results have steadily improved over that time, with return on equity trending up and the cost-to-income gradually declining.
Importantly, employees are engaged, with WIB's employee score rising to 79%, one of the highest in the group. We had solid lending growth of 9% across sectors, including health, property, and energy, and greater industry specialization, and freeing up banker time to spend with customers is driving improved results. Financial markets had a strong year, with revenue up 27%. With the growth in sales and risk management income, financial markets customers have benefited from greater external focus, and this has been reflected in much improved results. We ranked first for government and semi-government bonds, with our market share rising from 9%- 15%, the highest in 9 years. Investing in our cash management and transactional banking capability is also a priority. We're developing a new corporate cash management banking platform, and this is a multi-year investment, with the first major release now complete.
Pleasingly, we've grown revenue across all three businesses, CIB, Financial Markets, and GTS. Strengthening risk management and risk culture through our CORE program remains a top priority. We've completed 94% of activities under our core integrated plan, and we expect to complete all activities by the end of the calendar year. Our efforts then turn to embedding the outcomes of the program, which will continue as we transition in calendar year 2024. The ultimate aim is to ensure our risk culture is proactive and sustainable. In New Zealand, the BS11 and Section 95 programs completed, and we've continued to build our defenses to combat the escalating threat of scams. During the year, we launched a range of initiatives to detect, disrupt, and halt scams. This includes alerting customers through payment prompts, blocks for some cryptocurrency payments, and the use of biometrics.
We're now stopping almost 70% of scams, and we're working hard with peers, regulators, and law enforcement to make it even harder for scammers. We recognize higher interest rates and inflation are impacting some households and businesses, and our mortgage portfolio is demonstrating resilience, with most customers being able to respond to economic pressures. For variable-rate mortgages, rate rises have translated into higher repayments. However, average pay ahead rates were stable, and offset balances actually grew this half. We are supporting customers who are doing it tough and ended the year with just over 13,000 customers in hardship arrangements. This is still lower than the peak we supported during COVID, which is a positive indicator that customers are mostly adapting to the environment. Looking to the medium term, responding to climate change has been a major focus this year.
Consistent with our targets, we've reduced our operational emissions by 52%. We'll also support customers' transition to net zero by 2050. We're progressing our NZBA commitments, setting 7 new targets this year, and that sees 12 targets now in place. I'll hand to Michael now to run you through the details of the financial result.
Thanks, Peter, and good morning. The impact of inflation and interest rates on the economy, as well as market volatility and competition, continue to shape our operating environment, and it's come through clearly in our second half results. Reflecting on this, I'd make five observations. On revenue, we managed margins well, and our portfolio grew. We limited the reduction in core margin to six basis points. Economic and geopolitical pressures are heightened and volatile. For us, this has resulted in lower non-interest income, particularly the derivative valuation adjustment in markets. Inflation continues to drive costs higher. We acted in the half to limit cost increases to 5%. Our Cost Reset program remains critical to delivering our cost-to-income ratio ambition. Our balance sheet remains strong, with all metrics above minimums. It provides capacity to support customers through difficulties and for growth.
It also gives us flexibility for capital management, as shown by the AUD 1.5 billion buyback we announced today. And finally, credit quality is holding up better than we expected. While we've seen some deterioration, we are well provisioned for this stage of the cycle. With this context, net profit in the second half was down 20% to AUD 3.2 billion and, excluding notable items, was down 7%. The cost-to-income ratio rose 3 percentage points to 49%, and our key return metric, return on tangible equity, was 11.2% above the cost of capital. Turning to slide 14. As notable items and businesses sold continued to impact the results, in particular, the comparative period analysis, we've highlighted these impacts on the slide. Notable items in the second half reduced net profit by AUD 351 million.
These included customer remediation and litigation costs for prior year matters of AUD 176 million, restructuring costs of AUD 140 million as we continue to simplify the organization and divest specialist businesses … and the P&L impact of a smaller corporate property and branch footprint. Notable items also included a AUD 52 million benefit from hedging items, broadly offsetting the loss in the prior half. The combined impact compares to a AUD 178 million benefit in the first half. As Peter outlined, notable items were far lower this year. Non-core businesses that we have exited were not significant to second half 2023 earnings, but do impact prior period comparisons. Moving to the components of net profit. The 7% lower net profit reflects stable net interest income, lower non-interest income, higher expenses, and the drag from businesses sold.
Lower impairment charges provided some offset. Net interest income was up AUD 10 million. Average interest earning assets increased 2% to AUD 949 billion, comprising average loan growth of 1% and average liquid asset growth of 2%. This was broadly offset by the lower core net interest margin. Non-interest income declined AUD 70 million, with the derivative valuation adjustment the largest driver, as credit spreads expanded. Expenses were up AUD 266 million. I'll cover this in detail in the expense commentary shortly. Combined, these components led to a 6% decline in pre-provision profit, excluding both notable items and businesses sold. Credit impairments added AUD 132 million, reflecting the lower overlays in CAP in the half. The effective tax rate was 30.1%, slightly above the statutory rate of 30%.
Finally, the profit impact from businesses sold was AUD 91 million. Turning to lending. Total lending increased 3%, with growth in all 4 segments of consumer, business, institutional, and New Zealand. Australian mortgages grew at AUD 13 billion and at 1.2 times system. Improved service levels and focused customer retention strategies were all contributors to above-system growth. At AUD 51 billion, we saw the largest proportion of fixed-rate expiries in our book. We are particularly pleased that the proactive strategies saw retention rise to 90% for much of the half. Australian business lending grew 4%, reflecting pleasing growth in targeted sectors. Institutional lending grew by 9%, as we continued to deepen relationships with our existing customers. Lending was 1% higher in New Zealand. New Zealand mortgages grew below system, as we chose to balance margin and volume growth in a highly competitive environment.
Personal lending declined 6%, driven by the planned roll-off of the auto finance portfolio. Our deposits have grown 2%, as momentum continued. Customer deposits now provide 71% of our funding and give us a strong base for growth. Consumer deposits increased by AUD 14.8 billion, as we grew our share of household deposits 1.2 times system and attracted new customers. The largest uplift was in behavioral savings accounts, which more than offset a decline in transaction account balances. We saw no additional switching into term deposits. There was a AUD 3 billion increase in mortgage offset balances. Customers that had shifted from fixed-rate loans brought with them other savings as they moved into the variable rate product. WIB deposits grew AUD 2.5 billion, mostly in term deposits. Transaction and savings balances were stable.
Business deposits were AUD 2.9 billion lower, in line with system. Some business customers drew down on cash buffers to meet higher interest and input costs, while the market continues to remain competitive. New Zealand deposits were stable in New Zealand dollar terms, with reductions in transaction and savings accounts offset by growth in term deposits. Core net interest margin declined 6 basis points to 1.84%. Loan spreads, mainly in mortgages, subtracted 10 basis points from margin. Mortgage customer retention, along with the averaging impact of competition in prior periods, had the largest impact during the half. Business lending spreads were only marginally tighter. There were a number of moving parts in customer deposits, which were a drag of only 1 basis point in the half. A decline in spreads was largely mitigated by higher returns on hedge deposits.
Wholesale funding costs were slightly higher, lowering margin by one basis point. We timed our funding well, avoiding some of the more volatile periods when spreads were particularly high, raising AUD 15 billion of new long-term wholesale funding in the period. Reflecting the step up in the cash rate, higher earnings on capital contributed six basis points. Treasury and markets added two basis points to the margin, with the contribution rising from eight basis points to ten basis points. Notable items increased margin by two basis points, with the hedge impact moving from a negative in the first half to no impact in the period. Moving to non-interest income. Notable items and businesses sold had the biggest impact on non-interest income in the half. Excluding these impacts, non-interest income was down 5%.
Fee income was down slightly, with lower cards income in consumer, partly offset by higher lending fees in the institutional bank. Wealth was broadly flat, excluding the impact from businesses sold. Markets income was down slightly, following good growth in the first half, and was particularly impacted by the lower derivative valuation adjustment. Turning to expenses. The 5% increase in expenses in the half was mostly from inflationary pressures, combined with increases in both software amortization and investment. Ongoing costs were almost AUD 500 million higher from salary and wage growth, along with higher third-party costs. The latter was widespread, but particularly high across software maintenance and license costs. Investment expenses were up AUD 182 million, including higher software amortization, which added AUD 120 million in the period, as a number of regulatory and business growth projects completed.
These investments have contributed to better risk, customer, and capital outcomes. We delivered just over AUD 400 million in savings through Cost Reset. This included a 6% reduction in FTE in the half, as we continued to simplify the organization. Moving to investments. We saw a shift in investment spend towards growth and productivity. Although our regulatory compliance agenda remained a priority and the majority of our spend, we expect that spend has peaked in both absolute and percentage terms. Total investment spend decreased by 3%. Our risk and regulatory spend was 9% lower, while we increased growth and productivity investment by 8%. Major growth investments included the platforms and infrastructure, which provide benefits over a longer period. As these larger projects complete, we expect our capitalized software balance to decrease over time. Turning to credit quality.
Stressed exposures as a percentage of total committed exposures increased 16 basis points. Tension in the useful life reflect higher spend on his reflects the lift in mortgage arrears and some downgrades to watchlist in business lending. Mortgages 90 days arrears have increased 13 basis points, while a 30-day bucket increased 15 basis points. As customers face higher rates and inflationary pressures, we know that these are not being felt evenly. Most of our customers have been able to adjust to higher repayments, and many have also maintained buffers above their scheduled payments. However, some have found this more difficult, which is reflected in rising arrears. Unsecured lending has performed well as we improved our collections processes. The increase in stress across business customers, reflected in higher watchlist and substandard exposures, was most pronounced in construction with a modest rise in property.
Others related to a small number of exposures across a range of sectors. Turning to provisions. We are well provisioned for a more challenging economic environment. Our coverage remains appropriate for the risks we see in our portfolio, and we continue to hold overlays for risks not captured in our models. This half, collectively assessed provisions to credit risk-weighted assets increased 2 basis points to 1.35%, with slightly higher provisions and lower credit risk-weighted assets. As you see from our result, the composition of provisions has shifted in the half. Overlays were lower. We removed the New Zealand weather overlay and partly released overlays across Australian and New Zealand mortgages and some business portfolios, as these risks are now captured in modeled outcomes. Stage 2 CAP increased due to higher model provisions, including movements from both overlays and Stage 1.
Higher stressed exposures and early cycle mortgage delinquencies also lifted Stage 2 provisions. We did not make any changes to our scenario weightings and continue to believe a 45% weight to the downside is the appropriate setting for what we know now. We will continue to assess this as economic conditions evolve. Moving to slide 24. As I said earlier, credit quality is holding up better than expected. Impairment charges of AUD 258 million were seven basis points of average loans, down from ten basis points in the prior period. This remains below the long-term average. The IAP charge comprised new IAPs of AUD 121 million, another low charge relating to a small number of exposures, and a lower level of write-backs and recoveries compared to the first half, which included a recovery of a large exposure that had previously been written off.
The other movement in CAP was well down on the prior period at AUD 19 million, as we assessed that the overall level of provisions remain appropriate. Moving to capital. The CET1 capital ratio ended the half at 12.4%, well above the top end of our target operating range. Net profit added 71 basis points, while the payment of the first half of 2023 dividend reduced capital by 54 basis points. RWAs added 5 basis points, with a reduction in credit risk-weighted assets adding 15 basis points from data refinements, offsetting 12 basis points from lending growth and the modest deterioration in credit quality. Other changes reduced capital by 12 basis points from an increase in capitalized software and a higher deduction for deferred tax assets.
With this result, we also announced a AUD 1.5 billion dollar buyback to return excess capital to shareholders. This will reduce capital by 33 basis points, taking our pro forma CET1 capital ratio to 12.05%, still above the top end of our target operating range. We entered 2024 in a strong financial position to navigate what we expect will be ongoing economic and geopolitical challenges. On revenue, we expect system credit growth to be positive as we target growth in line with market. Margin headwinds are likely to continue, although the composition may vary. The drag from previous divestments will be less of a factor than in the current half. We will continue to be disciplined on costs, and we'll rigorously pursue savings under our Cost Reset program, including from the lower headcount we delivered in the second half.
However, investments that completed this year will drive higher amortization costs. Inflationary pressures will persist, and risk and regulatory spend, while lower, will remain elevated. Our balance sheet is strong and positions us well to support customers, growth, and our technology simplification investment. Finally, maintaining capital at or above the top of the operating range provides flexibility for the board to consider further capital management options. With that, let me hand back to Peter.
Well, thanks, Michael. At the half year, I outlined our strategy for growth and return. Just to recap, our strategy was refreshed, and it's guided by our purpose of creating better futures together. There are four strategic pillars of customer, easy, expert, and advocate, with the outcome being growth in key markets and improving returns. The organization restructure mentioned earlier is critical to support our strategic refresh and to sharpen the focus on target markets. The strategy is all about the customer. They're at the heart of what we do, and we value the whole of customer relationship and work hard to anticipate their needs, including through delivering personalized experiences, offers, and insights. Transaction accounts and payments are at the center of the customer relationship, enabling us to build earlier and deeper relations. We continue to make banking easier, more intuitive, and digital.
This next phase is about radically simplifying the bank. For this to be successful, it's fundamental that we accelerate the simplification of processes and technology. That brings me to slide 29, which shows the work underway to reduce the size of our technology stack by two-thirds. Over the past three years, we've progressed the foundational elements, seen here in the technology foundation layer at the bottom. More than 70% of our infrastructure is now evergreen, meaning it's current and available to be built on. The focus from here is accelerating the simplification of product, platforms, and enterprise, and we'll start by reducing customer masters and modernizing payments. The task at hand is laid out here. Our technology isn't older or less capable than peers. We just have too much of it.
Cutting our technology components from around 180 down to around 60 will improve our speed to market, make us more efficient on costs, and reduce operational risk. This is a big agenda for the company over the next 4 years. A period of sustained investment is required to support this strategy, and we believe that this can be achieved with a relatively modest increase in the investment envelope to approximately AUD 2 billion per annum. To put this into context, in the 5 years to FY 2019, we invested approximately AUD 1.3 billion per annum. The increase to around AUD 1.9 billion in the last 4 years, with almost two-thirds allocated to risk and regulation. Our intent is to redirect from risk and regulation spend to growth and productivity. Execution will be the key, with a whole of organization approach that is principles-based.
Customer experience is obviously the key driver, and the simplification will be jointly led by both the business and technology. Our approach will be modular, where we address components within layers, and this will add flexibility, allowing the individual work streams to be scaled up or down as required. We're outcomes-focused, with key measures of success being improving return on tangible equity and growing the business in line with market. In summary, we've finished the year with a stronger franchise and balance sheet. We are focused on technology simplification and are well-positioned to grow and to help customers navigate the environment. Thank you, and back to Justin for Q&A.
Thanks, Peter. So we'll move to Q&A now. Just a reminder, star one to ask a question, and we also encourage the media to register as well. So our first call comes from John Storey from UBS.
Thanks so much. Thanks, Peter. The question I have, just first off, is just really around the Cost Reset program. I think you told us a few years ago that the bank had gone back to a decentralized cost program, and just looking at your underlying BUs this morning, particularly around the consumer business, you actually saw quite a big increase just in the cost-to-income ratio. So there's obviously, I appreciate, there are a lot of different ways that you can look at costs, but maybe if you could just give us some sense around some of the levers that you can pull outside of what's happening at the center of the group and the impact that that has on the underlying BUs.
In terms of the program, there were three broad levers. Firstly was the portfolio simplification, which, you know, we're, we basically completed this year. The second was reducing notable items, and, while they're down, they're not down as far as what we need, so that's continues to be work in progress, and certainly, the risk management uplift plays a critical part there. But also, the technology simplification is a big part, 'cause one of the challenges with running too much technology is it's hard to manage sometimes. And then the third bit was obviously simplifying and digitizing the bank. So that's, that's the bit we're after. We are seeing... We have seen the reduction in FTE in the second half that both, Michael and I spoke to.
But Michael, why don't you also add to what we're seeing in the Cost Reset? I would just say on consumer, it's obviously revenue and expenses, and the challenge with revenue and consumer is mortgages is having a big impact, but Michael?
Yeah, thanks, Peter. As we indicated previously, the Cost Reset is based, as Peter said, on portfolio simplification, business simplification, and organizational simplification. Portfolio is completed, as Peter said. Business simplification continues underway, and the technology plan that Peter outlined today is a big lever for that going forward. And the organizational simplification has delivered us around AUD 1 billion over the last three years and continues to be a core lever for us. We said that we would reduce head office roles by 20% by the end of 2024. We're on track for that. We said we would reduce corporate property by 20%. We've already delivered that in FY 2023, and there's a little bit more to do in 2024.
The 6% FTE, or the headcount reduction in the second half, will provide us some savings into 2024. Having said that, we, as I indicated, inflation and wage growth, and particularly inflation on third-party suppliers, continues to be intense, and so we'll still see that as a headwind going into 2024, but those levers that I talked about remain in place to offset most of that going forward.
Our next question comes from Brendan Sproules, from Citi.
Good morning. I've just got a couple of questions on costs as well. In the second half, on slide 21, you show that your ongoing expenses were up AUD 489 million, almost 10% increase in a six-month period due to persistent inflation. Obviously, you, in your outlook, you've said that this inflation will persist. Can you maybe give us an impact of how different 2024 will look compared to second half, 2023 on this measure?
Look, I think, you know, the best way to respond to that is to say that, you know, we called out persistent wage growth, consistent third-party expense growth, and we see that that will flow into 2024. Cost reset through lower headcount will offset some of that, but we still think that the sorts of cost increase we saw in the second half will play into the first half 2024.
Brendan, was there a follow-up there or?
Yeah, I've just got a second question, if that's okay. Just on your investment spend, you kind of indicated that AUD 2 billion is kind of the number that you want to kind of work for, to over the medium term. But just on slide 22, the level that you expense of that is actually quite low relative to your history, also relative to some of your peers. Now that the mix is shifting away from regulatory and risk and more into this growth and productivity bucket, how will the mix between expensed investment spend and capitalized investment spend change?
Yeah, look, the outcome of capitalization expenses is a factor of the sorts of areas that we're investing in, and as we said, we invested in platforms. We'll continue to invest in platforms and infrastructure, and that'll be capitalizable. But as you say, we will spend less on risk and reg, so that won't be. We saw in the second half that the capitalization percentage dropped, and we'd expect that to be similar into 2024.
Our next question comes from Andrew Lyons, from Goldman Sachs.
Thanks, and good morning. Just two questions from me. Peter, just firstly, you've noted that the balance sheet has capacity to grow, and that you now want to maintain market share in key lending and deposit segments. Just in light of this, can you just talk to how you're thinking about the volume margin trade-off, particularly as it relates to mortgages? You, you noted some improvement in mortgage profitability through the back end of the second half, but we have heard that one of your large competitors has reengaged in recent weeks. So just to what extent, you know, this was to accelerate, how will you manage balance sheet growth in the business?
Yeah, I think we want to be consistent in all our markets, including mortgages. So, you know, one of the challenges for this organization has been to be a little bit in and out of the market. So I think the word we use is consistent. So we want to consistently serve, get consistent service, and look to to grow. In terms of mortgages, where we ended up over the year was actually point out a system. We're a bit softer in the first half and stronger in the second half, so we'll always look at it. But my assessment of the market is that there were reductions or in discounts in the second half.
And if you look at the RBA stats, the difference between portfolio and new lendings, the closest it's been in a little while. So it's always a dynamic question. But hopefully that gives you a sense of how we want to serve. We want to serve by reducing the time to yes. So make sure that our service is really good where it needs to be, and then we'll look at, you know, tactics over time. But it's more about being consistent and growing at market and showing the franchise can grow at market.
Thanks, Peter. Just a second one, maybe for Michael, just around a bit of a clarification around the response to Brendan's question. Your second half costs ex notables was annualized AUD 10.5 billion, and if we're sort of assuming mid-single digit inflation, that brings FY 2024 cost to about AUD 11 billion. Is that sort of broadly speaking how we should be thinking about the trajectory for costs, or is there some upside risk to that number as that sort of 5% from the second half growth continues into the first half?
Yeah, I think the best way to think about it is that, you know, wage growth is still going high. We saw it at 7% in 2023. And inflation is impacting on third-party vendor costs, particularly in technology, and that's running well ahead of that. And then, so you know, we'd say that run rate is higher than we saw it in total terms, but that the work that we're doing will reduce that overall impact. Now, I'm not going to put a number on it, but hopefully that gives you a sense. You know, I've indicated that the sort of net increase we saw in the second half is likely to persist into the first.
Our next question comes from Victor German from Macquarie.
Thank you, Justin. I was just hoping to two questions as well. First one, on slide 19, you provided the bridge in terms of margin performance. Customer deposit margin down one basis point. I was just hoping if maybe you can give us a little bit more color and how that number actually comes together. I think there's quite a lot of moving parts, obviously, with higher rates still benefiting. And some of the offsets, if you can maybe talk about and what you've seen over the course of the half.
Yeah, the best way to think about it is that we did see more competition for deposits in the second half, and that the spread expansion we've seen over the last few years just isn't there anymore. So the greater competition, mainly in consumer but also in business, meant that the spread compression was higher in customer deposits, but offset by the increased rate, the tracker rate, on non-rate sensitive deposits. So they broadly matched off, is the best way to talk about it.
Would you say that there's been acceleration in kind of impact of mix into the fourth quarter versus-
Yeah, I think as I indicated, yes, is the quick answer. But we didn't see, as we expected, a big mix shift into term deposits. What we saw was a shift out of, transaction accounts into savings accounts, which are higher rate. But, not as big a shift into term deposits. So you've got-- That's why we said there are lots of moving parts in deposits, and I think that will continue to evolve over 2024. But, I think we're well positioned, as a bank with a high level of non-rate sensitive deposits to take advantage of that impact.
And then, just very quickly on the buyback. Given that you've got about AUD 3.5 billion of franking balances and they're still rising-
Yep.
Just thinking around doing a buyback versus a special dividend?
We always think about growing the dividend, and obviously, that returns franking credits. In relation to the buyback, given where the share price is, we felt that was the right balance for all shareholders.
Our next question comes from Matt Dunger, from Bank of America.
Yeah, thank you for taking my questions. Just wondering if we could unpack the lending margin decline of 10 basis points. You talked about mortgage competition being the key driver. We hear you're offering some steeper discounts versus peers. How long can you price ahead of peers, and how much of this decline in mortgage margins is coming from front versus back book?
Well, I think, broadly, there's, there's 2 big buckets going on. One is, retention repricing, including the fixed, variable roll. So that was a, a sizable part of that 10. So most of it was mortgages in terms of the 10. And, and broadly, most in Australia, a little bit in business, a little bit in New Zealand. But you've got 2 buckets. You've got retention repricing, and then you've got, new flow, and I think they're broadly the same. In relation to your comment about where we're sitting in the market, you know, we're being competitive, in the market. So from the data I'm seeing, through the RBA and APRA data each month, I don't think it's that far different to competitors. But Michael, would you have anything else?
Yeah, I'd just add that what we've seen over the last 12 months or so is quite a contraction at an industry level on the front book, back book margin, and you can see that through that RBA data that Peter mentioned. And that's really come about by an increase in the customer rate. So the customer rate on new lending is picking up. The other thing I would say is that, as Peter indicated, we had a large, the largest portfolio of repricing, effectively from fixed to variable, in the half. And that comes down a bit in the first half 2024, and then comes off to more normal levels. So that elevated level of repricing through retention will come down a little bit in the first half.
Our next question from Jonathan Mott, from Barrenjoey.
Yeah, if I could just ask two questions. The first one, you did talk a bit about the institutional business returning to number one, but you haven't given us any targets on what you're trying to do in business banking. Obviously, this is a focus for a lot of the banks. Could you tell us what your goals and KPIs are for business banking and what you're trying to do over the next couple of years?
Yeah. So, the first thing is, if you look at the NPS or the service metrics in business, they're pretty low. And that's—they're negative in absolute sense and probably close to third, but they're not where we want them to be. So the first thing is to improve service. We've just rolled out a new provider of NPS, which is providing much more information at a product and experience level and geographic level, which is allowing us to link data between what we see internally and what the customer is saying. So that's the first thing. The second thing is payments, as I said.
So, we're investing in payments, so both the capability and merchants through MX51, the focus on healthcare, the focus on origination of deposits. The app has been improved, so payments and the digital ecosystem there. And then lending is really a rebuild of the lending process. So we improved the lending process a lot, but compared to market, it's not where it needs to be. And you put that together, and we've got a business that's pretty skewed to the top end of the business bank, the commercial end, if you like. We've got to get after SMEs as well. So we need to have a business more balanced, providing service, providing all features, and we certainly see good returns, particularly in that SME business.
We have a lot of existing customer relationships through deposits, which will be the first focus in terms of where we grow.
May I ask a follow-up question to this slide? I think it's either 29 or 30, depending on what you're looking at, which is the acceleration and technology simplification. So this is a huge project, reducing the number of systems from 180 to less than 60. You called out some numbers, roughly AUD 1 billion per annum for four years, so it looks like it's a, you know, AUD 4 billion roughly project, plus or minus a bit of inflation. But if you look at what ASIC called out when they talked about the hardship proceedings, and they quoted your audit report of saying that there's been a very complex system due to years of underinvestment. Can you provide some more information on this? And it might be a different strategy day, because this is a massive turnaround strategy, and a huge investment.
How long it's going to take? Four years. What commitments we're going to get? What are the benchmarks we should be looking at through this timeframe, as you effectively rebuild the back end of the bank?
Yeah. So, we will do an update next year, John, and agree this is, you know, this is a massive commitment for this organization. There's a big goal here, but we have to do it, so we're a simpler organization for so many reasons: customer service, risk management, costs. And as the world gets more complex in terms of its requirements, we need to simplify. Broadly, you know, we'll break the back of this in four years. And, collections or hardship as an example, is one of the capabilities in the enterprise layer that we're after. So I think, you know, the board and management are committed to it. We see this as a must-do, that we need to get on and do it.
We've got more bandwidth now. The portfolio simplification is completed, and we've done a lot of the uplift in risk management. And so that's the logical next phase. But I understand you want more detail, and I don't think you'll be alone in the market, so... But it's probably an hour by itself and not the right time to jump into it today, but we're happy to do something next year.
Thank you.
Our next question comes from Andrew Triggs, from JP Morgan.
Thank you, Justin. First question, please, just to really follow up to Victor's question. Looking at transaction account balances, they were only down AUD 5 billion in the half, and they looked to be about a third of the decline in the previous half. Interested in your sort of response to the earlier question around seasonality, well, not seasonality, but a change in the dynamic in the fourth quarter. Could you just sort of, maybe, talk a little bit more about that? Do you expect this slowdown that we've seen to continue, or was there sort of a fresh increase in the fourth quarter?
Well, as I think I indicated, customers did move funds out of transaction accounts to savings accounts, which is the rational response to higher interest rates. We're not alarmed by that. We, we expected it. And, you know, that trend that we saw in the second half is persisting into the first half 2024. I think until rates stabilize, we'll still see a bit of that in the first half.
Thanks, Michael. So a similar pace of decline-
Yeah.
something that we could expect?
Yes.
Yep. Great, thank you. And then just a question on the business bank. The NIM, I think, I observed, was up to about 5% for the second half. Obviously, very strong performance. You did allude to some asset competition pressures, asset spread pressures on the NIM, but obviously deposit returns outweighed that. Could you talk to competition in this market? Are you seeing... I mean, why shouldn't we expect to see some of these outsized gains in the NIM competed away over time?
Yeah, well, it's possible. I mean, but we're, we're, you know, one of the smaller banks in the market. For us, the opportunity is particularly in SME, which is a higher, a higher spread business. So, competition that's in mortgages, we'll have to wait and see what happens in terms of the future. But in this result, in that 10, in the margin waterfall, it was a pretty small portion of the 10 in terms of business lending across both the business bank, WIB, and New Zealand. So not the feature for us. Mortgages was the real dominant factor for us.
Thanks, Peter. You don't, you don't see-- you haven't seen in the recent sort of weeks and months any change in that dynamic, i.e., an intensification of competition as returns have increased so much?
Yeah, at the margin. So you know, it's at the margin.
Trouble. Thank you.
Our next question, Matthew Wilson from Jefferies.
Yeah, good morning, team. Can you hear me okay?
Yes.
Yes.
Yep. Two questions. Firstly, just New Zealand. Can you sort of give us more color as to what's going on there? There's not much growth. It hasn't grown for a while. Your Core Equity Tier 1 sits at 11.1, which is below peers and well below the 13.5 that you need to get to eventually, which is a AUD 1.2 billion impost on capital. What's the path there and the strategy for New Zealand? Then I've got a second question.
Yeah. I'll let Michael, who sits on our New Zealand board, speak to New Zealand.
Yeah. Thanks, Matt. So there are a couple of things going on in New Zealand. Obviously, for Westpac, we've been focused on BS11 compliance, which is the outsourcing requirements of the Reserve Bank of New Zealand, plus we've had Section 95, which is another regulatory program, so a reasonably similar sort of backdrop to what we've seen here in Australia, and so that's taken up a lot of attention from management to get through that. In addition, the New Zealand economy has slowed. We've seen some slowing in the Australian economy, as Peter indicated, but we've seen a lot more slowing in the New Zealand economy, with a higher interest rate and higher inflation. So we've had the Westpac focus on risk and reg, and a slowing economy.
On the CET1 ratio, the board in New Zealand is very focused on meeting the requirements of the RBNZ capital ratios. We have a path through earnings and risk-weighted asset optimization. So I think we're comfortable that that will be managed within the existing parameters. Okay, and then the second question is obviously on technology. We've talked about these tech issues now at Westpac for at least eight years, and there was always a reluctance to go down the path that you've announced today. You sort of defended on the basis that they're just ledgers. What's actually changed to make this right decision today? And then as we look to the core, is it gonna be Westpac Hogan or St. George Celeriti? Now, which one are we merging to? And just to confirm, Mott's point, is it AUD 4 billion it will cost you?
So there's a bit in that. In terms of the cost, we haven't—all we've said today is the envelope for the group needs to increase to AUD 2 billion. So I haven't put a number on the whole program. We can do that down the track. So we believe we can fit it within the envelope for the group of AUD 2 billion per year. In terms of our technology focus for the last few years, as I said, it's been on the foundation layer. So think about that as networks going from six to one, data centers, the you know the data platforms work, how we code technology. So we're pretty... We're gonna be pretty much where we need to be on that bottom layer in early 2024.
So that's the foundation, you know, that allows us to build everything else on top of it. And then on the top layer, we've been working on the digital experience. That's been, you know, three years of hard work to get, particularly the Westpac consumer app, up to where it needs to be. So that's really been our focus in the last few years. And now, with the bandwidth from portfolio simplification being behind us, and as I said, risk management, we've broken the back of, we can look to the next phase. Matt, I'd encourage you to think about it as modular. So, you know, in terms of the deposit ledger, that's not really the critical piece.
It's things like, we have multiple ways to ID people, and when I say multiple, it's not one or two, it's in the tens and twenties. So, it's collapsing all those systems that are just as critical as what ledger it needs to be. But again, you know, the collections example. It's quite manual in some cases, so we need to replace that particular area. The ledgers work, and they still work, and they're still not gonna be the priority and the time horizons. It'll be the modules around the ledgers that we'll particularly get after.
Okay. So we'll still have two core banking systems essentially. We'll just sort of digitalize around that. Is that correct?
I'll talk. Yeah, we'll pick it up in detail, but it's, you've got to think about it as modular. Each of those rectangle squares in the picture on slide 29, I think it is, is what we've got to simplify.
Okay. Cheers, guys.
Our next question is from Richard Wiles, from Morgan Stanley.
Good morning. I think Michael's comments on the cost outlook probably suggest costs will be up again 5% in the first half of 2024. So something like AUD 10.55 billion. So run rate tracking at AUD 11 billion. I know you haven't given guidance, but that seems to be where you're pointing us to. If you're gonna reduce the cost to income ratio relative to the peer group in the medium term, does this imply that beyond 2024 costs are gonna come down? How do you get to that sort of outcome of a narrower cost to income gap?
Well, thanks, Richard. So look, obviously, as you'll appreciate, the cost-to-income ratio has two components. Firstly, the revenue component, and we see that revenue growing over time. We'll see 2024, as we've indicated, there are margin headwinds. But after 2024, we see that, you know, growing in line with system, in a more stable margin environment, will grow revenue. And on cost, I think, you know, we're the only major bank that's calling out a formalized cost program, and we will remain disciplined on costs. And we think that that will be, in a relative sense, a positive compared to peers. So when you look at those two aspects over the medium term, which is what we've guided to, we believe that our cost-to-income ratio will reduce, and we'll get closer to peer group.
Okay. And for this year, sounds like the gap's not gonna narrow if the cost base is heading towards AUD 11 billion.
Well, I don't think at this stage... I think 2024, as I indicated, margins will- there was headwinds on margins and, and persistent inflation and wage growth remains, so it's a difficult year from that perspective.
But Michael, you know, relative to the peer group, they're all operating in the same environment.
Yep.
They've all got headwinds for volume growth. They've got ongoing pressure on margins. What's going to drive cost-to-income ratio improvement relative to the peer group this year?
So I can't really comment on what peers are doing, Richard, and obviously, we'll see what that outcome is over the next little while. But as I said, we continue to remain focused on growing our balance sheet at market and keeping out the cost growth from wage growth and inflation, as low as we possibly can. Now, we think that that's the right setting for Westpac at this stage, and we'll just have to see how that plays out against peers.
Okay. Thanks, Michael.
Our next question comes from Ed Henning, from CLSA.
Thanks for taking my questions. I've got two. First one's on capital. In the outlook today, you've talked about ongoing opportunity to capital management. You've announced a AUD 1.5 billion buyback. Can you just clarify, is that therefore, are you trying to buy that AUD 1.5 billion back in the first half, as you've got considerations?
. your considerations, the outlook after the first half for ongoing opportunity in capital management. And then just-
Yeah.
And so just within the capital, you also talked about you've got a 15 basis point benefit from data refinement. Can you just talk about any more optimization or, you know, differences relative to peers you've got on your capital that could benefit you in the near term?
Yeah. So on the size of the buyback, Ed, the best way to think about it is we think we can execute that over the next six months, and then we can look at our capital position again, and the board can make a further decision. So that's how we've sized the one half about what we can execute on market. On the Basel piece, so we're really happy with the implementation of Basel, and you've seen that in the uplift. Michael, do you want to just comment on any further opportunities?
Yeah, we, we have an ongoing risk-weighted asset optimization program. We still think that there are some optimization opportunities for us in, in the broader sense. But the benefit you've seen in the half and the year through Basel III, we don't, we don't think that that will repeat at that level, but that's not to say that we won't continue to look for optimization opportunities.
Continue-
Okay, thanks. And just one quick sec, second one. You know, there's been a lot on margin today as well. You look at the third quarter, the core margin, 1.86. Fourth quarter was around 1.82. You talked about September at 1.81. You know, while you talked about margin headwinds continuing in 2024, if you look at the fourth quarter and then in September, exit margin, you know, are you seeing those headwinds starting to ease, or is the competition picking up, and we should think about the trends continuing what you saw in the last couple of quarters?
I think that the analysis is right in terms of the fourth quarter and 181. But-
Yeah
as usual, there's lots of moving parts in margin.
Peter's right. There are lots of moving parts, but the way to think about it is the mortgage margin compression was the biggest impact on margin in the half and the quarter, and we expect that to play through into the first half.
Right here, this is Mercy.
Thank you.
Our next question is from Carlos Cacho from Jarden.
Thanks. Thanks for the opportunity to ask a question. I've got two as well. Firstly, on the business bank, there's been a few questions around that. Can you give us a bit of an idea now, kind of post the restructure, any thoughts on what investment is needed, what needs to be done to improve the outcomes in the commercial bank and any guidance on the timeline and cost of that?
Yeah, so I think I covered that in the answer to the previous question, I think, Jonathan Mott. But, yeah, we're very focused on payments, and deposit capability and cashflow management effectively. And, you know, one, the opportunity in WIB to re-platform, I think, will benefit some of the business bank as well. So that's the first thing. The business lending pace is probably... And so I'd say on payments, we're well progressed, in WIB, and we've made some good strides with the EFTPOS Air for small business, also some of the other capabilities that we're integrating in merchants. Business lending's got a lot more work to do, so we know that.
In terms of time frames and costs and whatnot, I don't want to pick out particular businesses, but I would say it's a priority in the way that we're thinking about it. So both of those... Oh, sorry, and then the other point was the SME segment, where we're a bit light in SME, so that is definitely an opportunity for us in terms of the SME segment.
Thank you very much. And then just secondly, on, I guess with rates, you know, with the RBA widely expected to hike up tomorrow, you were kind of some of the comments suggesting that maybe the benefits of higher rates are fairly neutral on the deposit book. For overall earnings, do you think it's still a tailwind if we get further rate hikes, or it's more of a neutral impact now?
Well, I think on Michael's side, he pointed to interest rates as being one of the determinants of future margin. But of course, I can't comment on what we may or may not do on pricing on a go-forward basis. You'll just, you'll see it when it happens.
Thanks.
Our next question comes from Azib Khan, from Evans and Partners.
Thank you, Justin. A couple of questions from me on costs. Firstly, Peter and Michael, you, you've said you're on track to reduce head office roles by 25%, by FY 2024. But at the same time, you're accelerating the digital applications. What do you expect the Delta to be for your overall headcount, including contractors, over the next two years? And is it fair to presume that as perhaps overall permanent roles go down, there will be an increase in contractors over the next couple of years?
It'll be a little bit more complicated than that, I think, because there will also be partners that we use, so some of the work could come through in partner line rather than through the salary or the contractor line, Azib. So, you know, I think the best, go back to the investment spend, and we'll accommodate it within the investment spend, is how we're thinking about it, at AUD 2 billion a year.
Also, on that, I think I heard Michael say that wage inflation experienced in FY 2023 was 7%. Can you please tell us what was contractor wage inflation?
So what I indicated, that was for FTEs, so actual permanent employees of Westpac, was at 7%. Third parties varied, you know, and that depended on the third party. It was anywhere between 10%-15% per annum during the year.
Thanks. And just one more question on costs. In terms of your spend on cybersecurity, the annual spend there, do you think that's now peaked or is there more of a ramp up to come? And also on that, obviously, you know, Canberra is thinking about making the banks liable for scams. What sort of discussions, if any, have you had with Canberra on that front?
On scams, the discussion's about an industry code, so we're working on the industry code. But the thing about scams, though, is it's an ecosystem. So if you look at investment scams, which are half the money that are lost, often, the opportunity appears on a social media platform. You then have, you know, interactions, and the bank's sort of at the back end of it, trying to do our best to stop people investing in these type of things. So it's got to be a whole-of-ecosystem approach. It just can't be a code on the banks. It's got to be for the whole system. But you know, we're doing as an industry, and Westpac's playing a leading part, we're doing everything we can to educate people.
At the moment, we tell people when we think it is a scam, and we're actually going to integrate the sophisticated decisioning that we have at the back end right into the app, so the customers can make better decisions. We block cryptocurrency for certain exchanges where we could see a high flow of scam dollar values through it. So I think it's not so much the discussion with Canberra, it's we're doing everything we can, and we need an industry code that looks at the whole ecosystem, not just the banks, 'cause we sit at the back end effectively. Sorry, as if you had a first leg to that question that I didn't write down.
Yeah, the cybersecurity annual spend, do you think that's peaked or that there's more ramp up in that to come?
Yeah, I think every investment we do now has to have a cyber layer. So if I think about what we're talking about in terms of the reduction in that middle three layers in the technology stack, a lot of that will go to modern technology, which is better for cyber. So I wouldn't... We've got to do sort of cyber stuff like monitoring and testing and perimeter testing and whatnot, but then there's just the basics of access control, employees, and whatnot, and we've worked on that hard over time. Is it gonna go down? No, it'll increase. And we've just got to keep you know, keep alert and keep investing in that area.
Thank you very much.
We'll move now to questions from the media. So we'll start with James Eyers from the AFR. James?
Well, thank you. Hi, Peter. As, as Carlos said, I just think there's inevitably going to be a lot of focus on the RBA rate decision tomorrow. I might just ask about that, you know, and the impact of the customers, rather than, than future pricing. I see your economists sort of pointing to a cash rate peak at 4.35%, and then falling to 3.85% in 2024, so two cuts. You said today, though, that inflationary pressures will persist, so to see potential for higher oil and energy costs, given all these geopolitical risks and, and whatnot. So I just wondered if you could talk to any risks to that 3.85% 2024 forecast.
Like, do you think there's any chance that perhaps you'll be up above 4% throughout all of next year? If that's the case, I know you've talked about customers being resilient, today, but, you know, if rates have to stay higher for longer, which will obviously prolong reduced borrowing capacity, could you just talk through how that might flow through to credit growth and housing prices, and even sort of delinquencies in 2024?
Yeah. So just putting aside the big uncertainties in the global world and geopolitics, I'll just put them aside. I think if you look at the domestic economy at the moment, there's big demand for infrastructure, there's big demand for energy transition, there's demand for more housing. We've obviously got immigration. And if I think about how well the economy has performed, it has performed stronger than we thought, and I think there is some pretty big demand drivers around at the moment. And if that does eventuate, interest rates will probably need to be higher than what we're thinking. So I'm not going to talk about the Westpac economics forecast. They're independent and, you know, obviously we respect that.
I think the risk is that interest rates stay higher for longer, 'cause we've still got a lot of domestic demand to do things that are really important in the economy. As we said, what we're seeing right now is, actually, the vast majority of customers are adapting to the environment, so paid ahead rates in mortgages are pretty similar. Offset balances grew faster this half. That was probably the biggest surprise, I think, in the half. We've seen the number of customers only making the minimum repayment on cards at similar rates for a long period. So that's why we say the step back comment is that it's sort of... They're working it through.
But we also know that some are not, and that was the reference to the 13,000 customers in hardship, and we do say to customers, "If they need help, call us." 75% of those people are either getting temporary reductions in repayments or a repayment pause. So, you know, what helps often is time. They might have lost their job or whatnot. So I think the key question to me as I look forward is: What does unemployment or what does employment look like? And if you've got a job, and you can get hours, and that's, I think, what's solving a lot of the issues at the moment. But we'll have to wait and see about where these interest rates settle.
We've probably got too much demand in the economy at the moment.
Just on unemployment, Peter, like your economists have sort of seen that up from 3.8% now to 4.7% in 2024. I mean, if these sort of rates do have to stay higher for longer, being the risk, which you just said, do you sort of see potential for that unemployment to sort of adjust into the 5s, perhaps?
Oh, no, but I’d say from our perspective, and Michael covered this well in the presentation. You know, we’ve provisioned appropriately, but well above the expected base case in terms of the outcome. We’ve got strong capital. You want to stay well-funded. So we’ve set the bank up, I think, for a more challenging environment. And then we’ve also got to be aware that there’s some pretty big geopolitical issues at play at the moment, and they could see global demand come down quickly, and you could actually have a fast reduction in interest rates. So, you know, it is a challenging time to pick the future.
You can't actually pick what's going to happen, so you've got to set your balance sheet up for the best that you can in terms of dealing with different scenarios.
Okay. Thank you, Peter.
Our next question comes from Michael Janda, from the ABC.
Hi, Peter. Just a question around mortgages again. You've got in your presentation that 40% of mortgage customers are less than a month ahead in repayments, including offset accounts. So has Westpac done any modeling on how hardship and arrears might look if interest rates remain at or around current levels up to the end of next year? How many people start running out of the buffers they've built up?
Well, what we've seen in the disclosures is the buffers are actually pretty consistent. So, the figure that you refer to there actually includes, say, interest-only loans where a lot of people don't want to pay ahead because of tax benefits, fixed rates, as well as those that are new, which are new loans, which typically aren't ahead because they haven't had the opportunity to get ahead yet. But I think the bigger point is the trend hasn't changed that much. So, that's why we say most customers are adapting to the environment. And of course, we've kept a 3% interest buffer for new loans.
So those who have been originated in the last period, since interest rates moved up, actually they've got buffers in their affordability. So it's more the ones that were originated in the low interest rate period that we're watching, and they're broadly going okay. But I would end it with, you know, if customers are feeling tight, give us a call. There's options. And you know, certainly we can look at their individual circumstances.
Just a quick follow-up on your fixed loans. It looks like Westpac is more like halfway through your fixed mortgage rollover, whereas maybe the system is more like two-thirds through. If that's right, you had some quite long dated fixed loans at cheap rates during COVID.
I think we got through the big cohort this six months, and then really we're through it in the next six months, and then it's back to normal, is the shape. So I don't think we're that out of whack with the market. And certainly what we're seeing is, people are getting prepared, and one of the reasons they were getting prepared was often they had split their mortgage between fixed and variable so they could see the change. So, no, I feel like we're well progressed through that fixed rate rollover.
Our next question comes from Karen Maley from the AFR.
Oh, hi, Peter. Right, looking at. Thanks for taking the question. Looking at your mortgage book, it looks as though had Westpac's strategy been to skew its mortgage book in favor of people on higher incomes over 200,000? It looks like that cohort seems to be stronger than I would have expected.
Yeah, well, I think over time, there's been a couple of trends over time. We've moved the mix of the book away from interest only to principal and interest, so that's been a multi-year journey to do that. We've also seen more owner-occupied versus investor. And I think consistently, the quality of the borrower has been higher income. And we've shown those charts that you're referring to consistently over time. So that's one of the reasons I think that the shape of the book and the way it's moved through the last period has seen most customers being able to adapt to higher interest rates and the inflation being higher.
And is that also. In your new business, are you also, in the new mortgages that you're writing, are you also targeting that segment? And is that one of the reasons why your offset account balances have increased?
Oh, I think, well, I think new loans at the moment, they've got a 3% buffer on them, so they're pretty good from a banking risk perspective. They're pretty good quality borrowers, 'cause they've got excess income, if you like. And so, you know, that's why we're very happy to be in the market and right in the business. We think they're good, high-quality businesses. On the offset, probably the one thing that might be a little bit different is as people roll off fixed to variable, under the fixed product, you can't have an offset. Under the variable product, you do. So I think we've seen a little bit of consolidation of deposits and savings into the mortgage bank and into the offset account.
That, that's pretty smart, 'cause it's a high return if you're offsetting your mortgage rate.
I also ask about write-downs of cash back. What's Westpac's policy of cash back?
Michael?
Yeah, so Westpac's policy is consistent with, you know, accounting standards, and, you know, we capitalize it on the balance sheet and amortize it over sort of an agreed period. And that period's sort of between four and five years related to the effective life of the mortgage.
Right. So you do it mortgage by mortgage or on a portfolio-
We do a portfolio calculation of the effective life of the portfolio, and we amortize it over that period.
Right. Right. Excellent. Thanks.
Our next question comes from Paulina Duran from the Australian.
Hi, good morning, and thank you for taking the questions. So my first question is around, you mentioned starting to see a little bit of stress on business. Can you go a little bit deeper on that? Which sector, which areas? And is that, you know, particularly on SMEs, please?
Yeah. So, there's a good slide in the deck, but broadly, what it says is, the most stressed sector is property construction, so that's not a surprise. That's to do with the, you know, the fixed prices, the material and labor increases. And that's sort of flowing through into the portfolio. But, you know, we could see that, but we've been working on that. Then outside that, it's really been single customers that have unique issues. So it's not, there's not any particular sector where we think there's a sector theme. And small business, you know, it's not really. If we take cafes and restaurants as an example, stress has actually reduced in the six months. So that's why I say there's no macro thematics that we're seeing. It tends to be more individual customers.
At this point, it's a modest increase in stress, and something that we can work through.
So that underlying exposure, though, do you feel that that spike reflects the wider sector? Is that or is that more of a Westpac exposure thumbnail?
No, no. It's, it's one exposure. Not just Westpac is involved there, but it's just one exposure.
Thank you. Thank you. If I may put my last, the final question for me around competition. I mean, the dynamics there have been quite interesting, with a lot of pressure on some peers of yours. Can you just go a little bit on what your expectation for the future of cashbacks is? You, of course, make a decision on the Westpac brand, but not on others. So just interested in your comments around that.
Yeah, well, I can't talk about what we may do in the future on pricing. But in terms of what we've done, we have removed cashbacks on the Westpac brand. A couple of weeks ago, we've removed cashbacks on the Bank of Melbourne brand. And for St. George and Bank SA, we've halved the cashback. So, that's where we're sitting at the moment in terms of the cashback, in our brands.
Our last question today comes from Lucas Baird, from the AFR.
Hey, guys. How you going? I was just wondering if you could elaborate a little bit more on the geopolitical risks that you mentioned in the shareholder letter. Like, I mean, what specifically are you expecting to hurt Australia coming from, like, tensions in the Middle East and stuff like that?
Yeah, well, I think the risk to Australia is global growth twofold: global growth and what happens, and energy prices. And any time you've got conflict in the world, particularly in the Middle East, it could go wider. I'm not saying it will, I'm just saying it could. And so what we need to be worried about as a country is the flow-through on economic activity in the world, and if the world slows, that's not great for us, is sort of the short answer. And obviously, if energy prices go up because of uncertainty on supply in energy, again, that's an import shock for the country.
So, so those two things are the primary mechanisms that something overseas could come back to us, and very hard to, to tell, but the risk has obviously gone up a lot with two major conflicts in that, in the, in Europe and, and the Middle East popping up in the last little while. So we've got to be alert to, to the risks. As I said, the domestic economy is going pretty well. There's, there's, there's a lot of demand, but we could be influenced by what goes on in the globe.
Okay, cool. Then just the second one, commercial real estate. I think there was a slide in the presentation that said, commercial property values are down about 15% over the last 12 months and expected to fall another 0.5% next year. I mean, what's it gonna take for commercial property values to start trending up again?
Yeah, so the figures you refer to there are what we've used in our credit provisioning models, so they're sort of estimates, forecasts, if you like. From our perspective, the average LVR at the moment in the portfolio is around 50%. So we can accommodate quite large falls in property prices from here. And that represents the lending decisions and settings that we've had over the last few years. So what will, you know, what will spark a change in property prices? It'll depend on people have to sell, I think, and if they can handle the higher interest costs and pass it on, then they won't have to sell. But if there is more turnover, then maybe the prices will reset in commercial property.
Cool. Thanks, guys.
Thank you.
Thanks for your time, everyone. We look forward to catching up with you over the next week or two. Thank you.
Thank you.
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