Good morning, everyone. Thanks for joining us for Bendigo Bank's 2026 full year results briefing. Let me begin today by acknowledging the traditional owners of the lands in which we meet today, the Gadigal people of the Eora Nation, and I pay my respects to their elders past, present, and emerging. I also extend my respects to the Aboriginal and Torres Strait Islander people who are present on the call today. Following our recent results announcement on 18th of August , we have slightly adjusted our approach to the result presentation today. Richard will start with a high-level overview of the key performance highlights. He will run through the strategic deliverables and an update on the AML/CTF program. Andrew will then step through the audited financial performance and provide an overview of our credit position within the current macro environment. We will then move on to Q&A.
I will now hand over to Richard.
Thanks, Sam, and good morning, everyone, and thanks for taking the time to join us today. We recognize our market release on 18th of August provided a number of updates, including unaudited statutory profit and financial metrics. Today I would like to provide some more detail in relation to our strategic progress and risk programs. Our full-year result demonstrates our ongoing disciplined approach to driving targeted business growth and delivery against our strategic agenda. Cash earnings have again improved this half, benefiting from continued growth in lower-cost deposits, supporting margin expansion. Our second half expenses were down, reflecting the benefits from Phase 1 of our Productivity Program and fewer days in the second half. We have regained lending momentum following a return to growth in our residential lending book in half two.
Our key differentiators, including our quality products and a Bendigo brand net promoter score that is 21 points above the industry average, continues to attract customers. We are on track to exceed 3 million customers, with Up's customer numbers growing 11.5% over the year. Up's profitability continued to improve into the second half, with deposit balances growing 45% over the year to more than AUD 4 billion, while momentum in Up Home loans continues, with growth of 56% over the year, now reaching AUD 2.6 billion just over three years since launch. Our acquisition of RACQ Bank's loan and deposit book is progressing at pace, with a significant amount of pre-migration work completed. As outlined on the 18th, the uplift of our risk capabilities is our number one priority. I will provide more detail on this later in the presentation.
I want to share some more detail with you now in relation to the financial performance for the 2026 financial year. Cash earnings for the year of AUD 530 million were 3% higher than the prior year, driven by income growth of 5.1%, while expense growth was 4.2%. Income growth benefited from a 7 basis point increase in net interest margin, higher fee revenue, and Homesafe realized income. The improvement in margin over the year was largely driven by our continued focus on delivering a more favorable mix of lower-cost deposits and a measured approach to term deposit pricing. Operating expenses for the year increased by 4.2%, reflecting the expected increases in software amortization and technology costs and the ongoing investment in risk and digital capabilities. Our focus on productivity and cost management helped to offset a proportion of these costs.
Second half costs were down 2.1%, benefiting from a lower average FTE number, as a result of our Productivity Programs, and lower remediation expenses and fewer workdays. Credit costs increased for the full year, reflecting our cautious outlook from the updated macroeconomic forecast. That said, the overall credit portfolio remains resilient, and we are focused on helping customers that face difficult choices due to cost of living and other pressures. Pleasingly, our ROE is now back above 8%, and our return on tangible equity is above 10%, with half two ROTE near 10.5%. Our three areas of focus that will support our 2030 ROE target are all progressing well. Our efforts in these areas will be further enabled by our risk uplift programs, which will strengthen our risk management frameworks and systems to support sustainable growth. Let me step you through the progress we've made this half.
Our deposit-first approach to managing our balance sheet has been supported by digital deposit sales growth of 34% over the year, following the introduction of new digital onboarding capability in the Bendigo app, along with continued growth in our Up customer base. The enhanced functionality in the Bendigo app has materially improved the experience for new-to-bank and existing customers. Easy Saver deposits continue to grow, up 10.7% over the year. The introduction of Grow and Flow to Up-siders has helped grow Up's deposit balances by 45% over the year to reach AUD 4.1 billion. Leveraging what we've learned, we will improve the functionality and experience for business and agri customers over the next 18 months, with a sequence of improvements and uplift in the digital capability for B&A. This functionality we're building will make it easier for our customers to join the bank and further support growth in lower-cost deposits.
Turning to productivity. Our FTE numbers have reduced by 3.4% over the year, driven by the first phase of our Productivity Program. In April, at the quarterly trading update, we announced two significant strategic partnerships as part of the second phase of this program. In July this year, we commenced a seven-year technology service partnership with Mphasis, which will significantly improve IT service delivery and provide access to enhanced capabilities, software engineering, and AI talent to deliver innovation capacity. We've also established our six-year business operations partnership with Genpact, which will bring deep expertise in process optimization and delivery to drive greater productivity and support stronger process disciplines across the bank. Finally, to sustainable growth. We've seen some positive impact from recent targeted pricing through BEN Express and our Qantas partnership to support digital channel growth momentum in residential lending, which was up 1.9% in the second half.
The Bendigo Lending Platform now accounts for 80% of home loan flow for the Bendigo brand, reducing time to decision for our customers and improving our productivity. The momentum behind Up Home continues, up 56% to AUD 2.6 billion, and coming soon to Up-siders in this half, the Up Home investment loan. We have been clear about our objectives for business and agribusiness to be at growth by FY 2026 and above system in FY 2027. We achieved our growth targets this year with agribusiness lending up 3.8% and business lending, excluding portfolio funding, up 8%. Since Adam Rowse has joined the bank in 2022, we have selectively grown our agribusiness book by more than 15%. In business, we continue to build in Business Direct and the commercial broker channel. In FY 2027, we will be launching a new equipment finance platform to support both our agri and SME customers.
I want to share how the two programs of work depicted here will serve as the foundation to strengthen our risk management frameworks and systems to support sustainable growth as we deliver on our 2030 strategy. In December 2025, the Financial Crime Transformation Program commenced with a focus on enhancing our enterprise-wide AML/CTF risk management. This program will deliver a material uplift in our ability to detect, deter, and disrupt financial crime, and we continue to add capacity and capability to our financial crime operations team to support this work. We expect to invest AUD 70 million-AUD 90 million, of which AUD 8 million was spent in FY 2026. These expenses will be contained within our existing investment slate. Last week, we announced a rectification plan to address deficiencies in our management of non-financial risk.
This multi-year program of work is expected to require an initial estimated provision of AUD 70 million, which has been included in the 2026 financial year results. The plan will drive a fundamental shift in our risk maturity. Our approach to embed non-financial risk management into all aspects of the organization will ensure we can continue delivering for our shareholders, our customers, our people, and our communities. This is the number one priority for the board and executive team and will be led by me. Andrew will run through the costs and associated treatment of these expenses in more detail shortly. Now for some more detail on our Financial Crime Transformation Program. We launched this program to significantly strengthen our controls against financial crime and enhance our AML/CTF framework. Since the announcement late last calendar year, we have acted with pace and purpose.
We appointed a new AML/CTF Chief Compliance Officer in January, bringing in significant experience to drive this change. This program is well-established across five dedicated work streams, and we are already seeing tangible results. We have upgraded our monitoring systems, improved controls, and are, excuse me, and are leveraging our new partnership with Genpact to draw on their global expertise and capacity. Looking ahead, our focus remains on building a best-in-class financial crime function to help protect our customers and the broader community. Finally, I would like to recap our progress on the first year of our 2030 strategy and the strategic deliverables we have achieved. We first spoke to the market about our new strategy this time last year, outlining the five strategic pillars and our three enablers that will help deliver on building scale through innovation.
We recognize as a bank with 2%-3% market share, innovation, partnerships, and capability will create the opportunities we need to grow efficiently. The FY 2026 results demonstrate our progress on the 2030 strategy, with the streamlining of our approach to both lending and deposits. The Bendigo Lending Platform is now being utilized by all of our retail branches, in addition to our broker network. Approximately half of our new-to-bank customers are being onboarded digitally via the Bendigo Bank app. The migration of our Adelaide Bank customers to Bendigo Bank in December 2025 marked the completion of our multi-year core banking consolidation project. This key strategic program has delivered a simpler and more efficient bank and created a platform for sustainable growth. Over the year, we have delivered several initiatives that will pave the way for the next phase of growth, including our partnership with Google.
We currently have over 5,000 of our staff actively utilizing our Google AI platform, Gemini Enterprise, to support their daily productivity. Our partnerships with Infosys and Genpact will deliver the capabilities we need to maintain and improve our foundational technology, allowing our core technology team to drive improvements in data quality, cybersecurity, and AI. Finally, we have appointed a new Chief Customer Officer for Consumer, Christopher Dean, who assumes the role in September. Christopher brings deep retail banking experience, most recently as Managing Director at HSBC U.K., where he managed a network of 300 branches and led digital banking services for 8 million customers. Christopher is well-placed to help us deliver on our 2030 strategy by deepening our customer relationships and improving how we manage risk.
I would like to thank Adam Rowse for leading both customer divisions over the past six months and helping to bring a consistent, disciplined approach to customer experience across both networks. I will now hand over to Andrew.
Thanks very much, Richard, and good morning, everyone. First of all, let me confirm that there are no changes from the unaudited numbers which we presented last week to the audited numbers we are presenting today. Going now into some of the metrics underpinning the second half result. Total lending grew 3.5%, with strong seasonal growth in agri and business lending, and a return to growth in residential lending, which grew around 0.6 times system. We have also seen an improved funding mix, with lower-cost deposits now comprising almost 55% of total deposits. Through careful management of our funding requirements, we have continued to improve net interest margin, printing 1.98% for the half. We have tightened our management of Business As Usual costs in the half, delivering absolute cost reduction compared to the first half. Given the uncertain macro environment, we have increased our collective provision and skewed scenario weights more to the downside.
Our operating performance was 11.2% higher than the prior half, reflecting a combination of income growth and expense reduction. Cash earnings of AUD 273.8 million was 7.7% higher than the prior half. With the improved operating performance, return on equity for the half improved to 8.26%. Our balance sheet is in a strong position going into the financial year 2027, reflected in strong capital, funding, and liquidity. Turning now to total income for the half. Income of AUD 1.04 billion was up 2.6% on the prior half. Net interest income increased 1.6%, reflecting an improved margin, offset by a small reduction in average interest-earning assets and the impact of three less days. Other income, excluding Homesafe, was up 5%, reflecting improved wealth and cards income. Homesafe income was up 29%, reflecting 40% growth in completed contracts on the prior half and a slightly softer average profit per completion.
In respect of key considerations, there are two. First, we expect the RACQ transaction to complete during second quarter 2027, so you should expect a resultant uplift in income in-year of between AUD 33 million - AUD 37 million. That reflects around AUD 2.6 billion of loans and around AUD 2.3 billion of deposits. For this gap and LCR requirements to be funded, most likely with wholesale funding. Second, as previously flagged, income from the Homesafe portfolio will reduce over time, subject to the rate and profit on contract completions. This half saw the number of open contracts reduced by around 4%, which is a slightly faster rate than the last two halves. The average life of contracts completed through the half was around 10 years. Turning now to net interest margin. Compared to the prior half, our NIM was up 6 basis points to 1.98%.
Asset pricing negatively impacted 4 basis points, which was due to a combination of front book pricing pressure in residential lending and ongoing retention pricing pressure in business and agri. Deposit and funding pricing improved 6 basis points, mostly reflecting the benefit of term deposit repricing. Mix provided a 4 basis points benefit, reflecting a combination of improved funding mix and improved asset mix. Income from our replicating portfolios was up 3 basis points as expected, and revenue share negatively impacted 3 basis points. Our fourth quarter average NIM was 200 basis points. On key considerations for one half 2027, we definitely see headwinds and a couple of tailwinds. On headwinds, there are two. We see competitive pressure on both sides of the balance sheet, and funding costs will also be a headwind, noting that we put some wholesale funding into the balance sheet in the fourth quarter.
We also lifted term deposit pricing through the fourth quarter. On tailwinds, we think there is possibly one more cash rate rise, likely late in the first half, and higher swap rates should see replicating portfolio contribution continue positively given the current delta between replacement yields and expiring tractors. Turning now to residential lending. Settlement volumes in aggregate were up 31% on the prior half, with strong growth recorded in third party and digital channels. Discharges improved following a spike in the first half, which was mostly due to the closing down of one of our partner channels. We continue to prioritize the deployment of capital into channels where both the economics are compelling and growth opportunities exist, being self-serve digital mortgages and our proprietary branch network.
This half, around 35% of new settlements came through our physical network, whilst just under half came through broker-intermediated channels and 15% through direct digital channels, including Up. The positive trends in our mortgage book continue. First, around 40% of new loans are below 60% LVR, and almost 90% of new loans are below 80% LVR. Second, the average credit risk weight on new mortgages has continued to improve. Momentum in the book has slowed following the federal budget. We expect system credit growth for residential lending to ease to around 3%-4%. At the same time, we see a lot of opportunity to continue to grow through our digital and our physical networks. Importantly, discharges also slowed progressively over the second half.
With this momentum in mind, we are targeting growth around system through financial year 2027, although this may be influenced by the level of competitive pressure. On deposits, our deposit gathering franchise has strengthened this half. We continue to see good momentum in digital deposits. In our Up business, digital deposits increased 16% over the half, whilst Bendigo digital deposits grew 14% over the same period. Whilst deposit growth over the half looks modest at 1.1%, deposit mix has continued to improve. We continue to see strong growth in Easy Saver accounts, which were up 3.4% on the prior half, and overall savings accounts up 4.3%. Following a dip in third quarter, transaction account balances had a strong fourth quarter, finishing marginally lower than the prior half. We also saw offset accounts reduce almost 2% over the half.
Whilst term deposit balances were down 0.6% on the prior half, we did reset our pricing in fourth quarter and recorded 3% growth for the final quarter. The overall picture is that lower cost deposits increased to 54.8% of total deposits, up from 52.5% just 12 months ago. Critically, our household deposit to loan ratio remains strong at 76%, which is 10 percentage points higher than the industry average. Turning now to OpEx. As previously flagged, second half costs came in lower than first half, down 2.1%. BAU costs, which exclude remediation costs, reduced 1.1% over the half, mostly reflecting our ongoing Productivity Program and cost management program. Spot FTE were 0.7% higher than the prior half, reflecting investment in our risk team as we continue our work on lifting risk maturity across the organization.
In respect of financial year 2027, we expect Business As Usual cost growth to be between 5%-6%, including RACQ. This reflects three factors. First, we expect inflationary pressures to persist and inflation to stay around the fours. Second, as we complete the RACQ transaction, we will bring AUD 8 million-AUD 9 million of costs into the organization in year, which is in line with previous guidance. Third, we are making further investment in risk capability as we seek to uplift our maturity. We expect expensed investment spend to be flat year-on-year. Over the medium term, we reiterate our cost guidance, which is to keep BAU cost, which excludes remediation and investment spend, contained to no higher than inflation through the cycle. Underpinning that, we expect to fully realize the benefit of our strategic partnerships in financial year 2028. Moving to credit quality and credit expenses.
Our key credit metrics remain sound, and we continue to carefully watch trends in the industry and within our book. Through the half, we booked a charge of AUD 16 million, mostly related to an increase to collective provision, reflecting an expected deterioration in the economic environment. Our coverage of total provisions to credit risk weighted assets has increased 3 basis points on the half and 2 basis points on the prior year. Gross impaired loans have continued to reduce down to now 13 basis points of gross loans. Arrears across the book remain low but are increasing. 90+ days arrears in residential lending have increased in the low single-digit basis points in the last six months to 87 basis points. In agribusiness, arrears have reduced over the half, and the dollar value of arrears has reduced.
The technical issue that we have previously disclosed around expired facilities has mostly been resolved. Business arrears have continued to improve, now at their lowest level in a number of years. While asset quality remains sound and arrears are at relatively low levels, we do expect bad debts to trend upwards over time. This half, we have included further detail on the composition of our business and agribusiness exposures. In our business book, excluding our portfolio funding business, over 99% of customers have loans of less than AUD 10 million, and we have a very small number of large customers. Arrears in the portfolio are modest, and 95% of the book is secured. In agribusiness, the profile is similar. Almost 99% of customers are sub AUD 10 million, and again, we have very few large customers. 99% of the book is secured. Our funding and liquidity metrics remain strong and well-diversified.
Our average liquidity coverage ratio for the fourth quarter was strong at 140.2%. The proportion of customer deposits to total funding reduced on the prior half to around 77%, following the raising of around AUD 1.8 billion of wholesale funding to fund around AUD 3 billion of asset growth. Our coverage of household deposits to loans at 76% is well above the industry average. Our Community Bank partnerships importantly provide us with a net AUD 15 billion of funding, which provides further diversification and a relatively cheaper funding source than wholesale funding. To illustrate my earlier point on funding pressures, you can see that we have a large volume of term funding maturities to manage through financial year 2027. Turning now to capital and dividends. Our CET1 ratio eased 3 basis points to 11.34% over the half, and this reflected a few key drivers.
Earnings were impacted by lower statutory profits, resulting from AUD 59 million of regulatory provisions, which we took up, as disclosed last week, which lowered CET1 by around 15 basis points. We did benefit through the half from some data and modeling enhancements, which lifted CET1 by 11 basis points. CET1 was also impacted 18 basis points by the APRA capital overlay reflected through a higher operational risk capital charge, which was effective 1 January 2026. Our capital remains well above the board target of above 10%. Directors have determined to pay a final dividend of AUD 0.33 per share, which will be fully franked. This represents a 69% payout ratio for the half, and on a cents per share basis, is flat on the prior comparative period. In summary, we are in a strong capital position going into financial year 2027.
Last week, we gave you a summary of some notable items into next year. I wanted to now bring that picture together for you, along with a reminder of the benefits associated with a couple of our strategic programs. For financial year 2027, as we disclosed last week, you can expect us to report on three key notable expense items. First is the cost associated with the implementation of our strategic partnerships of AUD 56 million-AUD 66 million. This is consistent with the disclosure which we made in early April of total costs of roughly AUD 85 million-AUD 95 million. Second is costs related to the migration of RACQ customers onto our core banking platform of AUD 28 million-AUD 34 million. This is consistent with the disclosure which we made in early December 2025.
Third is a one-off methodology change to the mechanics of our staff equity scheme of around AUD 16 million-AUD 23 million. In aggregate, these costs will total between AUD 100 million and AUD 123 million pre-tax. We expect each of these costs to be isolated to financial year 2027. As a result, our costs, including notables, will be elevated, and return on equity inclusive of notables will be diluted in financial year 2027. To support our progress towards our return on equity target of above 10%, we are on track to deliver the benefits which we previously guided to on both our strategic partnerships and RACQ, as you can see on the right-hand side of this slide. There's a lot of information which we've just run through. Let me summarize the total impacts across our key line items in financial year 2027, and this includes income, expenses, and capital.
On BAU expenses, we expect to grow between 4% and 5% on financial year 2026, excluding RACQ operating expenses. We expect investment spend to be in the range of AUD 230 million-AUD 240 million, inclusive of notables. We expect AUD 120 million of that to be expensed, around AUD 60 million to be capitalized, and AUD 50 million-AUD 60 million of notable items related to our strategic partnerships and RACQ. That means expensed investment spend pre-notables is expected to be flat on financial year 2026. For RACQ specifically, on the basis that we complete the transaction during second quarter 2027, we expect the following in-year impacts. First, NII of AUD 33 million-AUD 37 million. Second, incremental OpEx of AUD 8 million-AUD 9 million. Third, a 31 basis points impact to CET1 upon completion, reflecting the risk-weighted asset carry, and fourth, an uplift to return on equity of 23 - 27 basis points.
I'll now hand back to Richard for closing comments.
Thanks, Andrew. To recap, our areas of focus for FY 2027 are clear. Embed our risk programs to drive a fundamental shift in risk maturity, continue to grow our deposit base, migrate the RACQ customers, and leverage our strategic partnerships as we build a better bank. We remain committed to our target of an ROE of 10% by 2030, delivering long-term value for our shareholders, supported by the necessary uplift in our risk capabilities as we build a better bank. Finally, let me take the opportunity to thank our people, partners, and customers for their continued support over what has, at times, been a challenging last 12 months. I will now hand back to Sam to moderate the Q&A.
Thanks, Richard.
Thank you. Thank you. Just a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. I will now hand back to Sam.
Thank you. Our first question comes from Annabel Ross of Barrenjoey.
Good morning, and thank you for taking my question. Hopefully you can hear me okay. I just wanted to go through the Operating Expenses guidance that you provided. In FY 2026, your Operating Expenses, excluding investment spend, landed at AUD 1,142, and your guidance for FY 2027 Operating Expenses, pre-notables and RACQ is to grow between 4%-5%. If we then add in the RACQ impact, of which you are guiding to approximately AUD 8 million, this implies BAU expenses next year should be around AUD 1.2 billion. Next, adding in the investment spend expensed of AUD 120 million, this means costs ex-notable should land at around AUD 1,320. If we then add in notables of AUD 100 million -AUD 123 million, this means total expenses should land around AUD 1,420 to AUD 1,460 in FY 2027. Is this the correct way of thinking about it?
In FY 2028, you talk about the strategic partnerships, which are going to give a 65 - 75 benefit. Is this benefit required to keep the cost growth in 2028 to around inflation, or are you implying costs will fall further by that number? Thank you.
Annabel, that was about 87 questions in one. What we might do is Andrew or Richard, if you could just give the top line on that expense guidance, that was probably helpful.
[crosstalk]
[ crosstalk]
Annabel , just on your second question first, let me cover that off. What we previously said is that our business-as-usual cost growth ambition over the medium term is no higher than inflation through the cycle. To be clear, the benefit of the partnerships is included in that BAU cost growth of no higher than inflation. The key reason for that is that there is a large part of our cost base, or around 20% of our cost base, which is growing faster than inflation, and that is license, cloud, and amortization costs. What those partnership benefits will do is allow us to meet that BAU cost guidance no higher than inflation. That is the first question to cover off. Let me step briefly through then the second part of your question, which is: how do we bring all these pieces together?
There is quite a bit of detail we have given, which I will step through. You are absolutely right. Our business-as-usual costs for 2026 were AUD 1,142 million. That is absolutely right. We then said add 4%-5% on top of that, then add the run costs or the Operating Expenses for RACQ on top of that again. That is AUD 8 million-AUD 9 million. That total cost for BAU is around about 5%-6%. Then there are a couple of notable OpEx items. These are items that will only occur, we believe, in 2027, and no further than that. There is a proportion of the partnership costs, which we disclosed. That is somewhere between AUD 34 million and AUD 40 million. Then there is the incentive scheme adjustment, which is AUD 16 million-AUD 23 million. That implies then that the overall costs are growing somewhere between 9% and 11%.
That is the BAU costs. Then on investment spend, we have said the expensed investment spend, we expect to be flat year on year, so around about AUD 120 million. Then there is a proportion of that partnership spend which relates to investment spend. That is between AUD 22 million and AUD 26 million. That means that our overall investment spend OpEx is between AUD 142 million and AUD 146 million. Hopefully that is clear in the way that all those parts come together.
Yes. Thank you.
Our next question is from Kelsey Bentley of JPMorgan.
Hi. Thank you, Sam. Richard and Andrew, I just wanted to ask a question on your outlook for mortgage growth. You talked to wanting to grow around System just based on competitive tensions, sort of see how that tracks. How does that sort of feed into the information you give on slide 9 where you talk about the average mortgage NIM for new business, and we can see a pretty steady trend downwards over the last year. How has this sort of fed into your growth in particularly the fourth quarter of FY 2026, and how you see things trending in FY 2027? Thanks.
Yeah. It's a really good question, Kelsey , because I think we're all going to be facing into a pretty dynamic year when it comes to the mortgage industry, given what has been happening from a government perspective with changes to tax rules, et cetera. From my perspective, I think we're reasonably well positioned to continue to see some growth going forward, particularly through a couple of channels that I'd like to highlight. First of those is the digital channel, which consistently has sort of been that 15%-20% of mortgage settlements for us, and we expect that'll continue to see pretty steady growth. With some of the pricing changes we've made recently in a couple of those offerings there, I think that will hold us in good stead.
The other one, as we continue to mature the use of the Bendigo Lending Platform through our retail channel, we expect we will continue to see some growth there. We have seen a reduction in application volume from where they were through most of FY 2026 by about 15%, but that has steadied now. We are starting to certainly see some, in the last few weeks maybe, a little bit of more resilience coming back to that market. It is going to be dynamic this year, so that is why we are not giving any firm guidance on that. I do not know, Andrew, is there anything else you want to add?
Yeah, Kelsey , just picking up your comment on slide nine. Part of the reason why we saw a dip in that NIM to credit-risk-weighted assets, that is the chart on the top right-hand side, is we did see an opportunity through the course of the half to write some fixed rate business, and we felt it was important to build some momentum. It was a little on the thinner side in respect of margin. The returns were still returns we were looking for. So that really is the explanator for that dip.
Yeah.
Thank you both.
Thanks, Kelsey. Our next question is from Sally Hong from Morgan Stanley.
Good morning, team. I have a couple of questions. Firstly, you are targeting business and agribusiness growth at System for next year. What do you think System growth is for FY 2027, and can you comment on the business and agri competitive landscape?
Yeah, Sally, we are thinking that that is going to be in the order of just above mid-single digits. Again, there is a little bit of wet finger in the air with this stuff, but probably in the order of maybe 6%-7% growth, just based on the resilience we have seen last year and over the last few months. We actually are pretty comfortable with the offerings that we have got, that we can continue to see some solid growth coming through our business there. We clearly have some strength in the agri space. There were some concerns earlier this calendar year on the back of what happened in the Middle East, that this was going to be a really challenging year for farmers around the country with fuel prices and fertilizer prices.
But on the back of what has been a pretty good year in many parts of the country from a climate perspective, it looks like there will be another probably solid year from a yield perspective. As we are looking forward, we think there are a number of areas that we can continue to drive that growth. Sure, things are competitive. There is always competitiveness out there in the market, although, we are finding plenty of opportunity based on our relationship-based banking to find customers that are interested in joining us.
Thanks, Richard. Just a second question on the margin. The June quarter margin was around 2%, but you are flagging mortgage competition and term deposit repricing as headwinds, with some benefit from the replicating portfolio to come through. Should we expect the first half 2027 margin to be below this June quarter margin? Can you give us a sense of what those magnitude of those competing impacts would be?
Over to you, Andrew.
Sally, we do not normally give too much guidance on margin other than talk about the headwinds and the tailwinds. As we said last week, we think there are definitely headwinds, and those headwinds you have just laid out, which are competition, which we are all seeing on a day-to-day basis on both sides of the balance sheet. In respect to funding costs, we can definitely see headwinds there. We have a wholesale funding task ahead of us through the course of 2027. We put some wholesale funding onto the balance sheet in the third quarter, so there are some headwinds there. In addition to that, part of what drove our margin outcome in the half and to an extent, in the final quarter, was our approach in respect of term deposit pricing.
As those term deposits further reprice, when that book turns, there will be a headwind there. On the positive side, on the tailwind side, we can certainly see that in our replicating portfolio, particularly on the deposit side, the gap between front book tractors and back tractors is still quite wide. That will give us a benefit, assuming that five-year swap kind of stays about where it is. We do think there is still a possibility of a cash rate rise. I think the market this morning is still implying somewhere between 60% and 65% by the time we get to the end of the calendar. As you all know, what we have typically talked about in respect of our leverage to rates is roughly two basis points for every 25 in cash rate.
Can not give any more specifics than that other than give you all of the various considerations.
Thanks so much, Andrew.
Thanks, Sally. Our next question comes from Andrew Lyons from Jefferies.
Thanks and good morning. Just a question on investment and the progression out to your 2030 targets. Just your investment slate, you are now carrying a number of items that you describe as notables, and there is also the AUD 70 million -AUD 90 million that will come through over the next two years for AML. You obviously speak to better cost growth of sub-inflation, but just thinking about the impact of investment spend on that cost trajectory out to 2030, as some of these programs, notable programs fall away, how should we be thinking about investment spend? Should we see it decline, or will you be basically reinvesting in the broader franchises as those programs come to an end?
Yeah, look, it is a really good question, Andrew. It is one we ponder a little ourselves. I cannot give you a definitive answer. It is one of those things that we are going to need to turn our mind to over the next year or so. As you point out, some of those programs naturally start to wind down. This year, obviously, there is a fair bit of work going into setting up those new partnerships and the RACQ migration that will be finishing up. At the same time, we will be ramping up the work we are doing on the risk front, both the AML/CTF piece, but also the work we are going to need to do in the non-financial risk area. It is really going to be dependent on what is happening in the market and what are the investments we need to make to remain competitive and relevant going forward.
I'd love us to be able to be in a position where we can see some reduction in that investment spend between now and 2030. I'm not going to sit here and make that sort of commitment, because things are changing so quickly in the technology space in particular, that I'm not sure how that's going to play. The whole AI area is really interesting, because you can mount an argument that that's going to drive so much productivity from a development perspective that you should be able to do more for less. At the same time, I'm not sure what sort of developments we're going to need to implement within our organization to keep up with the industry and our customers' expectations, importantly.
Just one other point, Andrew, sorry, just before you go to your next question. The rectification plan that Richard mentioned, we did provide for-
Yep.
in our 2026 results, so that's not part of our investment spend. That's already been put on the balance sheet, and we will draw that. I just want to make sure that's clear.
Yep. No, that's clear. Thank you. Maybe just, thanks for those comments, Richard and Andrew. Just Andrew, one for you. Again, it's similar to the previous question or maybe a bit of an extension, just around the replicating portfolio and assume swap rates remain where they are at the moment, and that's purely an assumption. How long would you estimate, if that was the case, that you'd have an ongoing tailwind from your replicating portfolio, if you were to make that assumption?
Yep.
And we have.
There's a couple of big ifs in that, Andrew.
Yeah.
If swaps stayed where it is now, there's probably another, I would say, 12 - 18 months of benefit ahead of us. That's really a function of where those back tractors sit right now relative to where we're printing front tractors.
Appreciate it. Thank you.
Our next question is from Ed Henning at CLSA.
Thanks for taking my questions. Just a couple of follow-ups. Just firstly, on the margin, Andrew, you talked about you put in some more wholesale funding and there is some more to do, and you increased your TD prices in the fourth quarter where you got a benefit through the half. Can you just talk about your margin? Obviously, you printed two in the fourth quarter. Is the exit from that down a little bit given TD pricing up, wholesale funding coming through, and then to think about then going forward, with the headwinds of competition and that? That is the first question.
Ed, we are not disclosing what the exit NIM actually was. What I can tell you is that the term deposit book does not reprice straight away. So there is new business that comes through, there are rolls. So there is a progressive reprice that will happen in the term deposit book. It then depends on what tenors customers choose. So if we have got customers that are on a 12-month rate and they were on that rate nine months ago, then clearly there is going to be an impact as those term deposits roll. Similarly with wholesale, that is a part impact that will have come through in the fourth quarter, and then that more full impact will play out into next year. What I will say, just in the interest of balance, is that we do have a pretty substantial maturity profile into next year, which we are going to be refinancing.
I would hope that we do better in respective spread. Where those deals were printing three, four, five years ago, depending on the tenor, our spreads would have been basis points wider than where we have been able to write wholesale business recently. While the volume of wholesale funding will certainly increase, I would hope to see some better spread, as we print in whichever form of execution we choose.
Yeah, that is helpful. Thank you. Then just a second question, thinking about cost and revenue growth going forward. You are talking about some margin headwinds. You have Homesafe rolling off a little bit, and you have substantial investment going into, through your P&L, just on regulatory and compliance. If we do get an environment where the revenue growth starts to fall for the system, how much discretionary spend do you have that you are able to pull back on spending? Or how should we think about that with, obviously, the regulatory spend that has got to come through?
Yeah. Thanks, Ed. From my perspective, that is the reason we are doing things like these strategic partnerships, to give us more flexibility there. They are, by their nature, costs that we can flex depending on the resources we are requiring from those areas. If we think about things like operations, if there is less volume going through, we require less support in processing areas and the like. Likewise, with the relationship with Infosys, we can make some decisions to flex up and down. That is generally, though, around the edges. The reality is there is significant fixed costs in running a bank. But look, we are always conscious of the revenue environment and in how we then look to manage our cost base, to try and make sure that we can continue to generate strong returns and, over time, improving returns for our shareholders.
Okay, thank you.
Thanks, Ed. Our next question is from John Storey at UBS.
Thanks very much. Morning to you. Hopefully, you can hear me. I just wanted to add a question just around the deposit benefit that you saw. I would be quite interested to just get a high-level understanding of your strategy in terms of how you think about deposit pricing, particularly on your savings product and just the elasticity of your rates, I guess, and how clients potentially could think about potentially moving to other banks, your rates relative to peers, would be helpful.
Yeah. Thanks, John. We get this question a lot, and I assume, in particular, you are probably talking about the Easy Saver product.
Yeah.
Which, from a savings product perspective, it provides a solid return for customers, but there are higher returns available elsewhere. We recognize that. But it is interesting. We continue to get strong growth in that product, over the last 12 months, north of 10%. We think that reflects the more general attraction of our offering to customers. It is not just around the product. It is around having access to over 400 branches if they want to come in and speak to someone face-to-face, which obviously for many of those banks that offer higher rates, that is not possible. It is for customers who actually like what we do in the community, and over AUD 50 million in the last 12 months, going back into community contributions. Often, those contributions are supporting things that are meaningful to those customers around the country in their local communities.
I think the last one I would probably point out is the reflection then in our net promoter score. Being more than 20 percentage points above the average of the industry is not by accident. Customers continue to be attracted to banking with us. They are satisfied with the returns they are getting from the products we are offering on the deposit side. If they are looking for a higher return, there are other options that we offer as well. We do know with the Easy Saver product, with the functionality it provides, along with a solid return, it continues to attract people to putting their funds there. Right now, with the flows we are getting, we are comfortable with where we have got that positioned.
Maybe just quickly one for Andrew. Just on the DRP, obviously, and how you have been using it, I guess, over the last few reporting periods. What percentage of investors actually take up their dividend script?
Undiscounted, John, it is typically around 12%-13%.
Okay, fantastic. Thank you.
Our next question is from Tom Strong at Citi.
Good morning, and thanks for taking my questions. Perhaps a question for you, Andrew, to start with, just on the NIM. On the waterfall, you can see 6 basis points from deposits, and you have called out term deposits were also 6. You should have got a benefit on the unhedged deposits from the cash rate rises. It would have been about probably 2 - 3 bps from those. Can you just sort of talk to the other things that might have netted off in that deposit tile?
Thanks, Tom, for the question. The deposit and funding pricing block of 6 basis points is all term deposits. We capture all the replicating portfolio benefit inside that replicating portfolio column. That includes both unhedged and hedged deposits. And remember that it is 80% that are hedged and only 20% unhedged. That is how we pick it up. What I will also point out, again, in the interest of balance, is revenue share, which someone will no doubt ask about, so we will go there now. Of that 3 basis points impact of revenue share, about 2 of that 3 is term deposits. And whilst, as you all know, the revenue share somewhat acts as a limiter when our margin is expanding and vice versa.
What we have seen with that pickup of term deposit margins through the course of the half, about 2 of the 6 has played out in revenue share, just to make that clear.
Thanks for clarifying that. Just a question on the RACQ book. You make reference to the 30 June 2025 numbers, but if we look at the December balances versus today, it looks like the lending and deposit balances are down 2%-3%. Can you just talk about how that book's performing, and how you can arrest that decline under new ownership?
Yeah, Tom, in respect of RACQ, we're not giving an update on their 30 June numbers because they are yet to release those publicly. Looking forward, we're very keen to see if we can continue to grow that book. We're bringing over nearly 20 lenders who currently support the lending book with RACQ, and also those RACQ members will have access to our very large branch network in Queensland. I can't remember off the top of my head, but I think it's about 90 branches across Queensland, where they can do their banking going forward. We are going to have a referral agreement in place with RACQ going forward, so we'd hope we can continue to attract more customers from their very large member base in Queensland, going forward.
Great. Thanks, Richard.
Our next question comes from Carlos Cacho from Macquarie.
Thanks, Sam. I just had a quick first question just around the partnership work. I know it is still early, but it would be great to kind of hear how that is progressing versus your expectations and if there is any kind of key learnings or insights as you have worked through that work with Infosys and Genpact so far.
Yeah, thanks, Carlos. Look, things are very much on track. We are very pleased with the way the partnerships are performing. Early days. The Infosys work has further progressed, and as part of that, we have had a significant number of ex-Bendigo members of our team transfer to Infosys as part of that arrangement. Things are starting to get better down there with Infosys picking up a range of existing services to provide back to the bank on our behalf. Genpact, that work is not as far advanced, but we are certainly in the process of well progressed with the blueprinting of all the processes that are planned to move across to Genpact.
One of the learnings from that, through that process, that has really helped as we have worked with Genpact to map our existing processes and to be able to leverage their experience, where they see opportunities from the work they do with other banks around the world to provide support and advice to us on how we may want to look at doing things differently or more efficiently going forward. From my perspective, it is certainly really quite exciting the way things are progressing and I will be heading across to visit those operations in October along with a number of others within the organization to see firsthand how things are progressing. As we sit here today, certainly we are really pleased, recognizing it is still early days.
Great. Then a second question maybe for you, Andrew, just around the non-interest income. You called out ex-Homesafe, that was driven by better wealth management and cards income. How sustainable is that? Should we kind of think about it as the new base going forward, or are there any one-offs that are likely to roll off for FY 2027?
Yeah, I'll deal with the two. Thanks, Carlos. I'll deal with the two separately. The wealth business is absolutely sustainable. What we've seen through the course of both the half and the full year is strong growth in funds under management and some improvement in margin as well. It's a good set of products. Our customers like them. They're very straightforward products. Our people provide general advice in respect of the sales of those. That is a good business there, and we expect that business to hopefully continue. On cards, there is a little bit of a one-off. We extended our partnership with Mastercard through the course of the year, and there was a little bit of a one-off benefit, which will mostly recur, but not fully recur in 2027. That's AUD 34 million.
It's not a big number in the scheme of things.
Great. Thank you.
Thanks, Carlos. Our next question is from Brendan Sproules from Goldman Sachs.
Good morning, team. I have a couple of questions. Firstly, just Andrew, in relation to your comment during the presentation around inflation, you kind of flagged 4%. Could you maybe distinguish between, I guess, staff wage inflation versus, say, tech and other cost inflation that you're expecting in 2027?
Yeah, thanks, Brendan. Just to reiterate the way we've been talking about our cost base the last few times we've spoken to you. If you think about it like this, we've got roughly 60% of our costs today that are staff-related costs. As you've seen through both our half and our full year results, we have managed that cost base to below inflation. That's largely because of the first wave of Productivity Program work that we've been doing. Clearly, that part of the cost base will be impacted by any wage inflation. At the same time, the strategic partner benefits will come through that line, as well. The second group of costs, which is around about 17%, 18% of our cost base, is license cloud and amortization costs. Software licenses, cloud costs, and amortization costs.
This part of our cost base is growing at a multiple of inflation. It'd be no surprise to you or anyone on this call that we continue to see when we utilize the services of global tech companies, that the costs of such services have been increasing in the double digits. The third part of our cost base is then what we would describe as property and external services. Whilst those costs over the course of the year have grown around about inflation, we're actually quite bullish on these going forward because we've continued to do a lot of work in respect of our corporate property footprint. We think over time, we can grow those costs below inflation. The final part of our cost, which is a very small amount, is what we describe as non-lending losses.
60% of our costs, going back to your point, we expect to see grow below inflation, and that's staff costs. We expect another 20% of our costs, which is property and external services, to be able to grow a little below inflation as well. Where the partnerships are really helping us to stand in front of a cost group that is growing faster than inflation is those license cloud and amortization costs. That's why, again, we come back to that overall guidance of our cost base of growing no higher than inflation through the cycle. Hope that answers the question, Brendan.
No, that's great, Andrew. Really appreciate it. My second question is just on the performance of the business and agribusiness division on slide 46. You've shown lending balances are growing above system 12.6%, also driven by the portfolio funding business, which you show in the slide is a higher NIM to credit-risk-weighted assets. When I look into 2027, how do I balance out that with falling customer balances, falling other income, particularly FX, higher expenses, and you've seen quite a fall in profit, I guess, over the year. We expect those similar trends to continue into 2027 outside of lending?
So a couple of things, Brendan, on that. I'll start, and Richard might want to jump in as well. We remain pretty bullish about business and agri. We talked about strong growth in agri. We recognize that there's seasonal growth that happens typically in the second half and then runs down in the first half. We have continued to expand our different channel offers through business lending, and you've already rightly pointed that out. One of those is portfolio funding, which is a really good business. It's a business that has been growing, and it offers, depending on the variety, either both NIM and credit-risk-weighted asset benefit and/or just credit-risk-weighted asset benefit. We continue to be pretty optimistic there. We've increased our presence in broker markets, not substantially, but nonetheless, that's a benefit there.
Where we've got more work to do, and it's part of our investment slate into next year, is in onboarding and digital onboarding. We very successfully, through the consumer bank, rolled out digital onboarding this year, and we've seen good signs of success there early on. The next piece of the strategy that we need to tackle is digital deposit gathering for our business and agri customers. That's certainly part of that investment slate we talked about earlier. We know we've got work to do there. Getting that part of our business really humming again will certainly help to underpin, I would hope, better stability and margin. Richard, you might want to-
Yeah, and look on that slide, John, I think the- Sorry, Brendan, I think the key point there is if you look at the growth in assets, yeah, that's positive and it tends to be every second half stronger because we get the agri flows with the seasonal lending there. But the liabilities has been pretty much flat over four halves. That's where we're looking to drive that growth, which will then help the margin. That's the key for us arresting that decline in margin from a divisional perspective, is starting to get the liability flow growing there. The reality is, we have fallen behind when it comes to digital capability in the B&A space for deposit gathering. That's a key focus for our digital team this financial year.
Thank you.
Thanks, Brendan. Our next question is from Brian Johnson at MST.
Hi. Two questions, if I may. If we have a look at slide 42, we can see that the average flow of a new home loan being done is about AUD 480,000, which is really low compared to the overall stats. What we can also see is that you seem to be over-indexed towards investment property. When we think about that, it would appear that even the life of the digital home loans would appear to be shorter than through the branch. Can we just get a feeling as to whether those three observations are right and why that may be? So low average home loan drawdown, and another question after this, the shorter life and the over-index towards investment.
Yeah. Thanks, Brian. We've historically have had a lower average mortgage value than the market, which also reflects our strength in regional Australia. The reality is, if you're buying a property in regional Australia, where many of our branches are, the price of those properties, and therefore the amount you need to borrow, tends to be significantly less than if you're focused more around Sydney and Melbourne. So that's historically been a key element of lower average value. As far as the investment flow, yeah, it's been 27% in the most recent half. But it's not massively different to the portfolio, which has been at 23%, 24% over the last three halves. Yes, we have chosen to be a little bit more competitive from a pricing perspective in investor.
The reason we have done that is because we know that we can generate an appropriate return there, because even being slightly sharper on rate there, it is still a rate that is above the owner-occupied rate. So we saw an opportunity there, in the market, to position ourselves to take a little bit of market share through that investment space. But certainly at 27% versus a portfolio of 24%, I do not feel like we are skewing the business in any significant way. On the weighted average life, I must admit, I have not turned my mind to that. The reality is, I suspect one of the drivers of that may be the fact that we shut down one of our third-party channels about 12 months ago, and we have seen increased turnover in that back book there as a lot of those customers through that channel have refinanced elsewhere.
I suspect that will be impacting that weighted average life. As that portfolio continues to reduce in absolute size, the amount of attrition there on a month-to-month basis continues to reduce. But it might be one that, unless Andrew, you have turned your mind to it, we might have to take that one on notice.
On the digital point, Brian, narrowly, it is probably still too early days to really get a sense as to the average life of a digital loan. We certainly know those numbers for broker-introduced customers and also through our proprietary network. And no surprise, for a proprietary loan, it is typically around five to six years average life, depending on the number of products the customer takes. And it is typically somewhere between three to four , maybe three to four and a half for third party. But it is still a little early in our digital, through the various channels like Up, to get a good sense as to how sticky or otherwise the life of those loans are. But Richard's point on the mortgage partner channels is right.
Okay. The second question, Richard, and I apologize, I am not sure whether this is a question for you or the chair or the head of the risk committee, but it is quite disappointing to actually go through another presentation and still we have not had it clearly enunciated whatever the AUSTRAC problem basically is, whether staff are involved, et cetera. But that said, right now if we have a look at the stock, as far as I can work out, net book value is AUD 11.67, so you are trading below book value. Common sense says issuing shares at a discount to net book value is net book value diluted. When we have a look this time around, you are issuing DRP shares, that is on slide 22. But when I actually have a look at slide 23, I can see the employee bonus equity plan.
There's this one-off adjustment where you're moving from 100% shares, as I recall, to 50% cash. I'd just really like to understand what is the logic when you're trading below book value, asking shareholders, issuing new shares under the DRP, but giving the staff basically 50% of the bonuses through cash in an environment where there has been this recurring governance issue which shareholders are yet to pay for when we find out whatever the AUSTRAC fine is.
All right.
Can I get some comment, please?
Yeah. Brian, there's a few elements in there. The first thing I will say is, and there was some information in the press over the last week, these matters are still being dealt with by law enforcement, and as such, I just can't comment around any details around the specific issues that led to the AML issue coming to light last calendar year. Unfortunately, that's going to remain that way until the police announce any action that they do or don't want to take in relation to that. We're certainly conscious of the fact that we're operating at a discount to net book value. For a number of halves there, we were not adding to our share count and doing that quite deliberately.
The reality as we sit here today, as I think you are aware, we do not know yet what will come of the investigation from AUSTRAC, and that may lead to some form of penalty. We just do not know. We continue to collaborate with AUSTRAC through that process. We do not know when we will find out and what impact that will be.
Sorry, Richard, if I just interrupt you there. The AUD 120 million of DRP underwrite we did last time around, which I think has been more or less linked to the AUSTRAC risk. What you are saying today is this DRP issuance is the uncertainty around the same issue, which is implying the fine will be greater than that?
No.
Could be?
No, you are not doing a great job of putting words in my mouth.
Sorry.
Yeah, I know you are. The reality is, in an environment like this where there is uncertainty going forward, we feel it is an appropriate thing for us to be conservative in relation to our capital position. We've just set aside about AUD 70 million at the end of 2026 for some further work we need to do on the risk front. That has had an impact on our capital position at 30 June. We are making sure we are conservatively positioned, until we have greater certainty around this issue in particular. I certainly don't have any view and will not be making any prediction about any potential penalty if one is applied and to what value that will be. I wouldn't read into the excess capital position we're holding today as any form of indication of what we're expecting on that front.
The staff issuance, cash versus shares?
Yeah, that is more driven by making sure we've got a competitive offer for the majority of our people that we look to attract and retain to this organization. We want them to be shareholders, hence 50% of their bonus plan, it will remain in equity. The reality for a lot of those people, they do really appreciate getting part of their bonuses in cash as well, rather than 100% equity. So that's the decision that was made by the organization, which has a one-off impact with a timing impact, effectively, bringing forward that cash element rather than being deferred by 12 months. That's the impact that is called out in the pack.
Thanks, Richard. Appreciate it.
No worries.
Thanks, Brian. We are going to our final question from Christian Mazza at Jarden.
Morning, team. Just one quick last question. Referring to slide 20 in the presentation, you mentioned there is 11.4% of your business portfolio exposures greater than AUD 50 million. Is there any exposures that exceed AUD 100 million? If so, what are they secured by?
I am trying to rec--
We will come back, Christian.
Yeah.
We will confirm afterwards.
Yeah.
Let's get the data for you. We will happily share that data. That's fine.
Yeah.
Okay. No worries.
From memory, Christian, I think there might be in the order of less than five. Again, let us come back with the security information on those through a one-on-one discussion. It is certainly for a bank of our size, anything with an exposure north of AUD 50 million, we make sure that there is very strong collateral in place, and we manage those very carefully.
No worries. Thanks, team.
Thanks very much. Thanks very much for everyone for joining us, and we will talk to you all this afternoon.