In a recent earnings call, the Commonwealth Bank of Australia (OTC:CMWAY) (CBA) presented its half-year results, demonstrating a commitment to customer support and stability in an environment marked by economic headwinds. CEO Matthew Comyn emphasized the bank's dedication to aiding customers and communities, noting significant investments in digital offerings and fraud prevention. Despite these efforts, the bank reported a 3% decrease in cash net profit from the previous year. However, CBA maintains a strong balance sheet and capital position, with a common equity Tier 1 ratio of 12.3%. The bank also declared a marginal increase in its first-half dividend and continues its strategy of on-market buybacks and dividend reinvestment plan neutralization.
Key Takeaways
- CBA focused on customer support, investing in future stability, and maintaining economic strength.
- Over 60,000 Australians were helped to buy new homes, with $100 million in scams prevented and recovered.
- $18 billion was lent to small businesses to support job creation and growth.
- CBA delivered $4 billion in dividends, with an interim dividend of $2.15, up $0.05.
- Operating income stayed flat, operating expenses rose due to inflation, and cash net profit fell by 3%.
- The bank's balance sheet is strong, with high provision coverage and conservative funding settings.
- Digital offerings and the CommBank app have seen increased engagement, with over 8 million users.
- The bank expects economic growth to fall below 1.5% this year due to inflation and interest rate impacts.
Company Outlook
- CBA anticipates a soft landing for the economy, projecting growth below 1.5% this year.
- The bank remains optimistic about the overall outlook, focusing on customer support and economic contribution.
Bearish Highlights
- Households face challenges with decreased consumption, reduced savings, and rising prices.
- Operating income remained flat, with higher expenses and a 3% decrease in cash net profit.
- Economic growth is expected to slow due to inflation and interest rate effects.
Bullish Highlights
- CBA has a strong liquidity, funding, and capital position, with a common equity Tier 1 ratio of 12.3%.
- The bank's digital offerings have seen strong customer engagement and loyalty.
- Business lending and non-retail deposit revenue have increased, with CBA leading the market.
Misses
- Margin pressure from higher deposit funding costs was reported.
- Increased operating expenses by 4.1% were largely due to inflationary increases.
Q&A Highlights
- CBA's strategy includes managing interest rate risk and focusing on stable deposit franchises.
- The bank aims to support lower-income earners and contribute to social and affordable housing.
- Executives emphasized the strategic value of the deposit franchise and the success of new account openings.
Throughout the call, CBA's executives reiterated their dedication to customer support and stability in a challenging economic landscape. The bank's strong capital position and commitment to sustainable dividends and growth for investors were highlighted, despite the pressures of inflation and interest rate increases on the economy and consumer demand. CBA's ticker on the market is CBA.
Full transcript - Commonwealth Bank of Australia (CBA) Q2 2024:
Melanie Kirk: Hello, and welcome to the Commonwealth Bank of Australia's results briefing for the half year ended 31 December 2023. I'm Melanie Kirk, and I'm Head of Investor Relations. Thank you for joining us for this briefing. We will be having presentations from our CEO, Matt Comyn, with an update on the business and an overview of the results. Our CFO, Alan Docherty will provide the details of the results, and Matt will then provide an outlook and summary. The presentations will be followed by the opportunity for analysts and investors to ask some questions. I'll now hand over to Matt. Thank you, Matt.
Matthew Comyn: Well, thanks very much, Mel, and good morning, everyone. It's good to be with you today to present the bank's half year results. Throughout the half, we've continued to focus on supporting our customers and communities, investing for the future, and providing strength and stability for the broader economy. We know that many Australians are feeling under pressure and are finding it harder and harder to deal with the current cost of living. So let me say directly to those customers who are facing hardship or are feeling stretched, we are here to support you. This includes home loan repayment pauses for up to 12 months, loan deferrals, interest-only loans and flexible payment plans. Each month, our digital tools also help 3 million customers save on everyday expenses, better manage their money and plan for the future. This half, we've helped more than 60,000 Australians buy a new home and prevented and recovered more than $100 million in scams. Safety and security remains a priority for all Australians, and we are investing more than $750 million each year to protect customers from fraud, scams, financial and cyber crimes. We also recognize how important small businesses are to our economy, and this half we've lent $18 billion to help them create jobs and grow. And all Australians benefit from strong and stable banks. We've further strengthened our balance sheet to ensure we remain well positioned to support our customers, communities and the economy, both today and into the future. We continue to have the largest ATM and branch network in the country, and all of our call centers are based in Australia. We've also made a commitment to keep every one of our CommBank regional branches open for at least 3 years. We also recognize that many Australians rely on us for dividends to support their income. And this half, we delivered $4 billion in dividends to over 12 million Australians. Well, last week's Statement of Monetary Policy showed that households have decreased consumption in real terms as well as reduced their savings. Our own data shows that those impacts continue to be felt unevenly across our customers and the economy. Fortunately, unemployment remains near record lows. We realize that many people are needing to take on second jobs or work additional hours to supplement their incomes. Overall spending per capita has only risen by about 1% as people cut back on both essential and discretionary spend in real terms. We can see customers using savings buffers to cope with higher prices and mortgage rates. And we recognize our younger customers have been impacted most heavily. Overall, household disposable income in Australia fell by approximately 3.5% last financial year. Pre-tax salaries increased disposable incomes by 8%, but rising prices offset most of these gains. Net interest payable also decreased disposable income by 2%. This is because Australian households hold $1.2 trillion more loans than deposits. We are here to support our customers who need it. We offer more options today than ever before and we've made them easier to access. We've contacted every customer coming off a fixed rate mortgage and discussed options with those looking for help and 99% of these customers are continuing to make their repayments on time. Higher rates continue to flow through the economy. Deposit customers received almost $7 billion in additional interest payments in the half, nearly 3x more than in the prior corresponding period. The average interest rate earned by depositors has increased by more than the average rate paid by home loan customers. For the Commonwealth Bank, expenses increased 4% in the half due to inflation, but this has been absorbed, with shareholder profit decreasing 3% or approximately $150 million. Because unemployment remains low, loan losses have too. In most years, we ride-off around $1 billion in loans, but this figure was $320 million in the half. Australia is more sensitive to the impact of rising rates, given high household debt levels. According to the Reserve Bank data, Australian banks have passed on less of the rate increases to home loan customers compared with other markets, while passing on more of these increases to depositors. Australian banks also hold higher levels of capital than offshore banks, to ensure we can support our customers during challenging times. This additional strength does come at a cost though, which we estimate to be between $7 billion to $11 billion per annum across the major Australian banks. We often get questions about the scale of CBA's business and how this has changed over time. We lend over $900 billion directly to customers and provide $75 billion of funding to federal and state governments for critical public services like education and health. We also safeguard over $800 billion in customer deposits and hold over $140 billion of low-cost international funding, which benefits Australian households. Our strength allows us to continue investing to improve the experience we provide and to attract more customers. Over the past 10 years, the Commonwealth Bank has grown significantly larger, with customer deposits almost doubling and loans to customers increasing 57%. We're also significantly stronger, holding twice as much Tier 1 capital. CBA's profits have increased by around 18% which is well below inflation of 30% over that period. Now turning to our results, our focus on deepening customer relationships has seen us finish the half with peer leading Net Promoter Scores across all key customer segments. This customer focus, coupled with consistent, disciplined execution, has delivered positive outcomes for all stakeholders. Throughout the half, we've maintained strong liquidity, funding and capital positions. Our operating performance and strong capital position has allowed the Board to declare a first half dividend of $2.15, an increase of $0.05 on the prior corresponding period. Operating income was flat for the half, supported by volume growth and falling margins. Operating expenses were 4% higher, driven by inflation and increased technology spend. Cash net profit was down 3% on the prior year. We remain well placed heading into a lower growth environment. We've continued to strengthen our balance sheet with high levels of provision coverage, surplus capital and conservative funding settings. The balance sheet is 75% deposit funded. Weighted average maturity of our long-term funding is 5.3 years and liquid assets are $187 billion. Our capital ratio of 12.3% is well above regulatory requirements. Our portfolio remains sound with arrears and impairments below long-term averages, supported by a strong labor market and savings buffers. Troublesome and impaired assets decreased to $6.9 billion, primarily driven by upgrades and repayments across a small number of exposures. Home loan arrears have increased in recent months, but remain near historic lows at 52 basis points, reflecting ongoing pressures from higher interest rates and cost of living. We remain well provisioned for a range of economic scenarios. We hold total provisions of $6.1 billion, which is $2.2 billion above our central economic scenario. We continue the disciplined execution of our strategy, which seeks to broaden and deepen our competitive advantages. We've talked before about how deep, trusted relationships lead to a higher frequency of engagement, a better understanding of customers' needs, and superior customer experiences. However, I thought I might also talk briefly about how this leads to value creation for our shareholders. 35% of Australians and more than 26% of businesses now consider the Commonwealth Bank to be their main financial institution. This MFI share leads peers by a considerable margin and continues to grow. We're Australia's leading transaction bank for both households and businesses. This business mix results in more stable and lower-cost deposit fundings and better risk identification. This underpins a structurally advantaged balance sheet with lower loan losses, higher franking and higher, more stable capital generation. We maintain conservative funding settings, hold excess capital and market-leading provision coverage. And this stability and consistency of earnings is reflected in a lower cost of capital and allows us to invest more than peers over the long term. It also allows us to steadily grow the balance sheet while consistently delivering strong, fully franked dividends and managing down our share count. One of the key ways we measure the strength of relationship we have with our customers is through the Net Promoter Score. For 13 consecutive months, we've held the leading NPS across all 3 of our business segments. And strong relationships underpin growth and performance across all of our businesses. Leading Net Promoter Score underpins our leading MFI, which has increased. This has translated into an increase in transaction accounts, with retail accounts increasing 6% and business accounts up 10% versus the prior corresponding period. We've continued to grow business lending volumes above system in the half, with more than 90% of lending customers also holding a transaction account with us. Our institutional bank continues to play a very important role. It has contributed over $70 billion in funding over the past 5 years, and its cash NPAT has now returned to 2019 levels, with a substantially lower risk-weighted assets. ASB continues to see strong deposit growth and has been very disciplined with asset origination. There's been interest in the competitive dynamics in retail banking. Home loan rates have increased by substantially less than the cash rate. The Reserve Bank has estimated that the interest rate paid by customers on variable mortgages in Australia has been discounted by around 70 basis points relative to the cash rate. However, the marginal home loan is wholesale funded and these funding costs have increased by even more than the cash rate. This has resulted in significant margin compression in retail banking in Australia. This has disproportionately impacted banks with more reliance on wholesale funding. We have the strongest retail franchise with the highest level of household deposits relative to the size of our home lending business. Our favorable business mix and disciplined execution mean that we've grown net interest income share in retail by 4 percentage points over the past 2 years. Our home buying business continues to perform well operationally. There's also been interest in the record period of fixed rate maturities that occurred in the half. We've contacted every customer coming off a fixed rate loan to offer support and have made personalized pricing offers using our customer engagement engine. 90-day arrears for customers rolling off ultra-low rates have been better than the portfolio average. We've also seen large inflows of deposits as customers come off fixed rates and are now able to pay down or offset their loan balances. The performance of our business bank has again been a highlight in the period. We've had a strategy for several years to build a high quality franchise through deep transaction banking relationships. We've grown our MFI share by 272 basis points since March 2020 and have a sizeable lead to our next competitor. We use our transactional banking relationships to continue disciplined growth above system in business lending and have increased share by more than 170 basis points since March 2020. We now hold $10 billion more business banking deposits than our next competitor and more of our lending is funded by stable transaction deposits. Our leading transaction banking franchise means we capture a larger share of the non-retail deposit revenue pool in Australia. Our deposit gathering franchise is a clear differentiator in this part of the economic cycle, and its performance has been a highlight for the half. It's underpinned by our leading MFI share, digital and physical distribution assets, and strong payments propositions. CBA now holds approximately 40% of stable deposits among the 4 major banks. We've further extended our market-leading digital offering this half. Our CommBank app is used by more customers than any other financial services app in Australia, with over 8 million users. Daily logins are up 28% year-on-year and a peer-leading Net Promoter Score. On average, customers are now logging in around 45x a month. We continually invest in tools in our CommBank app to help customers manage their money. For example, Benefits Finder has already helped CBA customers claim more than $1.2 billion in rebates and entitlements, and later this year the tool will be made available to all Australians. In an Australian Banking First, we're also rewarding our customers through CommBank Yellow (OTC:YELLQ), our customer loyalty and recognition program. In the 3 months since its launch, more than 3 million customers have actively engaged with the program. We know that safe and secure banking is critical. The combination of our digital app and customer engagement engine helps us to protect customers from scams, fraud and cyber incidents. We've invested in a number of digital innovations, which have enabled us to prevent and recover over $100 million from scams targeted at our customers in the last 6 months. We bring our customers an extra level of assurance that the person they are speaking to is from the Commonwealth Bank and that their payment is going to the right place. We're also piloting facial recognition identity verification in our app. And because this problem impacts every Australian, we're also working closely with the government, banks, telcos and social media companies on a national approach to scams and fraud. We welcome the government's focus in this area, including mandatory scammed codes for key industries. And looking ahead, we'll continue to invest to support our customers and communities. And I'll now hand over to Alan, who's going to take you through the results in more detail.
Alan Docherty: Thank you, Matt, and good morning to everyone who has dialed in. I will cover the various drivers of our financial results in a bit more detail. Starting with an overview of key changes in our operating context, how we have responded and what the implications have been. So looking firstly at our operating context. As you heard Matt talk about, it's been a period of falling disposable incomes and increasing cost of living pressure. In aggregate, though, the economy continues to show resilience, given both the divergent impact on households and also the fact that last year, we had the largest net overseas migration to Australia since records began. As expected, it was also a period of increased deposit competition, which is a normal feature of a rising rate environment. As a result, many Australians are now benefiting from higher deposit rates after many years of enduring a very low interest rate environment. On the global and domestic macro outlook, there is still uncertainty around the outlook for inflation and interest rates. So how are we responding to these changes in our operating context? First and foremost, we are focused on supporting our customers in a number of different ways. Secondly, we have continued to invest strongly behind our strategy and made measurable improvements to the efficiency, efficacy and yield of our $2 billion in annual investment spend. Thirdly, we have remained disciplined in our approach to volume and rate trade-offs across each of our businesses in Australia and New Zealand. And lastly, we have continued to strengthen our balance sheet settings in the context of continued uncertainty in the macro outlook. As a result of these actions, the long-term health of our franchise has improved. We've had continued improvements in customer Net Promoter Scores and that is a key driver of the extension of our leadership in main financial institution share across the retail and business banks. Our economically rational approach to volume and rate trade-offs has driven an increase in our share of industry net interest income, and we have further widened our return on equity premium to the rest of the banking sector. Our balance sheet strength also means that we can continue to weather a broad range of economic scenarios with greater relative earnings stability. We demonstrated this most recently during the COVID recession, and our strength allowed us to continue to support our customers and the economy while still delivering sustainable returns to our shareholders. Looking at the shorter time horizon on the bottom half of the slide, you can see the key financial outcomes for the current half included very strong organic capital generation, another increase in interim dividends and strengthened buffers in funding capacity, loan loss provisioning and capital. I'll now unpack the results in a little more detail. Statutory profit from continuing operations was $4.8 billion. The largest non-cash item was the loss on the announced divestment of our Indonesian bank subsidiary, PTBC. Excluding those items, continuing cash profit was a little above $5 billion for the half. On the prior comparative half, both cash profit and pre-provision profit were 3% lower due to competitive pressure on margins and inflationary increases in our cost base. Pleasingly, loan impairment expenses fell in the current half as the credit quality of our retail, business and institutional lending portfolios continue to show resilience in the face of tighter economic conditions. Over the sequential 6-month period, both cash profit and pre-provision profit were 3% higher due to improving revenue trends and the non-recurrence of prior period one-off costs. Looking firstly at the change in operating income over the prior comparative half. Overall, income was flat at $13.6 billion. Net interest income fell despite a 4% growth in average interest-earning assets due to competitive pressure on margins. This was offset by volume-driven growth in fee income across our retail, business and institutional divisions, as well as another strong period for our Global Markets business. Over the sequential half, income growth was 1%. As anticipated, we have seen continued margin pressure. And this slide decomposes the 6 basis point reduction in margin over the most recent 6-month period. The main driver was higher deposit funding costs. Price competition for term deposit products contributed 3 basis points of margin decline, and there was another 3 points of decline from customer switching from low rate transaction accounts. Wholesale funding was only slightly more expensive this half, driving 1 basis point of decline. Our choices around volume and rate trade-offs resulted in only a couple of points of asset margin compression within our retail banking portfolio, despite continued heavy levels of discounting by some banks. Our replicating portfolio and capital hedges delivered a 4 basis point increase in margin and competitive pressures in New Zealand drove a 1 basis point decline. For some time, we have used publicly available information from APRA and the RBA, together with peer bank disclosures, to allow us to track our market share of industry revenues. This provides all market participants, including each bank's management team, with transparency on the impact of volume and rate trade-offs on earnings. On the left, we can see the change in share of net interest income of the 4 largest banks in Australia, which is a total revenue pool of about $75 billion. The clear divergence of outcomes across the industry is very stark. We have grown our market share of that revenue pool by 50 basis points, which generated an additional $390 million of annual net interest income. Now part of that revenue gain relates to a structurally advantaged mix of liabilities. If we just look at the net interest earnings on home loans, which is the chart on the right, we have also grown our revenue share there by 50 basis points, or $80 million over the same period. We made a choice not to participate in unprofitable mortgage lending, and that shows up in the divergence between balance share and revenue share over the past year. Turning now to operating expenses. They increased by 4.1% on the prior comparative half. This was largely a result of inflationary increases in wages and supplier input costs. We continued to invest strongly in our technology capabilities, the digitization agenda and in other areas such as cloud computing and scam prevention. Growth in these costs were more than offset by ongoing business simplification and productivity benefits. Turning to our balance sheet settings and looking firstly at credit risk. Loan impairment expenses were $415 million as loan loss rates reduced to 9 basis points in the half. Consumer arrears increased off a low base and remained below long-run averages. Consistent with our past guidance on this item, we expect to see further increases in arrears as pressure continues to build on household disposable incomes. Corporate troublesome and impaired exposures dropped slightly over the half due to a combination of upgrades to some single-name exposures and external refinancing of others. As you can see in the call-out box on the top right, TIAs remain well below long-run averages. However, we would expect directionally higher levels of TIAs in the year ahead. Our provisioning coverage remains steady at 164 basis points of credit risk-weighted assets. Overall, provisions increased to over $6 billion, reflective of volume growth in our lending portfolio and a marginal increase in forward-looking adjustments. We continue to hold a buffer of more than $2 billion to our central economic scenario, and this gives us approximately 75% coverage of our stagflationary downside scenario. In August, I provided some details about our forward-looking approach to provisioning through the cycle. We build our provisions bottom-up, taking a very granular data-driven view at the individual customer level, and then overlaying top-down judgments based on probable outcomes for the whole economy and each industry sector. I've included here some of our sector level considerations. Every sector will experience the economic cycle differently and, in many cases, over a non-overlapping time frame. Broadly speaking, our base provisioning and our multiple economic scenarios haven't changed much over the past 6 months. We have slightly increased forward-looking adjustments across elements of our consumer book, entertainment, leisure and tourism and the agriculture sector. The rest of our balance sheet settings remain conservatively positioned with our deposit funding ratio stable at 75%. Deposits grew faster than lending over the 6-month period, which allowed us to both retire some expensive long-term debt and at the same time repay $19 billion of the RBA term funding facility. Short-term wholesale funding remains at a historically low proportion of total funding of 7%. This will naturally increase over the year ahead as we use some of that spare capacity as well as $20 billion of excess liquids to fund the final round of TFF maturities over the next 4 months. On capital, we've delivered a common equity Tier 1 ratio at 31 December of 12.3%. This is 10 basis points higher over the half due to strong organic capital generation. We commenced our on-market buyback during the period and also completed another DRP neutralization. This marked the ninth neutralization of our last 10 dividends and the longest streak of consecutive neutralization and CBA's post-IPO history. That approach has saved our shareholders from a dilution of their holdings equivalent to 60 million shares, or 3.3% of our share count. The interim dividend of $2.15 represents a $0.05 increase on the prior comparative half, taking our interim payout ratio up to 72%. Given our very strong capital position, the Board have decided to, again, neutralize the DRP in respect of the interim dividend. In closing, we have again positioned our key financial settings to ensure we remain resilient and can continue to support our customers, the economy and our shareholders through a broad range of macroeconomic scenarios. We have again strengthened provisioning and maintained significant spare funding capacity and capital surpluses as the economy begins to slow under the effects of higher rates. In addition, our $159 billion structural hedge of interest rate risk represents a source of significant support to net interest earnings over the next few years. Our return on equity remains strong, supported by earnings growth and buybacks. That has allowed us to generate strong levels of organic capital, which funds the extension of credit to our retail and business customers. For our shareholders, we aim to provide sustainable dividends while efficiently distributing their franking credits and continuing our post-IPO track record of long-term growth of our investors' capital. I'll now hand back to Matt, who will take you through the economic outlook and the closing summary. Thank you.
Matthew Comyn: Thanks, Alan. The fundamentals of the Australian economy remains strong. The job market remains tight, with unemployment still near historic lows, with business investment and strong terms of trade. We recognize, though, that all households are feeling the impact of higher inflation and higher rates. Consumer demand has slowed, but immigration is providing a structural tailwind for the economy. Even though wages are rising, real household disposable incomes continue to fall due to inflation, tax and interest payments. Higher rates are having the intended effect of slowing growth and demand in the economy. Inflation is falling, but still remains too high, and we expect economic growth to fall below 1.5% this year. Our base case remains a soft landing, and we're expecting these pressures to ease as inflation and interest rates start coming down later this year. The economy remains fundamentally sound and stronger than many international markets, and we remain optimistic about the overall outlook. So, in summary, we remain focused on supporting our customers and the broader economy. The Commonwealth Bank remains strong and stable. This is underpinned by consistent, disciplined operational and strategic execution. We have a distinct proposition and more customers are choosing to bank with us. We'll stay focused on our customers, offering personalized support and financial flexibility, and we will continue to invest in our franchise over the long-term. I'll now hand to Mel to go through your questions.
A - Melanie Kirk: Thank you, Matt. For this briefing, we will be taking questions from analysts and investors. I'll state your name, but please introduce yourself and the organization that you represent, and to allow others the opportunity, please limit it to 2 questions. We'll now start with the first question from Andrew Triggs.
Andrew Triggs: First question, just on Slide 70, the deposit mix slide. The headline says the rate is switching has slowed, which you can see from a transaction, a non-interest bearing transaction account perspective, but TD mix does continue to increase, especially in the business bank there. So I'm really interested in, do you really see that slowing what's happening in term deposits? And still interested, I guess, also on -- in the retail bank, whether there's a risk that households start to lock in TDs towards the period of rate cutting by the RBA?
Matthew Comyn: Yes, no, thank you and good morning. Look, we -- as we said in the slide, and I think some of the commentary, we've certainly seen it stabilize and even between the second quarter versus the first. You're quite right, there's switching in the context of TDs, and we think that's a factor in both the retail and business banking customers. I think one of the ways, I know we've talked about this in the past, we sort of look at the balance sheet and deposit mix composition in a pre-COVID and then clearly it changed quite substantially during the COVID period. And so we're still benchmarking against that starting point. I think what we're continuing to see is probably a slower rate of that mix shift and switching than we might have otherwise anticipated at the start of the hiking cycle. And clearly that's important and we expect that's going to be a factor on customers' minds. And one of the things that we watch fairly carefully, at least from our perspective coming into the result, we felt overall that it had stabilized and slowed and will be one of the drivers as we look outwards in terms of margin.
Matthew Comyn: Okay. And a question on costs. Interested in the outlook into the second half. You saw a modest pickup in productivity savings for the half, which was positive from a half-on-half perspective. Just interested in some broader unpicking of the other drivers around property cost inflation returned, software amortization expense also rose. Are there further headwinds from that side of things, please?
Alan Docherty: Yes. So, yes, there's a couple of the key drivers that you've seen. You've obviously seen the wage inflation roll through on the staff cost line. Underneath that, we're also – we're continuing with the program of in-sourcing of technology capability, so within the staff and IT lines, there's still an element of additional staff costs, which are displacing some third-party contractor costs, which historically would have emerged in the technology line. So you'll continue to see that as a feature of our result. As you said, software amortization, we've been continuing to invest strongly in a number of our technology capabilities and ongoing digitization. That will continue, that will drive further increases in software amortization likely over the next 3 or 4 years as we see that come up to run rate relative to the capitalization rate of our investment spend. So, yes, some of those themes have been very consistent for the last number of halves, Andrew, and I'd expect them to continue into the second half and beyond.
Melanie Kirk: The next question comes from Jonathan Mott.
Jonathan Mott: If I can ask a question about the home loans flow, and especially with the Commonwealth Bank brand rather than including Bankwest in particular. If you look at some of the disclosure, what it shows is that the fundings via the proprietary channels actually have been broadly flat for 18 months, but the broker originations are down 35%, probably a good indication of the price sensitivity across proprietary and broker channels. Alan, you put on Slide 30, the revenue share at about 35% for the home loans net interest income. Have you been able to break that down in the change between proprietary and broker? And also, Matt, this goes to a comment you made 12 months ago about the returns in the above cost of capital. What does this tell you about the ROE that you're getting on a marginal proprietary versus a broker loan?
Matthew Comyn: Yes, well, maybe a couple of things and then you supplement, Alan. So, a little bit where you started, Jon, as well. I mean, if we go back a couple of years and we're going to talk about the home loan cycle and some other observations we're having later. But during COVID, a big basis of competition was turnaround times. That is no longer a factor. I mean, we're well inside in terms of operational execution of our other major bank peers. Clearly, it's been a very price-sensitive and competitive market, which is you expect in a very high refinance market. You're quite right insofar as the price sensitivity. And from our perspective, I mean, it's been a challenging last calendar year for, I think, things that were sort of well-known and discussed. We've sort of sought to particularly compete in some areas, obviously, retention of our customer base and probably investor over owner-occupier, higher margins there, purchase over refi. And in the same way that you are doing, we look very carefully at both the risk characteristics through channel, the pricing, the return profile. And without sort of providing all the granularity across that, there's a skew and dispersion, some would have been further below cost of capital at points of last year. There's been a slight improvement coming into the calendar year across the market. And so we try to think about that very carefully. And I guess maybe the last thing we'd sort of say would be, as we looked at some of the customers that refinanced out some of the risk characteristics of those customers were higher. They tended to be higher LVR, further behind on their repayments. And so trying to balance all of those in a very, very competitive market remains a key area of focus.
Alan Docherty: And to your specific question on slide 30 on the analysis we've done there, Jon, yes, we've decomposed it. 2 of the main drivers around that improving revenue share, one, obviously, the approach we've taken on volume and rate trade-offs, which we've talked a lot about in recent halves. Another key driver is the better skew to proprietary flow that we've seen, particularly in the CBA and unloaned brands. There's a big dispersion and, as you know the return that you can generate on a broker origination versus a proprietary home loan and that increased skew towards proprietary relative to industry, which is skewed to broker, has been one of the drivers as we decompose that increased revenue share.
Jonathan Mott: Okay. And a second question, if I could, just on capital management. Obviously, the balance sheet's in very good position with CET1, very strong. But with the share price where it is, close to 3x tangible book, I think this is the first time I've ever been able to say this in world, but the cost of equity is lower than the cost of debt and buybacks are technically EPS dilutive at this stage. So when you think about capital management, what do you think about various forms of potentially increasing the payout ratio, special dividends? Or are you better off actually buying back senior and sub-debt, which is more expensive?
Alan Docherty: Yes. I mean, the weighted average cost of debt remains below the market implied cost of capital. It's certainly narrowed, and so it's economically less accretive, obviously, under current market conditions. But we're continuing with our on-market buyback. We're pleased with the progress we made in that in the last 6 months. As well as the on-market buyback, you'll recall we've also had the neutralization of the August final dividend to conduct through that period. So, if you take the 2 of those together, we've bought back nearly $900 million of shares through that last 6-month period, and it was a large DRP neutralization, because the participation rate on that final dividend in August was a bit above 18%, which is the highest participation rate that we've had in about 10 halves. So we had a lot to get through between the DRP neutralization and the on-market. Your broader point's right. The economics of buybacks are narrower now than they've been at probably any point in the last number of years. But our overall approach to capital management's unchanged. We've got surplus capital. We've continued to focus on lowering the share count, as we have done in this previous 6-month period, and we'll continue to keep an eye on market conditions, marginal funding costs and that cost of capital.
Melanie Kirk: Thank you, Jon. The next question comes from Richard.
Richard Wiles: A couple of questions relating to margins, please. The first one is that I think if we take your results and commentary from the first quarter, it suggests the margin was probably down 4 basis points in the second quarter. So, no moderation in margin contraction. Can I ask, what do you expect to happen in the second half of the year for the margins? And also, does your comment in November that home loan margins have stabilized mean that the asset pricing impact in the second half should be close to zero?
Alan Docherty: So, I mean, in terms of the quarterly margin trends, we don't get a lot of detail on the quarters, but my observation was actually very consistent margin trends between the first quarter and how that compared to the quarterly average of the second half of last financial year and then heading into the second quarter. And it was all the things that we talked about in August. We'd seen that switch and that increase in the headwind on net interest margin coming on deposits, both the pricing, particularly on term deposits, and also that continued switching. So that's been the dominant theme in the quarterly margin compression that we've seen both in the first quarter and in the second quarter. The second quarter was slightly -- there was slightly more margin compression, as you say, in the second quarter. That was more a function of the timing of the OCR lags. We've seen more OCR lags in that previous quarter reverse relative to the second quarter, because it was a quieter period in terms of RBA cash rate announcements quarter on quarter. But the overall themes were very similar. And I think as you look ahead into the second half, I mean, we talked about this in August. We haven't repeated ourselves today, but all of the factors that we talked about in August, I think you'd continue to focus on as you look ahead. What's the rate of switching? What are we going to see in terms of the competitive intensity on home lending and deposits? How are wholesale funding costs going to behave? We've had a very benign basis risk premium, for example, over recent halves. And so we'll keep a close eye on basis risk as we head out. So really all the things we've talked about, which are very well known and I think well understood across the market, would continue to be the key active considerations as you look out to the second half.
Matthew Comyn: Yes. I mean, overall, Richard, we'd probably say that asset pricing is a bit less the impact from home lending. There's a couple of points you can see in the group NIM on the growth in reverse repos. And then as Alan sort of touched on, I think, well, a number of the factors that we're watching closely, clearly in and around deposits, and we're getting the benefit of the replicating portfolio and the capital hedges that flow through.
Richard Wiles: Okay. And just my second question, a pretty simple one. Do you think rate cuts would be good or bad for margins at CommBank?
Matthew Comyn: Well, there's a lot of elements within that, Richard. I mean, all things being equal, I mean, banks generally expand net interest margins in a rising rate environment. And if you look at a very long-term, let's say, the last 2 decades of net interest margins at a group level, that's basically the case. You tend to have increasing competition on one side of the balance sheet versus the other. I think what we saw with a much more rapid increase in rates are a more rapid increase in asset competition, which compressed margins during that period of time. And so there will definitely be some different factors. Obviously, they're going to play out as part of that. But I think the rate cuts, at least from our perspective, are late this calendar year.
Alan Docherty: And as you know Richard, one of the things we're very focused on is interest rate risk. And in your question, there's both an absolute observation and also a relative observation. How relatively do you perform through different rate cycles? And that's one of the reasons we focus on stability of earnings through the cycle. And it's a key reason behind the size of that structural hedge of interest rate risk that we have through the deposit hedge and the equity hedge, $159 billion. So that will continue to create real stability in earnings regardless of the temporary movements in the cash rate.
Melanie Kirk: The next question comes from Matthew Wilson.
Matthew Wilson: Just 2 questions, if I may. Firstly, on business banking, given your outlook on the economy and the softening that you expect, are you already starting to see a change in the quality of applications? Or has the approval rate changed in the business bank at all, reflecting that deterioration? Or is that too soon?
Matthew Comyn: No. I mean, look, again, consistent with the outlook, yes, we expect some softening. There's obviously some sub-sectors within that. Overall, it continues to be relatively benign, and you can see that reflected, certainly, in some of the credit indicators, albeit a lagging. I'd say there should be 2 drivers. One, certainly on sort of risk identification and just being cautious, again, in some of those sub-sectors. Still finished the quarter strongly. It was probably slightly below where we would have otherwise anticipated. Some aspect of that was risk. It was actually as much there was some pretty aggressive price-based offers in the market. And so, look, if we feel that there's opportunities to continue to grow, which I'm sure there will be, then we will look to take those up. But at all times, we'll be very thoughtful about both the risk characteristics as well as the pricing that we're competing with.
Matthew Wilson: Yep. Okay. And then, secondly, further to Richard's question on interest rates, obviously, with the spike in rates that we've seen over the last 2 years or so, that's all come through in the benefit to free funds. Your spreads continue to contract, given the switching, given the competition that you alluded to. Your economist is pretty bearish. They've sort of got 150 basis points of rate cuts both here and in New Zealand over the next 12 to 18 months. If that does ensue and competition doesn't change, because clearly, other players have a very different view to CBA on where they see returns or what sort of returns they're happy to ride at, you could be looking at a net interest margin in the 170s. What are the levers that you can use to pull in that environment? And also we've got a labor government in place, so holding back rate cuts, et cetera, might be more difficult?
Matthew Comyn: Yes, I mean, look, just a couple of things. Clearly, being an economic forecaster is a difficult occupation. So there's a range of different outcomes about the -- when rate cuts begin and the pace. But I think the broader sort of essence is right. I mean, Alan touched on a couple of the things. We try to control the things that we can. I mean, the focus on building up a very high-quality deposit franchise with the most stable source of funding, both enables us to provide and hedge some of those balances to give us downside protection in a falling-rate environment. It also -- the closer we can get, clearly, to being fully funded, the more volatility, or the less volatility we'll have in our net interest margin, which is why you see -- we see a competitor that's competing very aggressively on price happens also be much more wholesale funded than we are. You can see the volatility and compression on their margins. And, I mean, to your point, there's a similar observation that we've had. I mean, there's a number of other idiosyncratic factors that I think that have gone into some of the pricing decisions that have been made, and maybe I won't speculate on some of those. But we've often wondered about actually, if rates had risen slower, would there have been better pricing discipline. And I think there probably would have been. And, clearly, that was a real cause for concern, because as you're back-solving about where the net interest margin should be versus where the cash rate is versus price cycles, clearly, it should be above where it is. You see a market like the U.K. where they're actually surplus-deposit funded. They've got excess liquidity. It sort of makes more sense to be putting some of those deposits to work in arguably or lower margin, whereas you look at a market like Canada, which looks a bit like Australia, it's higher wholesale funded. They've actually passed on more of the cash rate increases through. And so we look at both the absolute, the things that we can control, the relativities, try to plan for that as best we can. And we'll try to manage and make the best optimal sort of decisions that we can for the organization and, of course, to support both our customers and our owners.
Melanie Kirk: The next question comes from Brian Johnson. Brian, can you hear us?
Unidentified Analyst: Morning. Can you hear me?
Melanie Kirk: Correct.
Unidentified Analyst: Yes, I can. Can you hear me, Mel?
Melanie Kirk: Yes.
Unidentified Analyst: Fantastic. Congratulations on the management discipline. But, Matt, what's interesting is that I can see you losing market share in the broker channel, really focusing on the branch. And while I think that's to be applauded, you could be very sensible to the point where you have no business left at all. Is there a point at which you think CBA has to respond more aggressively on price? And then I'd a second question, if I may.
Matthew Comyn: Yes, no. Look, we -- clearly, it's a very competitive market. We're here to serve our customers. We can make, and we have made, very deliberate choices about where to compete and how best to. We have sought to optimize as best we can for some of those pricing decisions. But ultimately, we're in that competitive market. You're right, we think about a number of those factors in terms of the short-term and the medium-term, and we've certainly stepped closer to the market. You'd see, though, our recent volume performance, it's clear, we're not contributing or leading any of that pricing activity. And so it remains a really big focus for us. And I think Angus and the broader team have done an excellent job of trying to navigate a pretty difficult context to get the best overall outcome. And as we can see, that can -- it has the potential to deliver a lot of value over time. And, of course, we're going to try to continue to do that as best we can.
Unidentified Analyst: Okay. So we're not at that point yet?
Matthew Comyn: Not at which point, BJ?
Unidentified Analyst: The point at which the market share loss is so great that we come to a Telstra (OTC:TLGPY), Vodafone (NASDAQ:VOD) moment where it just makes sense to just go out and price at the level the market is pricing?
Matthew Comyn: Well we -- I mean, we think about volume, market share, franchise, customers, the whole relationship. Obviously, we're thinking about margin. You can see how that flows through into NII. I don't know that it would be particularly helpful if I speculated on our exact positioning, other than to say we're going to be very focused on making sure we're making the most optimal decisions across all of those factors.
Unidentified Analyst: Okay. The second question, if I may, relates to Slide 129. And one of the things I think the market is quite confused about, surplus capital, high share price, ongoing buyback, which seems to have stalled. I get that the dividend reinvestment plan neutralization is pretty significant. If we go through to Slide 129, which talks about TLAC, is one of the considerations here that the incremental cost of wholesale debt isn't in fact, normal kind of debt. It's actually loss-absorbing capital. Could you just explain to us, Slide 129, what it's actually saying, if possible, Alan?
Alan Docherty: Yes, sure. So we're going to have to continue to issue Tier 2 debt on normal course and speed in order to meet the APRA TLAC requirements by 2026. So you've seen us continue to issue Tier 2 debt. Tier 2 debt is obviously one of the more expensive forms of debt. So as we look at what are the potential uses of surplus capital, for example, then an obvious substitution for carrying excess common equity Tier 1 would be issuing further Tier 2 debt. And so we look at the economics of our capital management position relative to the most expensive form of marginal wholesale funding. Bearing in mind, the TLAC requirements are going to be very long-term requirements. They're going to be baked into the capital stack for many, many years. And so we will continue to have an orderly increase in the level of Tier 2 capital within the capital stack. But the cost of particularly U.S. dollar Tier 2 debt peaked probably around September, October time. We've seen spreads compress in the U.S. dollar market over the last, pleasingly, over the last 2 or 3 months. So the pricing of U.S. dollar Tier 2 debt has probably come in around 15 basis points. We've probably seen peak expensive Tier 2 debt earlier in the half. As we sit here today, the pricings certainly come in a lot in recent months. So, yes, it's an important part of the capital stack, an important part of how we meet the loss-absorbing capital requirements. We'll continue to weigh that along with all our other capital management considerations.
Unidentified Analyst: And Alan these a risk that all banks in the world need to get the same number at the same point of time, we get a bit of crowded issuance start to develop.
Alan Docherty: Potentially, and that's one of the reasons why we've issued ahead of that schedule. And so we've made good progress against that. Those markets are functioning very well. They're very orderly. But, yes, you don't want to be -- you want to be leaving it too late to get to your TLAC mark. And so that's why we've continued to have a very progressive issuance of Tier 2 over the last couple of years now.
Melanie Kirk: The next question comes from Carlos Cacho.
Carlos Cacho: Carlos from Jarden. I just wanted to -- similar to John's question around the kind of some of the decisions you're making on the loan book. Most of the investor share has risen quite a bit of about 5% half-on-half. That compares to the market where you invested share is up just 1.5% over that same period. How much of that is a deliberate strategy to support margins versus just on a result of where your pricing is versus PS.
Matthew Comyn: The former, Carlos. I mean, it's been an area where we've chosen to engage. I think we try to be quite tactical and deliberate and disciplined in different areas. The margins are available there. We're very comfortable with the risk characteristics that we can see. And so it's an example where we're prepared to grow faster there.
Carlos Cacho: And then just another question, I guess, maybe more -- more on the ESG side, but looking at your chart, which shows the breakdown of originations by income. It looks like now we've seen a significant shift to higher income earners driving the mortgage market. 1/3 of mortgage originations are now driven by customers and incomes over 200,000 versus less than 20% if we go back to December '19. How much do you see -- like, I guess, this seems like it's becoming a bigger political and social issue. And how do you see what CBA can do in terms of your focusing supporting Australia kind of helping society, et cetera. How do you -- I guess, how do you think about that and what it means and what you can do to support maybe lower income earners getting into the market? Because it seems like, based on this data, it's really stacked against them?
Matthew Comyn: Yes, look, I mean, the availability and affordability of housing has been a significant issue for many years. There's no question that it's an acute issue and will continue to be this year and into the next couple of years and obviously, primarily driven around supply and we can see the forward development pipeline and the availability, and it's going to be very challenging. So I mean, what can we do about it? Clearly, there's a number of different vehicles to contribute what we can or anything that would be useful from a policy perspective. I mean, where we can, and of course, we're restricted in terms of some of the borrowing decisions that we would make, but certainly continue to support our customers into the housing market, first home buyer has been and will continue to be an important customer segment has tended to be one of our strongest over time, availability and supply of housing, when we talk about it in the context of both the business bank and the institutional bank and also just the -- try to bring in or contribute more capital into the development of some of the social and affordable housing. And so that balancing act, both sort of strategically about how do we best support that. It's a very good question. It's I mean that we're very focused on and trying to think about how we can support that as best we can because undoubtedly, the strong population growth and migration growth is a big tailwind for the Australian economy. Clearly, the Commonwealth Bank is a beneficiary of higher economic growth, higher standards of living, Housing is an important economic and social issue. And so wherever we can, it should be a real objective, which it is to try to support that as best we can. I agree with you. I think, it's a very difficult issue over the next couple of years.
Melanie Kirk: The next question comes from Victor.
Victor German: I appreciate Matt and Alan, you've spent quite some time already talking about deposits and to quite a few questions. But given a lot of interest, I was hoping to get perhaps a little bit more color on that. In light of your comments around the strength of the deposit franchise and the benefit that you've got both in absolute and relative terms and noting your comments to previous questions on deposit mix, we still -- when we look at the numbers you presented today, we've seen about 5% reduction in transaction deposits for retail bank, about 7% reduction in the business bank. And yet, still, importantly, your transaction deposit balances are almost double the pre-COVID level in the retail bank and more than double in the business bank, while account numbers increased by around 40%. So considering all this, it would be good to hear your thoughts on the outlook for transaction accounts. To what extent do you think you can offset those outflows with account growth? Or do you still think that customers are likely to shift their money to higher interest rate accounts given the settings that we have in place? And also given, as you discussed, Market expects rate cuts to come through, whether it's later this year or next year, do you think some of the benefits that you talked about in your presentation relative to peers are likely to unwind? Or do you feel like there is offsets elsewhere, perhaps maybe on the cost line?
Matthew Comyn: Yes. I mean there's a number of questions within that Victor. I believe I'll start, Alan, you add. I mean, one of the points that you mentioned where I'd start is our consistent strategy for some time has been around winning a customer's main banking relationship, but often thought through the context of the transaction account. So that's been absolutely critical. For many years in the context of retail, particularly younger customers, obviously, and migrants business or a business transaction account has been a really strong part of our performance. I think it's more than 45% now digitally. I mean you can open a business transaction account with us in less than 7 minutes. So that primary account relationships, absolutely critical. We see that as quite a significant source of competitive advantage. It gives us a whole range of other benefits that accrue from that. Obviously, in addition to just liability-led funding advantage, stability of and consistency of earnings, risk identification, et cetera, et cetera. So that remains critical. And then, of course, there's different factors in both personnel and then in the business in terms of the period, business accounts can be lumpier. Some aspect of the retail performance is also a consequence of if you're below system and housing, you're losing some of the transactional relationship or offset balances that are going with that. Certainly, it sort of weighs on our mind, I think we see enormous strategic value long term in the deposit franchise and so some aspects of that. We're absolutely critical. We want to win every single day. There's some elements of it that we're sort of seeking to, of course, be both competitive, but again, be thoughtful about some of the pricing that's in market. I know the notice product that Mike announced earlier last year, that's sort of on track to hit $1 billion in balances. We want to be innovative. It links to our digital investments to have that deposit or main bank relationship payment is an important element of that as well.
Alan Docherty: Yes. Just to add a little bit of color on a couple of other metrics. I mean, we were really pleased with the overall deposit balance growth, as I mentioned in the presentation, over the period, and that's obviously added to the funding. On transaction accounts specifically, the momentum in the business bank has been excellent now for many haves. Our average weekly business transaction account openings are running at around sort of 4,000 a week. So we've been really pleased with the momentum in the Business Bank franchise. In the Retail Bank, over the last 12 months, we've had net new openings of retail transaction accounts of something like 650,000, and about half of those have been new to bank migrant account openings. So we've got a very -- we have historically and we've seen it again over the past 12 months, a very strong market share of those new migrant account openings in Australia. And obviously, with this record level of overseas net migration, that's been provided real franchise improvement and momentum within the Retail Bank. So both, I think, the Retail Bank and the Business Bank very focused on Net Promoter Scores, very focused on improving the service offering and the customer experience for our retail and business bank customers. You've seen that translate in NPS that's translating into MFI. And you've seen it in the account openings and in the overall balance. So yes, there's a temporary period of switching as we adjust to a higher rate environment that's expected, and we're pleased with the overall -- the underlying momentum that's in within our key franchises.
Victor German: I mean, I think no-one disputes the strength of the franchise, and obviously your share price supports that view as well. I'm just sort of wondering to what extent, because of the strength of the franchise, you've seen that substantial benefit coming through in terms of the proportion of transaction deposits that you have. And as that sort of normalizes, that relative advantage that you've seen and you've highlighted in the presentation relative to peers in terms of interest income starts to normalize? Or do you think that perhaps we're missing something?
Alan Docherty: No, thanks, Victor. I mean, I think as you know, the way we set up the replicating portfolio is very deliberately to avoid the position where you have very volatile returns from your liabilities through periods of changing rates. I mean, the point of the replicate portfolio is to invest that over a 5-year term. And so although, we've seen that sharp increase in the cash rate, we haven't yet seen that translate into net interest earnings, because it occurs over a 5-year tractor period. So, I think we've provided a lot of disclosure around the size and the exit tractor rate on the replicating portfolio. We've continued that again in this result. And so I think the relative size of our household deposit share and business transaction account share, the size of that structural interest rate risk hedge and then the sort of forward profile of that as you look at the 3-year swap rate on the equity hedge and the 5-year swap rate on the deposit hedge provides a structural tailwind to earnings both on an absolute and relative basis over the next few years.
Matthew Comyn: Yes. I mean, look, absent that hedge, yes, we get more leverage. We got a big deposit franchise and a rapidly rising rate environment. So we're able to benefit from that. As Alan said, the hedges give us consistency over a long period of time. We've got a big home loan book that's extremely high-yielding, high-quality risk asset. There's obviously been a lot of pricing pressure there. So the deposit franchise has been able to offset that because of the highest sort of deposit funding, it gives us less volatility. Some of those are short term, but that long-term feature in terms of consistency, predictability, we think flows all the way through into a market implied lower cost of capital, and that flows through into valuation amongst other things.
Melanie Kirk: The next question comes from Andrew Lyons.
Andrew Lyons: Andrew Lyons from Goldmans. Alan, just a first question for you. On Slide 34, you've recreated the slide you produced last half just in relation to the rough path of provisions under AASB9 versus the previous accounting standards. Can I firstly just have you to guess as to where you think your baseline ACL modeling currently sits on the economic cycle? And then more importantly, I guess, when we do at some point into the early expansion part of the curve, is the relevant reference point for where provisions are likely to be lower versus that level somewhere around the pre-COVID levels that you disclosed on Slide 33?
Alan Docherty: Yes. On the first point, I'll repeat something Matt said earlier, which is it's a very tough time for economic forecasts. I mean, you've seen another inflation surprise in the U.S. overnight. And the narrative can change very quickly. So I won't be drawn on where I think we are in the cycle other than what we've said. There's increasing pressure on real household disposable incomes. The full effect of the rates is still to roll through the economy. And I think it was set out very well and clearly in the recent RBA statement on Monetary Policy. So we'll look at it customer-by-customer, and we'll look at it sector-by-sector. I mean one of the points of this slide I'm trying to draw out as each sector is going to experience the cycle over a non-overlapping timeframe. So there's going to be a number of sectors. For example, you go office properties with very long weighted average lease terms, that plays out over a number of years. Other sectors exposed to discretionary consumer spending, you'd expect those impacts to roll through over a shorter time frame. So it's a very difficult business to sort of forecast the cycle. The cycle will manifest in aggregate, but also manifest an individual customer and sectoral level. So what we will do is continue to sort of keep everyone informed around what we are seeing at a sector level. And so that's the point of Slide 34 to provide that additional level below what we usually provide the total provisioning level to what we're seeing at an individual sector level. What was the second part of your question, Andrew?
Andrew Lyons: Alan, I guess it was just trying to sort of -- to the extent that when we entered the early expansion part of the curve whenever that might be, is a relevant reference point for that, the 1.29% that you disclosed on Slide 34, which is where you were pre that exogenous hit that was COVID?
Alan Docherty: Yes. I mean, pre-COVID, we've gone into the new accounting standard, AASB 9, we were running a buffer to the central scenario, I think, then of around $1 billion. So we're currently running a buffer of $2.2 billion to that central scenario. Look, as we look at it, it depends very much on what the economic situation is. If we look forward and we're seeing an improved if we're coming out of the trough of whatever contraction we see and we've seen an improved set of scenarios, then we'll run those top-down models and see what does that look like at probability would you assign to that? And that will determine where you end up in terms of the overall provisioning. So it's going to be very dependent on what we see customer-by-customer, sector-by-sector and how we weight the probabilities at that point in time. The last 24 hours, I think, have taught us things change quickly. So it's difficult to sit here today and make predictions about what we might do in 6 or 12 months around that overall level of provisioning. I think, as you know, Andrew, we've got a track record where we've had industry-leading levels of provisioning coverage. And that is a very deliberate choice to have those levels of provisioning coverage because it's another way that you can provide that long-term earning stability because undoubtedly you go through periods where there are tougher times and tougher conditions, and having greater earnings stability through those periods is one of the reasons we attract a lower market implied cost of capital. So there's real value tied up in having that additional layer of conservatism in some of the key balance sheet settings, including how we think about provisioning.
Melanie Kirk: The next question comes from Brendan.
Brendan Sproules: Brendan Sproules from Citi. I've just got a question for Matt. You made a comment in your presentation around the marginal cost of funding for home lending. You suggested it was wholesale funding. If I refer to Slide 67, you show here in this slide that household deposits over the last 6 and 12 months have actually grown faster than home lending. To what extent is your strategy in the business side, where obviously lending has been growing much faster than business deposits, actually impacting the volume growth in your home lending book?
Matthew Comyn: No, I mean, not at all, Brendan. I mean, look, we've -- I think we've talked a lot about sort of deposit funding and the importance of it, so I won't sort of labor that point. And then, you know, we saw very strong liability growth probably going up to sort of 3 periods ago, exceeding in the Business Bank liabilities over assets. Clearly, there's been a bit more of a contraction in terms of deposits, which you'd expect across businesses more broadly in the economy. I mean, we think about the overall settings, both at a group and an individual. We manage all of that through sort of transfer pricing on both assets and liabilities. We have a funding plan. We review that regularly around forecasts. We're not constrained in home lending. From a funding perspective, the constraint that was most evident and visible to us all of last calendar year was just the poor return profile that it was earning, certainly to a historical basis.
Brendan Sproules: So, given that, I guess my second question would be, what would have to change, I guess, in the mortgage market for you to grow back its system?
Matthew Comyn: Well, I mean, we regularly review pricing. We have to think about it both in the short term and in the long term. You've got to weight some of those factors. I think we certainly made our views quite clear last year. It was a challenging year to navigate. As you can see, sort of tactically and where we're choosing to compete, there's deliberate choices. We've certainly moved closer to the market on pricing and we'll continue to review that regularly. I mean, if pricing or risk was, not commensurate with, I guess, our expectations, so i.e. if we're not generating a return above cost of capital. And we sort of look at that also in the context of, Alan talked about basis risk or cash bill spread. I mean, that's been much lower. I mean, that could conceivably increase. And so we're sort of thinking about that in all of those sort of marginal pricing decisions. As I said, I think there was some improvement towards the end of last calendar year, and hence we've adjusted our posture. But I think it's important that we're sort of managing both through the short and the long term on a number of those aspects.
Melanie Kirk: The final set of questions will come from Ed Henning.
Ed Henning: 2 quick ones, hopefully, for you. Alan, before you talked about some OCR lags, I just wanted to double check if you think about the margin walk. Did that come through in the deposit price competition? And if it did, should that slow down in the next half, reducing that headwind there as a first one? And then the second one, just going back to capital, obviously you've got plenty of surplus capital. Why haven't you accelerated the buyback or looked at other capital returns? And should we expect the buyback to accelerate in the second half and you guys to look to utilize some of your excess capital?
Alan Docherty: On the first one, well, look, there was no hikes in the first quarter. There was a hike in the second quarter. So that was the comment on the timing of the cash rate lags. That occurs on both sides of the balance sheet. So you'll see it's not a material amount, but it just changed slightly the dynamic between the first quarter, how that compared to the second half quarterly average in the second quarter. That's an earlier question, but it wasn't a large change, but it just slightly changed the overall margin decline between 1Q and 2Q. And so given we've only seen one hike in the last 6 months, it won't be a material impact on second half margins. On capital management and the buyback, we're constrained by available trading windows, as you know. I mean, we're going to be, again, neutralizing the interim dividend. And so we're going to be on market buying shares to satisfy that DRP issuance through February and most of March. Then obviously, when we go through our Q3 processes, we are out of market. We're in a blackout period between the period where we closed the books for the third quarter and the reporting of that, which will occur in the early part of May. There's really, as we talked about before, limited available trading windows. We'll continue to progress and prosecute our on-market buyback through that period. It's difficult to have accelerations of buybacks without putting undue pressure, given our stock is not one of the largest volumes. So you want to have got a large volume of purchases to make. So you don't want to put undue pressure on daily trading volumes as you execute that buyback. So we continue to monitor that closely and we will continue to progress that through 2024.
Ed Henning: Just with that Alan, do you then have to get alternative capital returns if you can't buy back enough stock? But $1 billion buyback shouldn't be too big to get done in a half?
Alan Docherty: Well, I mean, we did. It depends how big the participation rate, for example, is in the DRP. So as I said, we had the highest level of participation in that August final dividend that we'd had in 10 hubs and one of the largest undiscounted participation rates that we've seen over the last sort of 10 years. So there's a substantial amount of on-market purchase required just to satisfy the neutralization. And then we'll look at available trading windows to complete the on-market. Yes, we look at the -- I mean, there's obviously limited opportunities to return capital other than via dividends or via an on-market purchase. The off-market buyback is no longer an option available to companies in Australia. And so you've got a choice of dividends or on-market purchases. And as you can see, and it's been a consistent part of our capital management framework, we want to pay a strong dividend. We want to pay a sustainable dividend. That's what we seek to do. And so that becomes part of the 6-monthly Board decision around any capital management actions, including the level and any growth in the dividend.
Melanie Kirk: Thank you. That brings us to the end of the briefing. Thank you for joining us, and we look forward to continuing the conversation with you. Thank you.
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