Earnings call: NAB reports mixed results, plans for digital growth

National Australia Bank (OTC:NABZY) (NAB) has disclosed its first-half 2024 financial results, revealing a slight decline in underlying earnings and cash earnings, attributed to flat revenue growth and increased costs. Despite the challenges, the bank announced a substantial $1.5 billion increase in its on-market share buyback, signaling confidence in its financial position.

NAB's CEO Andrew Irvine emphasized the bank's commitment to customer service, fraud prevention, and digital innovation, with a particular focus on a new unsecured lending platform. The bank's New Zealand operations outperformed, showcasing strength in a tough market. However, the Australian economy's slow growth and below-trend GDP projections present a cautious outlook for the future.

Key Takeaways

• NAB's underlying earnings decreased by 1.1%, with cash earnings down by 3.1%.
• Balance sheet settings remained cautious, with capital levels above the target range.
• Retail banking faced competitive challenges, while the New Zealand division excelled.
• A $1.5 billion increase in the share buyback program was announced.
• A new unsecured lending platform is underway, with completion expected by December 2025.
• NAB is experiencing balance sheet growth in business lending, home lending, and household deposits.
• Net interest margin (NIM) increased slightly, but lending margins faced pressure.
• Cost growth has slowed, and credit impairment charges reduced, but asset quality across the lending portfolio has deteriorated.
• The bank maintains a conservative stance due to an uncertain economic outlook.

Company Outlook

• NAB aims to enhance customer experiences and returns to shareholders through its long-term strategy.
• The bank will invest in digital servicing experiences and focus on customer centricity.
• NAB is cautious about increasing risk exposure given the uncertain economic climate.

Bearish Highlights

• The Australian economy is experiencing slower growth with real GDP expected to remain below trend.
• Higher rates and inflation have impacted the economy, leading to a broad-based deterioration in mortgage and business lending portfolios.

Bullish Highlights

• New Zealand's banking division delivered strong results.
• The bank reported solid balance sheet momentum with growth in key lending areas.
• Business credit growth has exceeded expectations, with the highest pipeline levels in company history.

Misses

• Underlying earnings and cash earnings both saw a decline.
• Competitive pressures and higher funding costs have led to a decrease in lending margins.
• Asset quality deterioration observed, despite a decrease in the impaired ratio.

Q&A Highlights

• CEO Andrew Irvine discussed the potential for taking on more risk and the need for a conversation about lending settings in Australia.
• CFO Nathan Goonan detailed the bank's capital management strategy and addressed the mix of deposits.
• The executives did not provide specific guidance on margins for the second half but noted factors that will influence them.

In conclusion, NAB's earnings call revealed a mix of challenges and opportunities. The bank is navigating a complex economic landscape with a clear strategy focused on digital innovation, customer service, and prudent capital management. With a cautious but proactive approach, NAB is positioning itself to support growth and maintain resilience in the face of headwinds. The ticker for National Australia Bank is NAB.

InvestingPro Insights

National Australia Bank (NAB), with its recent financial disclosures, has shown resilience in the face of economic challenges. In light of this, certain metrics and tips from InvestingPro can provide investors with a deeper understanding of NAB's financial health and stock performance.

InvestingPro Data highlights include a robust Market Cap of $69.51 billion USD, indicating a significant presence in the market. The company's P/E Ratio stands at 15.3, which adjusts to a slightly more favorable 14.17 when looking at the last twelve months as of Q4 2023. Additionally, the Revenue Growth over the same period was 7.51%, showcasing the bank's ability to increase its earnings despite economic uncertainties.

InvestingPro Tips for NAB reveal a mixed financial picture. On the positive side, the bank has raised its dividend for 3 consecutive years and has maintained dividend payments for an impressive 32 consecutive years. This consistent return to shareholders may be attractive to income-focused investors. Moreover, analysts are optimistic about the company's profitability, predicting NAB will be profitable this year, which has already been profitable over the last twelve months. However, it is important to note that NAB is also quickly burning through cash and suffers from weak gross profit margins, which could be points of concern for potential investors.

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Full transcript - National Australia Bank Ltd (NABZY) Q2 2024:

Operator: Thank you for standing by and welcome to the National Australia Bank First Half 2024 Results Presentation. [Operator Instructions] Go ahead, please.

Sally Mihell: Thank you, operator. Good morning, everyone and thank you for joining us today for NAB’s half year 2024 results. My name is Sally Mihell, I am the Head of Investor Relations. I would like to acknowledge the traditional owners of the land I am joining you from, the Wurundjeri people of the Kulin Nation. I’d like to pay respect to the elders past, present and emerging and to the elders of the traditional lands in which you are also joining from. Presenting today will be Andrew Irvine, our Group CEO; and Nathan Goonan, our Group CFO. We are also joined in the room by members of NAB’s executive team. Andrew and Nathan will provide an overview of our performance this half. Andrew will also provide some comments on the outlook and his priorities for the second half. Following the presentation, there will be an opportunity to ask questions, but you’ll need to be on the phone line. I’ll now hand to Andrew.

Andrew Irvine: Thank you, Sally, and welcome to everyone for our first half 2024 results. It’s an absolute honor for me to be presenting our results to you all for the first time. I have now been in the CEO role for 5 weeks, and have spent the bulk of my time listening and learning from our customers and from our colleagues. And what I have seen and heard reinforces what I had experienced in my 3.5 years running the business in private bank as part of NAB’s ELT. That is, that this is a good bank that is getting better. We have the right mix of businesses, allowing us to make choices about where to invest and where to grow. We also have a team focused on delivering better outcomes for customers by executing well every day. We saw the benefits of this through the consistent execution of our strategy across all divisions this half in what was certainly a challenging environment. Higher interest rates and inflation are weighing on households and the broader economy, resulting in slower growth across our Australian and our New Zealand markets. Against this backdrop, NAB’s balance sheet settings remain prudent. Our capital is above our target range, and we have maintained strong provisioning and liquidity levels. The majority of our customers have been resilient to date, reflecting the underlying strength in the employment market, together with strong cash balances. However, we do know some customers are struggling, and we are here to support those who need our help. I recently announced the appointment of new executives to lead our customer-facing businesses in Australia. This completes a strong executive leadership team to take NAB forward. Our financial results this half are pleasing in the context of a relatively strong second half ‘23 results. Underlying earnings decreased by 1.1% as broadly flat revenue was more than offset by higher costs. Cash earnings fell 3.1% over the half as lower impairment charges were more than offset by increase in the effective tax rate. Nathan will spend time shortly discussing in more detail the key drivers of the group’s financial performance. The interim dividend of $0.84 represents 74% of cash earnings for the half. The performance of our businesses over the half reflects the consistent execution of our strategy and deliberate choices we have made to mitigate the impact on ongoing competitive pressures on our returns. Across our two business-focused franchises, underlying profits were broadly stable in the half. These two divisions contributed almost 70% of total underlying earnings for the group in the first half of ‘24. The retail banking environment remains highly competitive, with lower margins in both home lending and deposits, challenging returns. While a disciplined approach in growth in home lending and cost management helped mitigate the impact on financial results, the underlying profit in Personal Banking declined by 9% this half. New Zealand Banking delivered a strong performance with a 4% increase in underlying earnings and a 16-basis point improvement in the return on risk-weighted assets. This is particularly pleasing given the broader slowdown in the New Zealand economy, which has seen real GDP for 0.3% over the course of 2023. This is one of our favorite slides because it shows our progress over recent years. Disciplined execution of our strategy should continue to deliver better returns to shareholders through an attractive return on equity and growth in cash EPS to support sustainable dividends. As indicated last year, our 2023 return on equity benefited from a rapid increase in cash rates. Our cash ROE this half has declined to 11.7%, broadly in line with the returns in 2022. This has benefited from a focus on reducing share count while maintaining a strong capital position. Having strong balance sheet settings is essential to our ability to deliver sustainable returns through the cycle. Our common equity Tier 1 ratio of 12.15% is comfortably above the target range of 11 to 11.5 percentage points. This provides the opportunity for further capital management. And today, we have announced a $1.5 billion increase in our current on-market buyback. APRA’s decision to remove the $500 million operational risk overplay, reflecting their recognition of improvements in our governance, in our risk, and in our culture since 2019 has been an important milestone this period, adding to our strong capital position. Collective provisions at 31 March remains strong at 1.47% of credit risk-weighted assets. Our total collective provision balance of $5.4 billion includes around $2.1 billion of forward-looking provisions, which positions us well for any further deterioration in asset quality. Both the liquidity coverage ratio and net stable funding ratio are well above minimum requirements. And our consistent focus on growing customer deposits has helped drive an increase in the share of lending, funded by customer deposits from 70% in 2019 to 82% today. This will remain an absolute priority for our bank. Households overall have been resilient in this more challenging environment. People are managing their money more through services such as our in-app money management and financial well-being tools, as they face a higher cost of living, including higher rates. But the impacts are uneven and a small number of customers have required extra support. As always, we are here to help them. And to anyone experiencing financial difficulty, I say, please get in touch with us. It’s one of the most important calls you can make. More broadly, there are parts of the community that are doing it really tough. Just last week, I met with partners at the Salvation Army and the Good Shepherd, and they are seeing much higher demand for their services across the community, including from renters and lower income workers. We will continue to work with vital organizations like these to try and find solutions. Another key focus for customer support from NAB has been in frauds and scams. We continue to work with government, other corporates and our communities to educate customers and implement tools that can help keep our customers safe. While together, we have more to do, the actions we have taken have helped prevent and recover more than $260 million in scam losses for customers since September 2021. This includes more than $60 million in the last half. Four years ago, Ross presented our refreshed group strategy. This is a long-term strategy that serves our bank well. It’s the core to the actions we take every day across our business to deliver better outcomes for customers and for colleagues regardless of the environment. Over the next few months, we will assess our progress against this strategy. We will consider the opportunities and the implications of the external environment to see where this strategy needs to evolve. Importantly, however, our focus on consistent disciplined execution will not change, nor will the focus on customers. I’ll talk more about this after Nathan’s presentation. Investing in our colleagues is key to delivering the better customer experience and overall performance we strive for as a bank. Colleague engagement is stable and in line with our target of top quartile performance. We’ve been investing in tools to make delivering a better service to customers easier for our frontline colleagues. This includes the rollout of a single CRM platform for all of our bankers and leveraging data and analytics to drive better engagement with our customers. Our ambition is to deliver consistently good experiences for all of our customers. This is an area we clearly have more to do. We remain number one in high net worth and mass affluent and number two in our consumer business. However, our business Net Promoter Score has declined this half, and we are now number four. This is deeply disappointing, and we have done a lot of work to understand our customers’ feedback. In our Business Bank, in particular, we know many of our customers have been impacted by our EU-related KYC remediation that we have been undertaking. Frankly, we need to manage this effort better for our customers, and we are taking actions to address this. As I mentioned upfront, each of our businesses have been executing well and in line with our strategic direction. Business and Private Banking is a key differentiator for NAB. Our ambition is to maintain clear market leadership through a relationship approach increasingly enabled by digital, data and analytics. This includes simplifying and digitizing our business lending processes, investing in innovative payment solutions, and leveraging our integrated private wealth offering. Our investment is delivering strong balance sheet outcomes with 8.6% growth in business lending and 6.4% growth in customer deposits year-on-year. We continue to see good opportunities to grow this business at attractive returns. Corporate and Institutional Banking has had a consistent focus on improving returns through the cycle. Selective growth and disciplined balance sheet usage are key, underpinned by deep and long-standing relationships with our core customers in targeted growth segments. We have also been investing to enhance our transaction banking capability and support growth in our at core deposits, along with increasingly simplifying this business. This approach has delivered an increase in ROE of 520 basis points to 16.3% over the last 3 years. In Personal Banking, our ambition is to deliver simple and digital banking for customers. Today, 75% of simple everyday banking products are now opened digitally and 95% of proprietary home lending flow is now eligible to be submitted via our Simple Home Loans platform, supporting better customer experiences and improved banker productivity. Given competitive dynamics, we maintained a selective approach to growth in Australian home lending this period. This has seen mortgage balances in Personal Banking grow 1.7% over the 12 months to March. This is lower than the 6.5% growth in Home Lending in Business and Private Banking, reflecting a deliberate management skew to growth in higher returning channels. We acquired the Citi consumer business just under 2 years ago. In that time, we have been focused on building a new unsecured lending platform and the integration of the Citi business on to NAB systems. We’ve made good progress in delivering this major transaction to date. This includes the recent very successful migration of around 425,000 Citi mortgage deposit and wealth customers onto NAB systems. We are also leveraging Citi’s capability in areas such as commercial crits as well as in our private wealth business. Our new unsecured lending platform will enable us to deliver market-leading digital capabilities and drive product innovation in unsecured lending. This is, however, a complex project, and it’s important that we get it right. We have decided to extend the integration and migration time line by 12 months to December 2025. Although it will take us longer to exit the transitional services agreement with Citi globally, I’m pleased to confirm that the targeted cost synergies are on track. Our New Zealand business is a bit of a quiet achiever for NAB and is executing very well in what is a very challenging marketplace. Dan and his team are focused on delivering better customer outcomes through simplification and through improved digital banking capability, and this is working. Despite a low growth environment, BNZ has grown its customer base and delivered strong growth in retail banking, where it is underweight. Importantly, the business has been able to maintain returns with cash earnings on average RWA improving by 16 basis points in the half. Consistent execution of our core strategic priorities has delivered good balance sheet momentum across our business over the past 3 years. This includes deliberate choices, which supported strong growth in higher returning segments. Our SME franchise grew business lending 35% over this period and growth in total business deposits has been well above system. Over 3 years, growth in both home lending and household deposits has been in line with system. This is a very good result in a highly competitive environment and reflects the actions taken to balance volume growth and margin outcomes. This disciplined growth, together with a focus on productivity and prudent balance sheet management remain key to the delivery of attractive and sustainable shareholder returns over time. I will now pass to Nathan, who will take you through the results in more detail.

Nathan Goonan: Thanks, Andrew, and good morning, everyone. Let’s start with a high level overview of the financials. Our results this period show a stabilizing half-on-half trend. To summarize, compared with second half ‘23, underlying profit was slightly lower with cost increases outpacing flattish revenue growth. The cash earnings decline of 3.1% is more than the movement in underlying profit. Credit impairment charges were lower, but this was more than offset by higher effective tax rate, mainly impacting Corporate and Institutional Banking, which relates to the repeal of the offshore banking unit tax concession. Statutory profit rose 1.4%, with the GAAP to cash earnings, mainly reflecting volatility in some of our economic hedges and the recognition of a deferred tax asset as a result of our New Zealand Wealth transaction. Revenues were flat over the half or 1% lower, excluding markets and treasury income. Volumes contributed $115 million, mainly driven by business lending, while home lending growth was more subdued, reflecting a disciplined approach. As expected, margins have been the main drag on revenue again this period, representing a $226 million decline. Fees and commissions rose $62 million with the key drivers, including higher business lending and capital market fees. Total revenue growth this period has also been impacted by $22 million of lower equity accounted earnings from our investment in MLC Life and $19 million higher customer remediation charges. Markets and treasury income rose $94 million with more favorable trading conditions and higher customer risk management in first half ‘24. I will spend quite a bit of time now discussing NIM trends given the importance of margins. Overall, NIM trends have stabilized after a number of volatile halves. This is consistent with the more stable interest rate environment. NIM rose 1 basis point over the half. Markets and Treasury was a benefit of 4 basis points, and the impact of holding lower average liquids was a benefit of 1 basis point. Both of these items have been largely revenue-neutral in this period. Excluding markets and treasury, NIM fell 3 basis points. A key driver has again been lending margin down 4 basis points. However, the pace of decline in this period has slowed from recent halves. Consistent with prior halves, this mainly reflects competitive pressures in Australian home lending. Funding costs were a drag of 2 basis points related to higher short-term and term funding costs, including 1 basis point from the impact of the first tranche of TFF maturing. Deposits were a drag of 2 basis points. Key drivers have been higher TD costs and deposit mix, including the full period impact of changes in the second half ‘23 flowing through. This was partially offset by the impact of cash rate changes. The overall impact across deposits and capital from our higher Australian replicating portfolio returns has been 3 basis points this half, with a further 1 basis point from New Zealand replicating portfolios. The bulk of the impact this period relates to our capital hedge. The volume of our Australian deposit hedge reduced $2 billion in the half due to underlying deposit mix and volume changes. Our approach to managing these hedges remains unchanged, and they will continue to provide an important earnings stability through the cycle. Looking forward, we’ve included a broad outline of some of the key trends that we will form part of the overall margin outcomes in the second half ‘24. Headwinds from the impact of home lending competition appear to be moderating. A similar situation is expected for TD cost impacts in the second half given a fairly subdued uplift in pricing in the first half. Deposit mix trends are harder to predict and are also impacted by the percentage of customers earning bonus and introductory rates in savings accounts. Regardless of any future mix movements, the full period impact of mix changes experienced this half will flow through into the second half averages. Funding costs will include the impact of TFF refinancing estimated at approximately 1 basis point in the second half ‘24. Funding costs are also sensitive to changes in short-term rates, including Bills OIS and basis spread. Changes in our balance sheet structure over recent periods means our NIM is now more sensitive to moves in Bill OIS spreads, which currently remains below long-term historical averages. Every 6 basis points move in the spread impacts our NIM by approximately 1 basis point. Liquids will move around in the second half with the repayment of the TFF in June, but the impact on NIM in the second half is expected to be fairly minimal and is broadly neutral to revenue. We continue to expect a tailwind from higher interest rates on our deposit and capital replicating portfolios. This benefit is estimated at approximately 4 to 5 basis points from our Australian and New Zealand portfolios in the second half based on the 31 March swap rates and volumes. Australian housing lending has been a key source of industry margin pressure in recent periods. As Andrew noted, we have been managing this impact through a disciplined and deliberate approach, which has seen us grow at an overall 0.9x system level over the 6 months to March. There are encouraging signs of changing market dynamics, which support a stabilizing margin outlook. Front book pricing for the industry is improving. At the same time, our back book repricing volumes have reduced from their peak and are now similar to pre-COVID levels, reflecting the more stable interest rate environment and a declining level of fixed rate expiries. These factors are also driving a lower percentage of refinancing volumes in the market. A shift towards a stronger new purchase market is also a positive. In recent years, when these market dynamics have existed, we know our service proposition has provided greater opportunities for NAB. While these are encouraging trends, we expect the Australian home lending market to stay highly competitive and current returns remain challenged, especially in the context of our overall lending portfolio. As such, we will continue to take a disciplined approach and iterate our settings to align with market dynamics. This includes a focus on improving the performance of our proprietary channels, which show encouraging early signs from a range of initiatives underway. Another important area of focus for us is cost. Consistent with our expectations, we have seen slowing cost growth compared with full year ‘23 levels. Costs rose 1.6% over the half year or 2.5% excluding the impact of the provision for the federal government’s compensation scheme of last resort booked in the second half ‘23. There’s a number of key points to call out here. Firstly, salary-related costs rose $49 million this half. This primarily reflects pay increases under our Australian enterprise agreement from 1 January 2024 and the non-repeat of the $30 million one-off enterprise agreement-related costs booked in the second half ‘23. Secondly, volume and new business-related costs increased $26 million. As expected, this is a slower growth rate than second half ‘23, which included the full period impact of full year ‘22 hires in B&PB to support growth, extra colleagues supporting customers in our call centers and NAB assist and additional costs associated with the establishment of new businesses. Thirdly, tech and investment spend rose $80 million. This reflects additional licensing and support costs along with higher cloud and mainframe usage plus technology resilient spend. Investment spend was lower in the first half ‘24 mainly relating to the timing of spend on various initiatives, partly offset by a higher OpEx ratio this period. D&A charges rose $24 million. Other costs increased $66 million. This includes $32 million uplift in financial client-related costs along with higher redundancies and short-term incentive costs. In addition, we have incurred a higher level of customer-related remediation charges in the first half ‘24. Helping offset these headwinds, our productivity savings of $189 million achieved through simplification, digitization and process improvement. Looking ahead to full year cost growth, the considerations listed here are unchanged from what we laid out in November. We continue to expect FY ‘24 cost to increase at a slower rate than the FY ‘23 growth of 5.6%. This is supported by a more stable volume and inflationary environment and a continued disciplined approach to expenses. The next two slides relate to CIC’s asset quality and provisioning. As the economic environment has become increasingly challenging, there has been an expected deterioration in the asset quality of our lending portfolio. But the overall message here is that customers are adapting, finding ways to manage their finances and remain resilient. Credit impairment charges reduced over the half to $363 million or 10 basis points of GLAs. This includes underlying charges of $403 million, reflecting volume growth in Business and Private Bank, and asset quality deterioration across the retail portfolios. This has been partially offset by the impact of higher house prices and a lower level of specific charges, which includes a small number of single name write-backs and recoveries. CICs this half also include a net $40 million released from forward-looking provisions, including releases from the Australian mortgage and Australian Energy forward-looking adjustments, reflecting the improved outlook for these sectors. The overall ratio of watch loans and non-performing exposures has increased over the half at a similar pace to prior period. The uplift in watch and default reflects a continued broad-based deterioration across the group’s mortgage portfolio and the business lending portfolios in B&PB and New Zealand, consistent with softer economic environment. Similar to the second half ‘23, we are continuing to see very little conversion of higher arrears into impairment, given strong security positions and current asset valuations. In first half ‘24, the impaired ratio is lower, reflecting a decrease in the portfolio of restructured loans relating to customers in New Zealand impacted by severe weather events that have returned to performing during the half. Excluding these New Zealand loans, the gross impaired asset ratio would have increased 1 basis point. While we are pleased with the performance of the portfolio, strong provisions have been a feature of this bank for a while now and continue to be. Collective provisions increased $137 million from September. This mainly reflects volume growth and deteriorating underlying experience. Total collective provisions stand at $5.4 billion, representing 1.47% of credit risk-weighted assets, unchanged from September. Total provisions of $5.8 billion represents 1.7x our 100% base case economic scenario after excluding FLAs from the base case. While the overall economic environment in Australia is holding up, there remains continued uncertainty in the outlook. As such, forward-looking provisions within our CP have been maintained at strong levels. Capital management has been an important thematic for NAB in recent times, and we remain in a strong position. Our group CET1 ratio stands at 12.15%, 7 basis points lower than September ‘23. During the period, our on-market share buyback accounted for 23 basis points of core equity Tier 1. Credit risk-weighted asset moves were a further 25 basis point reduction, reflecting volume growth and asset quality deterioration. This was offset by cash earnings net of dividends plus other risk-weighted assets, which added 30 basis points, including the removal of the APRA’s operational risk capital add-on and lower IRRBB risk-weighted assets. Other was a drag of 9 basis points comprising of a number of items, including FX impacts and non-cash expenses. Some of these items can be volatile period-to-period. As Andrew noted earlier, we have today announced a $1.5 billion increase to our on-market share buyback, given continued strong capital levels relative to our target range of 11% to 11.5%. Allowing for this and the completion of the remaining $200 million of our current buyback, the pro forma CET1 ratio is 11.75%. Liquidity and funding have remained strong during this period with both ratios continuing to show large buffers to the 100% minimum requirement. Quarterly average LCR is slightly lower at 139% during the period, reflecting a reduced level of average liquid asset holdings post the repayment of the first tranche of TFF in September. NSFR increased 2 percentage points to 118% that is expected to normalize to pre-COVID levels over time, including the impact of removing favorable treatment of TFF collateral. Excluding TFF collateral treatment, our NSFR would be approximately 116%. We issued $23 billion of term wholesale funding during the period. This and our overall balance sheet settings see us well placed for the refinancing of the final $18 billion of TFF maturing in the third quarter while continuing to support ongoing growth in our franchise. I’ll now hand back to Andrew.

Andrew Irvine: Thank you, Nathan. Turning to the Australian economy, activity has slowed as the ongoing impact of higher rates and inflation weigh on households. Real GDP growth has slowed from 2.4% over 2022, and we expect this to remain at below trend rates of less than 2% over the course of 2024. Both housing and business credit growth have slowed from peaks seen in 2022. Although business credit has surprised on the upside, we do expect it will moderate over the back half of 2024 and stabilize in 2025. Overall, while some risks remain elevated, I am optimistic that the Australian economy will remain resilient and is on track for a soft landing. Last month, I announced the appointment of Rachel, Ana and Cath to run our customer-facing divisions in Australia. Rachel and Ana began in their roles on Monday. I am delighted that all these appointments were internal. This reflects the investment made in developing diverse talent and leadership capability. This is a strong and experienced leadership team that will take NAB forward and maintain the NAB momentum we have across our bank. The results we have outlined today demonstrate that consistent execution of our long-term strategy has served us well. 4 years into this strategy, it’s important we now assess how we are tracking against our ambition to deliver better outcomes for customers and for colleagues. You should not expect any major pivots to our strategy. During the next few months, we will ask ourselves what’s working well, where can we do better? What are the impacts of our external environment, and where do we need to evolve our bank? Two areas of focus will absolutely be greater customer centricity and ongoing simplification in our business. At the same time, the core foundation of our progress that is the relentless focus on disciplined execution will not change. We need to wake up every day trying to be better than the day before. This includes prioritizing what really matters, being clear on accountabilities, getting the basics right every single day, and treating every dollar like it is our own. We will not be distracted from completing major projects such as the AUSTRAC enforceable undertaking and the Citi integration. The completion of these projects will provide capacity to fund investments in new initiatives. I am confident in the outlook for NAB and the Australian economy over the longer term, and we continue to see good opportunities for growth in our core markets ahead. Thank you again for your time, and I’ll now hand back to Sally for Q&A.

Sally Mihell: Thank you, Andrew. As we move to Q&A, just a reminder to please limit yourselves to no more than two questions. Please go ahead, operator.

Operator: Thank you. [Operator Instructions] Your first question comes from Andrew Lyons with Goldman Sachs. Please go ahead.

Andrew Lyons: Yes, thanks and good morning. I’m just having a first question on your capital levels. You’ve announced today a $1.5 billion increase in your buyback, and your disclosures do note that this would bring your pro forma level 1 capital down to 11.4% within your target band. Nathan, maybe a question for you, can I just ask just how you’re thinking about your target levels and whether you would be comfortable at reporting date, having your CET1 ratio, whether it’s Level 1 or Level 2 sitting within the range, just knowing that it will fall going with divvy. So just sort of came to understand how you’re thinking about that target level?

Nathan Goonan: Yes. Thanks, Andrew. Good morning. I think you’re right to pick that up. The way we think about that is we’ve got the target range there, 11% to 11.5% it does. We do apply that to Level 1 and Level 2. So, we would be comfortable operating within that range, but we wouldn’t want our Level 1 ratio or our Level 2 ratio going below the bottom end of that. So, you’re noting there that we’ve got a gap as it stands between Level 1, Level 2, we’d be comfortable to operate Level 1 within that range or towards the bottom end of that range, and then we’ll have Level 2 above that while we’ve got that structural gap given where we are with New Zealand.

Andrew Lyons: So, just a bit more clarity I say. You are saying that if you went ex-dividend as long as Level 1 was within that 11% to 11.5%, you would be comfortable?

Nathan Goonan: Yes, that’s right, Andrew.

Andrew Lyons: Okay. Great. And then, Andrew just a second question on strategy, while you’ve noted no major pivot likely to the long-term strategy at this stage, one of your areas of focus include greater customer-centricity. Against this, your NPS disclosure suggests you now sit at number four of the major banks on business NPS. You did give us some detail as to what were the drivers of this deterioration. But I was just wondering if you could maybe talk about what you think needs to be done to improve that, to fix it? And whether there is likely any incremental investment that might be required above and beyond your $1.4 billion annual investment requirements?

Andrew Irvine: Yes. Thank you, Andrew. Look, I might just unpack a little bit of what happened in the half on NPS and talk then more broadly about where we want to take our offering. So, as mentioned in my opening remarks, we were impacted in the half with a significant effort on KYC remediation. To give you context, something like 45% of all of our customers were touched with KYC, where we needed to improve the information that we had on that customer base. Particularly challenging this half was trust remediation. We are required by law to visually site trust needs. And so, you can imagine some customers rifling around in the dusty attic trying to find documents they haven’t seen for many, many years, and they didn’t enjoy having to do that, and they let us know it. The good news is that we’re through that. And so, I do expect us to move away from our current NPS to something more like historical averages. But I’d tell you that even if we were second, I’d be complete – or first even, I’d be unhappy with that. We want to be outstanding bank for our customers that delights them, and we’ve got more to do there. I would say, firstly, that it’s going to be a long time before our colleagues are not the primary driver of customer experience. In the business bank, we have 2,000 relationship bankers, and they’re incredibly important to the customer service we deliver day in and day out. And then on the technology side, I think what we would say is that we have made a lot more progress on product origination and customer onboarding. There, most of our capabilities are much better today than they would have been 3 or 4 years ago. And they’re good experiences for customers. But customer’s service capabilities in our digital channels haven’t lifted as much. And I think we need to turn our attention to improving our digital servicing experiences. And we are absolutely going to do that over the coming months. I don’t want to give any guidance at this stage on what implications that has for our investment spend. We are going to be thinking that through over the course of the next few months. But either way, you can expect us to be highly disciplined and focused on getting excellent outcomes from whatever we do spend for our customers and for our shareholders.

Andrew Lyons: Thanks for the data.

Operator: Your next question comes from Jonathan Mott with Barrenjoey. Please go ahead.

Jonathan Mott: Hi, thanks for taking this call. And if I can just follow-up on that theme and in the business bank in particular. You’ve been in Australia now 3 or 4 years running the business bank and now our CEO. I wanted to ask you a question on a comment that Ross McEwan made, just as in his last probably public speech before, he resigned, when he was at the ASR briefing, and he said that regarding risk potential is swung a little too far should we be taking a bit more risk. Now, if you look at the underlying revenue and margin pressures that you’re seeing across the group, especially you can see in the business bank as well. And then you talked about the strong capital provisioning and balance sheet settings, do you think NAB should actually be taking a bit more risk now and supporting its customers in the economy, and also delivering better shareholder returns? Is there an opportunity just to turn that risk dial up a bit, as Ross McEwan suggested?

Andrew Irvine: Yes. I was there when Ross was having his victory lap talking about some of these things. Ross, if you’re on, I hope you’re doing well. Look, I would say, first and foremost, we don’t yet know how the cycle is going to fully play out. We’re still mid-cycle. So, we need to see how our credit losses manifest over time. I would say that it’s looking like credit losses are materially deviating from historical patterns. But there’s still sufficient uncertainty in the outlook that would suggest we don’t know that for certain, and we need to see how this one goes. I do think that the dialogue we’re having now in Australia regarding our settings, not just in business, but frankly, on the consumer side as well, is healthy. And one of the things that Ross would have said, and I would agree with wholeheartedly is that in and of themselves every single piece of legislation was effective and well-intended. The issue that we now have is the cumulative effect on all those different pieces of legislation and guidance, I think, has created an environment where there is more conservatism and more difficulty in extending credit. I think the best example is on credit cards where I would absolutely agree with the comment that it’s probably harder to get a credit card in Australia than anywhere else in the world. So, look, this is a conversation that we should be having as a country, and we’re happy to be part of the conversation. Thanks, Jonathan.

Jonathan Mott: And can I just quickly follow-up to – so you just had the last question and answer the last question around KYC. One of the issues with KYC is it’s not a set and forget. As you mentioned, it’s ongoing and you have to have an ongoing know-your-client relationship. So, two parts on that. Is this going to be an ongoing issue where you’re going to have to have an ongoing need to see trustees or whatever you do? Is there any way you can use technology to reduce that burden on your customers? And secondly, why are you seeing this? The other peers are not necessarily seeing it in the business bank at the moment?

Andrew Irvine: Yes. Well, look, I think first and foremost, we had to do some of this because we weren’t doing it over the many years in the past. And that’s why we’re in the situation where we have an enforceable undertaking with AUSTRAC. We weren’t doing it in the past. We’re certainly doing it now, and we’re getting through that. I think the improvement for us, and we need to take this one on the chin is that we’ve got to simplify it, lower the friction, and wherever possible, enable our customers to update their information digitally. And those are capabilities that we’re investing in very significantly at this moment in time. The challenge we had is that we had to deliver a remediation when not all those capabilities were in place. And some of it was done in a brute force way more traditionally, and the customers didn’t enjoy that.

Jonathan Mott: Thank you.

Operator: Your next question comes from Andrew Triggs with JPMorgan. Please go ahead.

Andrew Triggs: Thank you. And good morning. A question on the Business & Private Bank. Can you talk a little bit, Andrew, to the pipeline after SME growth? It’s been very strong as your numbers now and in the APRA stats a lot did come through or suggests a lot did come through in the March month. Can you talk to – you indicated that would slow in this and perhaps in later in the year, but what’s the immediate sort of near-term pipeline looking like?

Andrew Irvine: Yes. I’m happy to comment on that, Andrew. Thanks for the question. I would say over the course of the last 6 months, business credit growth has continued to surprise on the upside. If you had asked me 6 months ago whether we would be printing 8.6% business lending growth over the year, I would have said not a chance. And the simple fact is we’ve done that. The comment you’re referring to is earlier today, I disclosed that our pipelines in our business and private bank are the highest today than they’ve been in the history of our company. And in the context of the economic environment in which we’re operating, I think, for me to be up here saying that is, frankly, quite astonishing. I think some of that reflects the fact that we have a business that is performing well. And some of that also reflects the fact that there are large portions of the economy that continue to do business and grow and performing well. And I do believe it’s true that while there are sectors of the economy struggling and there are certainly customers that are struggling, the narrative is somewhat overweight to that and underweight to the large tracks of the economy that are doing well. And you look at areas like agriculture, metals and mining, the defense industry, healthcare, manufacturing, where many companies are bringing supply chains onshore. These are all areas where there is quite a lot of commercial activity, and we are seeing that day in and day out in the marketplace.

Andrew Triggs: Thanks, Andrew. And maybe a second question, just on the institutional bank, it’s probably not a – the CIB probably doesn’t get a great deal of focus by the market, but you reveal again today that it earned about a 16% ROE, which is a bigger institutional bank, I think gives a number around 13%. Can you talk to, A, the sustainability of that return profile, especially with respect to the interest rate environment; and B, are there mix or other explaining factors which points to that strong ROE relative to what you’d expect for an institutional bank?

Andrew Irvine: Yes. Now, happy to. Well, first of all, this business is a better business today than it was 3 years ago. And we’re really proud of what David and his team have accomplished over the last 3 to 4 years. We’ve really solidified long-term franchise relationships in target sectors that are enduring. And so, wherever you have that, I think you’re much more likely to have ongoing returns that are above cost of capital because you’re delivering a service and an experience that clients value. So, we’re really happy with this business. And I had the leadership team of this business here in 395 Berkeley, our headquarters in Melbourne, and I told them, look, if you can continue to deliver these types of outcomes with our franchise clients and do that safely, and you can fund it. Well, I’ll give you more money. And so, this is a business we like, and I think we’ll do a little bit more in it. And that’s also – when you look at the kind of returns that we’re seeing in certain other parts of our business, it’s actually a sensible strategy to let this business do a little bit more.

Andrew Triggs: And is it particularly sensitive – that ROE particularly sensitive to where interest rates are in Australia?

Andrew Irvine: Nathan, do you want to take that one?

Nathan Goonan: I think, Andrew, it’s Nathan here. The ROE has benefited quite a bit from the interest rate rise. It’s a really strong deposit franchise, and you can see that in the numbers. And certainly, one of the drivers has been pretty strong execution on that side, the liability side of the business. And so, yes, those returns come off when you get into a lower rate environment. So that’s something to be mindful of. But I think, as Andrew said, the team, in particular, has been pretty good on the asset side. So, I think they’re optimizing that. They’re very targeted on their segments. So, there’s some sustainable advantages in there, which we want to continue to prosecute. But the deposit side will have the rise and forward the rate, which will impact returns over time.

Andrew Triggs: Thanks, Nathan.

Operator: Your next question comes from Victor German with Macquarie Bank. Please go ahead.

Victor German: Thank you. Firstly, I was maybe hoping to follow-up from Andy’s question. So, it’s one for you, Nathan. I’m assuming when you said that your target to be about 11% plus the dividend includes that sort of 20 to 30 basis point reduction that you would see once the dividend is paid in terms of level 1 capital base. And when I look at your payout ratio, which is currently at about 74% top end of your target, at the same time, while impairments are still at cyclically low levels. I’d just be interested in any comments that you can maybe give us around potential inorganic opportunities around capital, like, for example, model adjustments that we should be considering over the next couple of years. I know that you still probably have some IRRBB benefits coming through. Or to what extent are you sort of working on assumptions that the impairment charges are going to stay very low for the medium-term and that will support your dividends going forward?

Nathan Goonan: Yes. Thanks, Victor, and good questions. I think that really, when you take all of that in the round, we’ve tried to get our settings in a spot where we start with a strong balance sheet with good provision levels, which gives us good earnings stability, and then on the capital side, we’ve tried to be conservative. But I think we’ve got settings on the dividend side, which gives us an opportunity to be able to generate excess capital over and above the dividend payout range. And then as we’ve said over a number of years now, we’ve got a bias to buy back to reduce our share count, which is something that we’ve been well underway with and would like to continue to have that bias towards it. As it then relates to sort of generating that capital in excess of that dividend payout ratio. Obviously, you’ve just got the fundamentals of focusing on the higher returning segments in our portfolio. There’s the impact of growth on where the risk-weighted asset growth will go. And then there is a lot that we invest in to optimize that capital. And as you said, we’ve probably had probably a lighter half this half than previous half on things like model adjustments and things that are coming through, and we’ve got a pretty healthy pipeline of those. As you know, we invest pretty heavily in making sure we do get those, and I would expect that will continue over the next half. In particular, in the second half, we’ve probably got a bigger than – we’ll certainly have a bigger half in the second half than we did in the first half as it relates to risk-weighted asset optimization.

Victor German: Okay. So, there’s still a reasonable pipeline on that journey?

Nathan Goonan: Yes, that’s still pretty helpful, Victor. And I’m happy to say I’d expect that to be bigger in the second half than it was in the first.

Victor German: Okay, thank you. And then my second question relates to Slide 77. If I look at your transaction accounts, they were slightly down – broadly slightly down, while most of the growth in deposits are coming through the saving accounts, which are obviously more expensive. I don’t know if you can maybe give us a little bit more sense in terms of how this evolves throughout the half. I thought it was interesting to hear you say that the outlook from mix is uncertain. And so, suggesting that perhaps there is no longer a drag. I guess is there any evidence to suggest that you may be able to see transaction accounts growing, or the growth they’re matching TDs and saving accounts and therefore, not to see any drag from the mix going forward?

Nathan Goonan: Yes. Thanks, Victor, and happy to clarify a couple of points here. I think the first point to say is we’ve been a similar story to what we had in the second half. And we’ve been really delighted with the growth in the deposit side of the business. And yes, it has skewed a little bit in the business bank to TD growth and in the personal bank that’s skewed to the savings products. But underlying both of that has been really core franchise growth and whether it be in the business bank, we know that the very vast majority of those customers have got more than one product with us. And so, we’ve been trying to do more with those customers, and we’re delighted with that outcome. And then in the – on the personal side, on the reward saver, just by its definition, the reward saver is you are attracting a core customer because you need the customer behavior of the core customer to actually qualify for the bonus rate. So, the first point is we’re sort of very happy with the growth there. In terms of the mix, I probably could just clarify that. I think we probably have seen a slowing in the mix to TDs. And so, you can see that at the group level. We probably have seen pretty consistent now over two halves and probably across the quarters as it relates to the reward saver. So, we’ve seen a little – a drifting up of both – we’ve been growing quite strongly, in particular in the reward saver product, and we’re probably seeing pretty consistent drifting up of those that are qualifying for the higher rate. So, I would expect the impact – the mix impact in the second half, which pulls through to probably a little bit more of the reward saver mix impact and the TD mix impact. And then the point about mix impact being hard to predict is it’s just, I guess, at this point in the cycle, some quarters, it feels like it plateaus and then we might have a bit more of a run on it. It’s just been a little bit more hard to predict. And so, I guess, we just stand by that statement. It is difficult to know where that might go.

Victor German: Thank you.

Operator: Your next question comes from Matt Dunger with Bank of America. Please go ahead.

Matt Dunger: Yes. Thank you for taking my question. If I could just follow on from the net interest margin outlook in the second half. Around deposit competition, are you able to just clarify, we haven’t really seen any outlook statements around deposit competition into the second half. How are you expecting that to play out as the term funding facility rolls off?

Nathan Goonan: Yes. Thanks, Matt. I think maybe I can just answer it a little bit more broadly on what we’re seeing in deposits and then come more specifically to competition, I guess, it has been competitive on the deposit side. It’s probably worth just unpacking a little bit given that you asked it as a margin question, just what’s underlying the 2 basis points of NIM compression from deposits in this half. And then that gives you a little lead into maybe how to think about it in the second half. And apologies here, I’m about to throw a lot of about 2 basis points at you. But we did have that 2 basis points in the half from deposits that we called out. Broadly, we’ve had about sort of a little bit over 2 basis points of that has been TD costs that have pulled through into this half. About 2 basis points of that’s been mixed, which is both the savings mix or savings products, more customers qualifying for the higher rates and also TD mix. And then that’s been offset, as we said, by both the replicating portfolio. And then importantly, in this half, we had some benefits from the last overnight cash rate rise. And so then, I guess, when you look forward on that, the replicating portfolio, we’ve said overall across capital and deposits for Australia and New Zealand, we’re expecting that to be 4 to 5 basis points in the half. The benefits from the overnight cash rate won’t repeat, so we don’t get that benefit again in the second half. And then I guess on TD costs, we’re expecting that to be more moderate into the second half. And we’ve got a slide in there just to try and be a little bit helpful there just showing where TD costs have been in the first half. And given that’s been pretty moderate, we don’t expect a big pull-through into the second half on those. And then I guess, you’ve got mix. And while it is harder to predict where it will go from here, we do know that we’ve got the impact of the mix changes that we had in the first half are going to impact second half. And so, you could probably anticipate that they might be similar to what we saw in the first half around that 2 basis points. So, that’s sort of a little bit of color as to the moving parts on deposits, maybe more specifically on competition around TFF. I guess, this has been a bit of a theme for a little while. And I think we’ve probably been pretty consistent in this matter. I think at the point that we took out the TFF some time ago, probably before we took it out, we had a plan to repay that in a pretty balanced way, which is not just all about deposits. And so, while it’s been a competitive environment in deposits, and we know that all the people who availed themselves of the TFF have wanted to be at or around their natural market share for deposits. We haven’t really seen any shocks and you can see it in that TD pricing on the chart as we’ve gone through the first tranches of TFF. And I don’t expect anything abnormal as it relates to the TFF in the next half either.

Matt Dunger: That’s perfect. Thank you very much. And if I could just follow-up on costs. You’re flagging an outlook for a slowdown in volume growth, still targeting the less than 5.6% underlying cost growth. We sort of saw the productivity initiatives probably more skewed towards the first half than what we had seen historically. Is there room to go harder on costs in the near-term, given the outlook seems to be for weaker top line growth?

Nathan Goonan: Yes, I’ll start, and maybe Andrew will just give some overall comments on how he sees it. I think you’re right, we’ve just reiterated our cost guidance from November. And I think that what you should take from that is that we set out that guidance in November. The challenge with guidance is you’re a little damned if you do, damned if you don’t. So, the message you should take from the unchanged guidance is that we had clear plans when we gave that guidance, and we’re pleased with how we’re executing against those plans. So, there’s sort of nothing new to flag in that. And importantly, I think underlying that, we spoke at the full year about a couple of areas we thought cost growth could moderate, both in salary expenses and in volume, and both of those look to be playing out the way that we would have hoped. I think in terms of whether you can go harder in the short-term, there’s always opportunities to do things in the short-term to get short-term outcomes on expenses. I think as a management team, we’ve got to balance both – we’ve got a strong growing franchise, which is doing – we think, doing well in the market with good momentum on both sides of the balance sheet. And a lot of our productivity is getting delivered by programs of work that are multiyear, they’ve been delivering over that period. And so, while you can always do things that give you that short-term outcome, I guess we’re just balancing that short-term, long-term, and continuing to invest in the franchise. And we feel like we’ve got that balance right for the immediate term, and then we’ll have a look at things, as Andrew said, as we get into the second half.

Andrew Irvine: Well said, Nathan. The only point I’d say is that culturally, this is going to be a bank and a management team that’s going to continue to be incredibly disciplined and watchful around costs. And we’re going to be thoughtful. You can constrain costs that are helpful to growth and helpful to customer outcomes. And we’ve got to make sure that we’re focused on the right areas, focusing on simplification, on waste and on costs that don’t drive good outcomes for customers and for shareholders, and you can rely on us to continue to do that.

Matt Dunger: Thank you very much.

Operator: Your next question comes from Carlos Cacho with Jarden. Please go ahead.

Carlos Cacho: Thank you very much. I’m just interested in getting your thoughts around your provisioning. You now expect a soft landing and you did slightly upgrade your base case, but you did downgrade the downside case despite that improving outlook, maintaining a very solid level of collective provisioning coverage. Two questions related to this. I guess, given the current coverage level is relatively elevated versus history, where do you – do you have any thoughts on kind of where you see that level through the cycle as it relates to collective provisioning as a percentage of risk-weighted assets?

Andrew Irvine: Well, maybe I’ll take that first, Carlos, and Nathan, if you want to jump in after. I would say, first and foremost, that we are not seeing the portfolio perform as we would have expected at this stage of the economic cycle. So, while areas and impairments have increased on the margin, they’re quite a bit lower than we would have expected. That, I think, highlights the resilience that we’ve seen in the economy and the prudence that we’ve had in extending capital to our customers. So, if that were all we looked at, I think we would have released the challenge. I think, what we have is that there’s still sufficient uncertainty in the outlook and potential downside scenarios that we just didn’t feel it was the right time for us to be releasing. And so, we just wanted to keep conservative settings and we’ll keep watching that. And if we think the situation changes, we’ll take a different tack. But for now, I’m very comfortable with the approach that we have taken. Nathan?

Nathan Goonan: Yes. Just Carlos, probably just one point just to clarify. I think just the changes in the downside scenario, they’re not really changes in the outlook or assumptions in the downside. So really, what we’ve done there is just update them for the current experience we’ve got. So, you’re just effectively pushing out the same scenario, and that leads to a little bit of change in some of the ECL there. But yes, that’s just a clarifying point, probably nothing more to add from where Andrew went.

Carlos Cacho: Great. Thank you very much. Secondly, just on mortgages. You made some comments earlier today in the press about broker mortgages – broker-originated mortgages being below the cost of capital. Despite that, your broker share of both the portfolio as well as originations has continued to increase. I just want to interested in any thoughts about given they are below the cost of capital, wouldn’t that suggest you probably want to be moving back towards proprietary? Is there anything you can do to do that? Is that just – or is it coming down to continuing to roll out the simple home loans offering and reducing the cost to ride a broker mortgage, which can help bring that cost hopefully a bit closer towards the cost of capital?

Andrew Irvine: I’ll jump on that as well and see how we go. So, what we’re seeing right now is that returns in proprietary channels are now above cost of capital. So, we’re seeing that primarily in our business bank, which also skews to investor and away from owner occupied. So, I think that’s pleasing. You’re right to say that in the broker channel, we are continuing to see sub cost of capital outcomes in those mortgages. There’s a chart in our investor presentation that shows that front book NIMs have stabilized and are actually now on an upward trajectory. They’re still a fair bit below where they would have been in the past. But I think the trajectory is better for the market. In terms of our approach to the broker channel, what we’ve essentially done is we’ve kept a premium to other providers. So, we generally price our product at 5-to-7-point premium to the market. And we still win in that channel because we have a superior proposition. And we generally do better with customers that are purchasing properties than we do with customers that are refinancing. Obviously, when purchasing a property, the service proposition, the amount of friction, the reduction in stress and having confidence and certainty, and a settlement are more important for customers and certainly also for brokers. And so, we generally do better in a purchase market than the refi market. So, that’s been our strategy. We believe our proposition deserves a premium and we price a premium to the market. But we haven’t moved away from the market and priced at 30 or 40 points above it so that we would see no flow. Right now, we see us, depending on the month, growing at something between 0.7 and 0.9x system, and I think we’re really happy with that setting. I am also happy to say that, well, I’m not going to disclose the actual percentages in terms of proper broker drawdowns in our businesses. In the last couple of quarters, we’ve had good improvements in front book application volumes across all of our channels, that I think are up about 3 points vis-a-vis kind of 3 to 6 months ago on prop versus broker, and we’re going to work really, really hard over the coming months for that to continue.

Nathan Goonan: And maybe, Carlos, I’ll just add one point to Andrew’s comments there. It’s also just important to note just the differences between the channels. So as Andrew said, we’ve sort of skewed towards the business bank here for home lending growth. The broker proportion that’s coming through business bank is very different to what we’d be getting through the personal bank. So often, that’s pretty much exclusively, that will be coming with some form of either paired lending or deposits, and also just gives us the opportunity to look at relationship-based pricing in that channel. So, it is a very different product than what we’d be getting in the brokers through the personal bank.

Carlos Cacho: Great. Thank you very much.

Operator: Your next question comes from John Storey with UBS. Please go ahead.

John Storey: Hi, Andrew. Hi, Nathan. Nice presentation. And thanks for taking my question. Just wanted to follow on from that trend a little bit in terms of what Carlos was asking about. One of the bright areas, I think, from your results, was just the performance of UBank. It’s a good story, I think, in a pretty challenged retail environment. Just wanted to get a little bit of an understanding of what’s kind of driven the success of the franchise? And secondly, just around that, what is the economics of UBank look like relative to your own brand within personal banking? That’s my first question.

Andrew Irvine: I’ll take that one, if I can, Nathan. We are really happy with this business and its proposition. What we see is that customers, particularly in our target segments of $18 million to $35 million love the UBank experience. I think our NPS scores are routinely at the very, very top. I think in the 40 points of positive NPS. And so, while the business has done well, I actually think it’s nowhere near reaching its potential. And going forward, you should expect UBank to become a bigger part of what it is we do in our company. So, it’s growing volumes. Both lending and deposits are up in the teens. And I think it can do a lot more for us. Young customers just love the experience. So, we’re going to continue to invest in it and continue to drive this proposition.

John Storey: And just on the economics?

Nathan Goonan: Yes, I’m happy to take that one, John, on the economics. I guess it would not be too dissimilar to the rest of the retail banking propositions. It’s got essentially in its deposit product suite, it’s largely a savings product. So, you’ve got – it has – so that would have the similar economics to our savings products in the retail bank. And then home lines, there’s nothing that’s different in the home line proposition there that generates different economics in the market. So that’s – it’s probably just exactly the same as what you’d expect in a normal retail bank. Where we’ve really tried to focus, as Andrew said, is just on customer growth here, and it’s probably more skewed that way to growing deposits more than home mines. It’s just – yes, that’s probably where it focuses.

John Storey: Okay. And then just – very quickly on my second question. There’s been a lot spoken about just in terms of your deposit strategy. One thing I just wanted to ask to get a big point of clarity on was just how quickly do your deposits reprice as rates potentially start to come down?

Nathan Goonan: Yes, it’s a good question on rate declines on the deposit books, John, and there’s obviously going to be a lot that will play out both in the market competitively and how they will – how things will play out over there. I guess, all things being equal, you could expect that the deposit books might behave on the way down like they did on the way up. So, the deposits that we’ve been able to – that have repriced as rates have risen at probably the same deposits that you’ll be able to reprice on the way down, all things being equal competitively, of course. And then you – I guess, just the general thesis that lower rates mean impact on the earnings of banks. You very quickly get to the low rate or the non-interest-bearing deposits that are unhedged as being that pool of deposits that will have a revenue impact for the bank as you get into a reducing rate environment. And I think one of the things that will be true is we’re probably less sensitive to rate decline than we were to the benefits on the way up. And I think the math on the sort of non-interest-bearing unhedged portion of our deposit portfolio is something like a 1 basis point impact for every 25-basis point rate decline. So, it’s a little bit worse, and you obviously get the benefit of those very conservative hedge positions that will flow through over that 5-year period.

John Storey: Thanks so much, Nathan.

Nathan Goonan: Thanks, John.

Operator: Your next question comes from Richard Wiles with Morgan Stanley. Please go ahead.

Andrew Irvine: Hi, Richard.

Richard Wiles: Hi, good morning. I actually wanted to ask on deposits as well. So, a bit of a follow-up to John’s question. I mean, my observation is that in retail deposits on the savings account side, there’s been almost no competition since December. The rates on our online saver accounts haven’t moved, the rates on reward saver accounts haven’t moved. So, I find it surprising that bank executives talk about how intense deposit competition is. That’s not what’s happening at least on advertise retail deposit rates. So, I’d like you to provide a bit more commentary on why you think deposits are so competitive? And then just to follow-up John’s question on the impact of lower rates. Nathan, you just said that you thought they might behave, deposits might behave the same way on the way down as they did on the way up. Could you clarify what exactly you mean by that? Does that mean that deposit rates don’t move as much as the cash rate? Or does it mean that deposits rate moved more than the cash rate?

Nathan Goonan: Yes, I’m happy to maybe start on that one, Richard, and thanks for the follow-up. I guess I was really more trying to make the point that I think our deposit products that have increased in rates on the way up will also be the ones that have at least the opportunity to move down in a declining rate environment, and therefore, not have a P&L impact on the bank. So, it was just as simple as that, Richard, if that makes – if that clarifies it. And then I can go into just the detail on the deposits more broadly. I guess, the point on the reward saver is – on the savings products has just simply been. We have seen a drift mix impacts in those. And so, what we’re seeing half-on-half and it’s been pretty consistent the last couple of halves is that we’ve got a higher proportion of those customers are either earning an introductory or retention type rate in our saver or they are earning the reward bonus in the reward saver. And so, both that product has been growing. And so, the impact of that mix shift has been larger half-on-half, and then also as more qualifying than that has been an impact. So, I think we have seen competition for the marginal TD has still been pretty strong out there. I think I was – I think I did say to Matt’s question, we haven’t seen that. But I don’t think I said intense competition. I think I was actually saying as it relates to TFF refinancing, we haven’t seen sort of spikes in competition on TDs. And we have got a chart there on Page 22, which just shows that TD pricing has been pretty stable in the half. So, I think we are seeing the impact of it because we are seeing more customers qualifying for the higher rates. But I think TD pricing has been pretty stable over the half as you observed.

Richard Wiles: Okay. That’s helpful. Thank you. And if I could just ask one more question relating to divisional margins. Your disclosure suggests that the business bank and the personal bank margins fell by roughly the same amount in the half, so both down sort of 8 basis points or 9 basis points in the half. Why were they in line, particularly given the older competition we have seen in the mortgage market? And which division do you think has a better margin outlook, B2B or personal?

Nathan Goonan: Yes. Thanks Richard. I think the way to think about the divisional margins is simply to look at the top of the house and you look at the margin impacts there. And the most significant margin impact still for the half has been lending margin. And as we have called out, that’s primarily been home lending. And then when you get into the divisions, it is just the proportional impact of those impacts on those divisions. And so, as Andrew said, we have grown home lending over this period at sort of 6% in our business bank, and we grew home lending in the personal bank by 1%. So, I think while there are other factors there and we are certainly – there is a little bit of competition in the 4 basis points of lending margin. There is a little bit of unsecured in that. There is a little bit of SME margin pressure in that, but it’s primarily home lending. And then when you get back into the divisions, it will just simply be the proportion of that. And then in business bank, you have got a little bit more of the impact of the skew to TDs. And then in the personal bank, you have a little bit more impact of the higher rates from the savings account. So, it’s just proportional to that.

Andrew Irvine: Yes. I think the fact was we chose to grow home lending in the business bank because we are getting better outcomes there, better absolute returns than we do in the personal bank. But of course, given the broader NIM headwinds in home lending, while that decision was entirely sensible, it does mean that the divisional NIMs contracted over the half, but I still think it was the right decision and the right choice. I think the good news is business lending margins have continued to remain robust. And while there was a modest decline at the group level, it was less than the basis point. So, I think we are pretty happy with the stability of business lending margins as well in the half.

Richard Wiles: So, you give away a bit more margin in the business bank, but you get much better volume outcomes and therefore, better overall revenue outcome, that’s why you think about it?

Andrew Irvine: No. I mean look, it’s a relationship-led strategy in the business bank, and so we are not price leaders there. We have to meet the market where the market is, but we are not leading on price.

Operator: Your next question comes from Brendan Sproules with Citi. Please go ahead.

Brendan Sproules: Good morning. It’s Brendan Sproules. I have just got a question on the outlook for the economy and the soft landing and how that impacts the earnings composition at NAB. I mean you show in Slide 30 that you expect business credit growth just slow as the economy slows, but business in private banking now contributes almost half of the group’s cash earnings, that’s up from the third 3 years ago. So, as we look out into ‘25 and ‘26 and we see slower business credit and probably reducing contribution from business and private banking, are we expected to see a pickup in profit in the other divisions, particularly in personal to offset that, or is there going to be just a little bit further rebasing just because of the mix of businesses that you have?

Andrew Irvine: Well, look, maybe I will take that, Brendan. First of all, I wouldn’t swap the mix of businesses that we have for anyone else’s mix. I think the fact that we skew to business-focused divisions is great for NAB. I mentioned that nearly 70% of cash earnings came from C&I and B&PB. And actually, if you think about it, our BNZ business is also predominantly a commercial bank, a business bank. So, you are probably north of 80% if you actually looked at BNZ’s business-focused contribution as well. And I think we continue to feel that the businesses are maybe less leveraged than consumers. And therefore, you should expect that while I think credit growth will fall from the exceptional levels that they are today, they will still remain, I think quite robust as long as the worst doesn’t happen in the broader economy. And then in terms of mix, I am hopeful that you will see a continuing normalization in consumer – in the consumer business so that, that business can continue to perform well in a difficult market, so really happy with our mix of businesses.

Brendan Sproules: Okay. Thank you. And I just got a second question on your collective provisioning. Obviously, the Australian economy has performed much better than many experts had a pine at 12 months or 24 months ago. I did notice in your – you still got close to 45% weighting to the downside case, obviously, where unemployment is something like 7%. I mean how – to what degree can we keep pushing these assumptions to the right, just given that’s a pretty long way from where the economy is sitting at the moment? And to what extent do you think that CPs on a 12-month view might actually have to start coming back into the P&L?

Nathan Goonan: Yes. I am happy to take that, Brendan. Good morning. I think that, that is something that we look at every half and it will be a focus again in this half. We have also – this half, we didn’t – while we didn’t change any of the weightings and we didn’t change any of the fundamentals of any of the economic scenarios, we did release a couple of the targeted FLAs, and so we did have a net $40 million release there as it related to sort of partially releasing the Australian mortgage overlay, and we did have one on the energy sector as well, which we released. So, we do look at that every half. I think there is a lot of uncertainty still out there. We still have, as you said, unemployment is a long way from where those downsides are, but it is still at 3.7%, incredibly healthy. We are seeing arrears tick up in our mortgage book. We are seeing watch list loans tick up in our business bank. We are a long way from where the downside economic scenarios would suggest. But I think it’s just at this point in the cycle, we have really just wanted to maintain some prudency in that, see how things play out, and we can then get the opportunity to look at that when we get into the second half.

Brendan Sproules: Thank you.

Operator: Your next question comes from Ed Henning with CLSA. Please go ahead.

Ed Henning: Hi. Thank you for taking my questions. Just the first one on margins, going through what you have called out today, you have essentially said the lending headwinds are falling. We highlighted the front book mortgage margins are increasing slightly. You have a strong pipeline of SME, which has got a higher up. You called out your deposit mix changes likely 2 basis point headwind going forward, and then you got the 1 basis point from funding. So, kind of adding all that up, are you talking around flat margins in the second half on the first half as the first question, please?

Nathan Goonan: Yes. Good morning Ed. I guess we have not given guidance on margin, and that’s not common practice to do that. But I guess we have just really tried to be helpful, Ed, in breaking up all of the component parts that you would need to be thinking about as you think about your forecast into the second half? And I guess the reason we stop short of guidance is just that some of these are quite certain. And where they are, things like term funding impact from TFF, the pull-through of TD costs from this period or the whack into the next one, replicating portfolios, we have tried to be quite specific about how you could think about those. But there are others which are obviously much harder to predict, things like just general level of competition, deposit mix where things like Bills-OIS will go. And so, it is – appreciate the question, but it is difficult on a few of those to give guidance. And then, therefore it’s hard to bring it all together into an overall guidance statement. So, I really just tried to be helpful on the component parts. And then there is a bit of judgment in some of these other ones that are a bit harder to predict.

Ed Henning: Okay. Thank you. And just a second clarification question, you talked today about the Citi TSAs now completing in December ‘25 and you talked about run rate cost of $350 million in the second half, but you are expecting once the TSAs go below $300 million cost, that’s over $50 million in cost savings. Did they just all drop out in the first quarter calendar ‘26, or is there any offset to that, or is it just come out of your cost base?

Nathan Goonan: Yes. Thanks Ed. Good question. So, just to clarify a couple of things here, I think that the last bit of disclosure you would have had on the Citi cost base was that it was, I think just a shade overall pretty much right on $400 million for the full year ‘23. So, you are right to pick up the statement here, having got off the TSAs for the deposit and mortgage business. We expect that we are run rating at about $350 million into the second half. So, that migration happened in March. So, we will get a half year impact of that into the second half as we flagged there. And then as you said, we expect to be – which was really a reiteration of our statement at the time of acquisition that we expected that the overall Citi business to run rate below $300 million at the expiry of the TSA. So – and that’s a net number, so we have obviously got increasing our own expenses and then you have a decrease. So, the net synergy sort of impact is factored into that. So, we expect to run rate once we expire and you would expect that you would run rate from that as soon as you get off the TSAs.

Ed Henning: Okay. That’s clear. Thank you.

Nathan Goonan: Thanks Ed.

Operator: Your next question comes from Matthew Wilson with Jefferies. Please go ahead.

Matthew Wilson: Yes. Good morning. Matt Wilson, Jefferies. Two questions, if I may. Mortgage risk rates continue to sort of trend higher from 25% a couple of quarters ago to now 27%. Is that the early stages of risk inflation, or is there a product design element that’s coming through there? And why do you think it’s so contrary to the trend you are seeing in Tier 2 that’s gone from 25% to 23%?

Nathan Goonan: Yes. Thanks Matt. It’s Nathan here. Yes, you do have a few moving parts in this, you do have – as you are saying asset quality deterioration in your underlying portfolios, you do have more risk-weighted asset intensity come into the book. And then offsetting that, there are, as you know, from half to half, and I think Victor may have asked the question earlier, you do have a good healthy pipeline and all banks have that in terms of optimization of the risk weights, and we invest in those models and make sure they are up-to-date and so all of that. So, you can have a little bit of lumpiness there, where I think generally, we are all seeing probably similar trends on asset quality, which will be increasing intensity. And then at different times, you have different new models drop, you have different optimization initiatives drop. And so, you can sort of move maybe inverse to your peers in a given period. But over time, that should normalize.

Matthew Wilson: Okay. And just secondly, and a follow-up to Andrew Triggs’ question really, too. Andrew, you expressed surprise at the extent of growth coming through the business bank. When you look at the nature of that growth, is that businesses drawing down unused limits, or is it businesses drawing down capital to invest in CapEx and what have you, because typically, it’s not unusual to see businesses accelerate credit growth going into a cycle, knowing full well that banks will remove that credit if it’s not used in a downturn. Just some more color on the nature of that credit growth?

Andrew Irvine: Absolutely, Matt, happy to do that. Well, first of all, it’s pretty diversified growth. So, we are seeing growth across sectors and across regions in Australia, which is pleasing. And if I had to characterize the mix of growth, it would be far the latter than the former. We have seen a modest increase in utilizations, but that’s not the driver of 8.6% credit growth. It’s businesses looking to grow, looking into invest in their operations, making acquisitions and all the right types of things that we would be happy and excited to support. So, I think that’s really interesting. And we would have expected some of that. It’s just, I think the size and scale and just the robustness of the growth what is surprising us on the upside. And so, long may that continue.

Matthew Wilson: Indeed. And just if I could squeeze in one other question, I understand there is an arrangement between the major banks with respect to simple refinance assessment that APRA has endorsed, but only the majors can do, and the program lower sensitivity to buffers and income test, which expedites the refinance process on home loans. I wonder if you could add some color to how that arrangement actually works.

Andrew Irvine: I will need to take that one away. I am not familiar with that. And so, let me ask the team, and we will get back to you.

Matthew Wilson: Thank you.

Operator: That is all the time we have for questions today, and that does conclude our conference. Thank you for participating. You may now disconnect.

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