Half Year 2021 Bendigo and Adelaide Bank Ltd Earnings Presentation Victoria Feb 15, 2021 (Thomson StreetEvents) — Edited Transcript of Bendigo and Adelaide Bank Ltd earnings conference call or presentation Sunday, February 14, 2021 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Marnie A. Baker Bendigo and Adelaide Bank Limited – CEO, MD & Director * Travis Crouch Bendigo and Adelaide Bank Limited – CFO ================================================================================ Conference Call Participants ================================================================================ * Andrew Lyons Goldman Sachs Group, Inc., Research Division – Equity Analyst * Andrew Triggs JPMorgan Chase & Co, Research Division – Research Analyst * Brendan Sproules Citigroup Inc., Research Division – Director * Brett Le Mesurier Velocity Trade Capital Ltd., Research Division – Senior Banking and Insurance Analyst * Brian D. Johnson Jefferies LLC, Research Division – Equity Analyst * Edmund Anthony Biddulph Henning CLSA Limited, Research Division – Research Analyst * Jonathan Mott UBS Investment Bank, Research Division – MD and Banking Analyst * Joshua Freiman Macquarie Research – Analyst * Richard E. Wiles Morgan Stanley, Research Division – MD ================================================================================ Presentation ——————————————————————————– Operator  ——————————————————————————– Ladies and gentlemen, thank you for standing by, and welcome to the Bendigo and Adelaide Bank 2021 Half Year Results Conference Call. (Operator Instructions) And just please be advised that today’s conference is being recorded. But without further ado, I’ll hand the call over to your first speaker for today, Marnie Baker. Thank you, and please go ahead, Marnie. ——————————————————————————– Marnie A. Baker, Bendigo and Adelaide Bank Limited – CEO, MD & Director  ——————————————————————————– Thanks, Miles. Good morning, everyone, and welcome to the market briefing for Bendigo and Adelaide Bank’s financial year 2021 half year results. Let me begin by acknowledging the traditional owners of the land on which we meet today and pay our respects to all elders past, present and emerging. Like I said, I’m Marnie Baker, the Managing Director of Bendigo and Adelaide Bank. And presenting with me today is the company’s Chief Financial Officer, Travis Crouch. Also joining us is the company’s Risk — Chief Risk Officer, Taso Corolis, who will be available to take questions alongside Travis and I at the end of the presentation. (Operator Instructions) I will start today’s briefing with an overview of the 2021 half year results and an update on the business before handing over to Travis to take you through the financial results in more detail. The bank was well placed coming into the half and has remained so with a well-capitalized, robust and resilient balance sheet and strong business performance. Our common equity Tier 1 ratio of 9.36% sits comfortably above APRA’s unquestionably strong benchmark. And our lending portfolio remains well secured, and performance remains sound. Our strong capital and provision levels ensures that we are well positioned to manage through the pandemic. Loans on COVID-19 repayment deferral arrangements have significantly reduced, including in Victoria and, at the end of January, represented less than 1% of gross loans, which is a reduction of more than 90% since their peak in May 2020. We continued to deliver on our growth and transformation strategy with lending growth of 9.2% and deposit growth of 16.9%, both well above system, whilst also delivering a 3.1% decrease in operating expenses on last half driven by a strong focus on achieving sustainable cost reductions across the business. Our deposit funding and liquidity position continues to be a strength, with customer deposits representing 77.3% of total deposits and a loan coverage ratio of 139%. The challenges faced by many Australians in the economy continued into the half. And we continue to support our customers as we have always done. We also continue to play our part in the transition to a sustainable and low-carbon economy through our unique business model and close connection with our customers and their communities. We work alongside communities in addressing important social and environmental challenges both at a national level and a local level. As one of the largest social enterprise movements globally, the Community Bank model has, since inception in 1998, contributed over $250 million back into local communities, enabling tangible economic, social and environmental benefits for these communities and the economy. In line with the previous halves, the number of customers choosing to bank with us climbed yet again, increasing 4.3% on the prior half to just under 2 million. At the same time, we continue to deliver on our commitment to provide a positive customer experience, as demonstrated through a Net Promoter Score of 29, which remains 26.8 points higher than industry and 30.7 points higher than the average of the major banks. This sentiment was also reflected through our business customers with a Net Promoter Score well above both industry and the average of the major banks. Consistent, strong, above-system growth has enabled us to continue to increase our market share even in a low growth and highly competitive environment. Above-system lending growth continues to be a standout, increasing 9.2% over the half, as was our record residential lending growth at 14% or 3.6x system, which was predominantly in owner-occupied and principal and interest loans. As always, this growth has not come at the expense of asset quality. Rather, it reflects strengthened executional capability, success in partnering and an effective marketing strategy to transfer customer consideration to acquisition. Our focus on profitable and sustainable growth, removing complexity from the business and taking costs out delivered a meaningful reduction in the cost-to-income ratio and an increase in return on tangible equity in the half, providing significant momentum into the next half. Employee engagement remains strong. And I do want to take this opportunity to recognize our over 7,000 staff right across the country, who despite what may be going on in their own lives, have gone above and beyond for our customers to ensure that they receive the level of support they need in these challenging times. The way the team has adapted both at pace and scale is a testament to our culture and something I continue to be extremely proud of. Moving to the financial results. Statutory net profit of $243.9 million for the half was a significant improvement on both the last half and the prior corresponding period, up 67.3% on the prior corresponding period. Cash earnings of $219.7 million for the half was also up on the last half and up 1.9% on the prior corresponding period. Total income of $849 million for the half, up 3.3% on the prior corresponding period and 5% on last half. It was backed by strong above-system lending growth and a well-managed net interest margin, which increased 1 basis point in the half to 2.3 percent. Total expenses were down 3.1% on the half, representing a return to positive jaws and a 502 basis point improvement in the cost-to-income ratio and a 591 basis point improvement in the return on tangible equity. Common Equity Tier 1 improved 36 basis points on the prior corresponding period to 9.36%, remaining above APRA’s unquestionably strong benchmark. Our consistently strong capital position reflects a well-managed balance sheet and risk management approach while supporting continued lending growth and future transformation investment. Cash EPS was 41.4% (sic) [$0.414] for the half, down 5.5% on the prior corresponding period. An interim fully franked dividend of $0.235 per share has been declared as well as the full year 2020 final fully franked dividend of 4.5% (sic) [$.0.045] per share on the deferral of the decision to declare a dividend last year giving the — given the challenging and uncertain environment at the time. Our focus on key priority markets, combined with effective cost management, resulted in positive cash earnings across all divisions. Strong lending momentum was matched by strong customer deposit growth as we moved fast to remove costs and simplify our business for our customers, partners, shareholders and our people. Strong above-system lending growth was strengthened by a 26.3% increase in residential lending applications on the prior half. The proportion of applications coming from our retail channel continues to strengthen and currently represents 52% of all applications. Our deep connection with our customers and their communities also resulted in a significant $5 billion increase in customer deposits since June 2020. For the fourth half running, our consumer division outperformed the industry, recording record strong growth in residential lending at $3 billion on the prior half. This ongoing strong performance reflects the value customers and our third-party partners are placing in our bank as we continue to invest in the proposition and experience we provide them. Positive agricultural conditions supported strong performance of the bank’s agribusiness division, with cash earnings contribution up 25.8% and operating expenses down 5.9% in the half. This was supported by higher-than-average loan balances for the half, which combined with good margin management to drive higher net interest income. The division also continued to see higher revenue from its government services business. The bank’s relationship model supported a strong half for the business banking division with above-system growth, increased customer numbers and a continued decline in COVID-19 assistance packages. Cash earnings contribution was up 39.7% and operating expenses down 12.9% as customer numbers increased 1.5% in the half. Operating expenses were improved through an active focus on cost management, the reduction in disposable assets under management and the integration of community sector banking. Higher net interest income was further supported by strong deposit growth and effective margin management. The value of loans on COVID-19 repayment deferral arrangements continues to reduce from their peak in May, including in Victoria. These arrangements have assisted customers in strengthening their ability to navigate the economic challenges posed by COVID-19 and resume repayments. Our approach to deferrals has been people-led, working with our customers with data and analytics used to assist prioritization of contact. Across our customer base, prior to the expiry of the first 6-month repayment deferral arrangements, we worked with our customers to put in place tailored solutions. We have now done this with those customers that sought additional deferral arrangements. Our business bankers have engaged directly with customers, offering tailored assistance and support. This has been a significant exercise and reflects the relationship and risk management approach we take in our business. We have completed our contact program and are now working with customers who still require assistance after the deferral period ends. The dollar amount and number of lines on deferral continues to decline with most customers resuming repayments. As of 31 December 2020, the value of accounts where repayments had been deferred was $1.1 billion, down 84.2% from a peak of $6.9 billion. As of 31st of January, the value of accounts on deferral arrangements have reduced further and now represents less than 1% of the bank’s gross loans. Just over 1,800 customer accounts remain on deferral. And in the short term, the biggest risk for customers still under deferral arrangements is a new and sustained lockdown. We reviewed our COVID-19 collective provision economic overlay at 31 December 2020 and gave — and given the ongoing uncertainty around the future impact of the pandemic, the review resulted in a modest reduction in this overlay. However, the collective provision increased overall, further strengthening our provision coverage. Whilst the forward view of the economy is looking more positive, we remain cautious from a provisioning perspective. Our balance sheet is well positioned to support continued above-system lending growth and investment in transformation. Common Equity Tier 1 sits comfortably above APRA’s unquestionably strong benchmark. And our liquidity profile, customer deposit funding and provisioning coverage remain strong. As I stated earlier, the Board has declared a fully franked dividend of $0.28 per share, which includes $0.045 per share relating to the full year 2020 final dividend and $0.235 per share relating to the interim 2021 dividend. This follows the Board’s prudent decision to defer the final full year dividend last year given the challenging and uncertain environment at the time. A fully underwritten DRP or dividend reinvestment plan has also been announced with a 1.5% discount. The dividend decision today supports our strong capital position, our business outlook, including expectation of continued above-system lending growth and APRA’s recent industry guidance on capital management whilst balancing our commitment to support our shareholders during the ongoing market and economic uncertainty. There is no change to our dividend target payout ratio of 60% to 80% of cash earnings on an annual basis. In line with our strategic imperatives to reduce complexity, invest in capability and tell our story, this half, we continued to simplify and modernize our technology, enhance strategic partnerships and further implement digital capability to reduce costs and improve the experience we offer our customers. Community sector banking and specialist banking service for not-for-profit organizations was successfully integrated into Bendigo Bank, reducing brand complexity, cost and process duplication. We reached an agreement with a new provider which will simplify our merchant facility systems from 7 to 1; introduced further enhancements to our mobile banking app; broadened the use of digital acceptance and documents to improve the customer experience; implemented new ways of delivering learning to upskill our staff, building better capability and productivity. We accelerated our cloud journey, successfully moving 22 applications in 30 days to Amazon Web Services. We reviewed our operating structures, resulting in a 5.2% reduction in FTE numbers, and achieved our first half targeted procurement savings of $7.3 million. To better meet evolving customer trends and further support an efficient and convenient in-person customer experience, the optimization of our branch network continued with a new community-focused experience store opening in Bendigo, a net reduction of 12 branches and a 16% increase in mobile relationship managers. This half, mobile relationship managers have written more than $1 billion in loans, a 61% increase on the prior corresponding period. As we continue to invest in areas where our customers demand a greater experience, our branches remain very important to our community connection whilst attracting strong customer deposits to support our business. Our people are our greatest asset. And the personal support we offered customers in 2020, underpinned by our customer and community connection and our enduring purpose, saw us continue to be rated as one of Australia’s top 20 most trusted brands in all categories. This, combined with our consistently high customer satisfaction scores among home loan customers and our business banking division named the highest-rated banks in supporting customers through COVID-19, resulted in further growth opportunities for our bank. The events of 2020 accelerated the need for change in the way we work and how we look and operate. It has accelerated the adoption of digital technology, reinforced the importance of strong community connections and demonstrated how vital trust and the use of data and insights are to underpin strong risk management systems. Our transformation road map is focused on delivering structural and sustainable change to support growth, increase operational leverage and maintain a leading customer experience. During the half, we delivered on a number of key initiatives ahead of plan and are tracking to plan on all others. We increased the use of cloud and API capability, providing benefits in the scalability and agility of our business to adapt to the changing needs of our customers. We implemented product reference data ahead of our compliance time frame for open banking and are seeking to participate as an accredited data recipient shortly after launching as a data holder in the middle of this year. Open Banking is a core enabler within our broader transformation program, providing the opportunity to implement new technology and business capabilities that will drive innovation across our digital platforms, delivering compelling customer value. We accelerated the modernization and optimization of our branch network to ensure we continue to meet the changing needs of our customers and to increase productivity within the branches. Just under 70% of the Bendigo Bank branches are owned by their local community, operating under our Community Bank model. We continue to work closely with our Community Bank partners on the ongoing evolution of these branches. We continue to reduce the number of brands in market to remove cost and confusion, rationalize and simplify our product range, drive efficiencies through economies of scale in repeatable processes and like function, simplify our key customer journeys to improve the customer experience, modernize the delivery of training for our staff and enhance data capabilities to mitigate risk, with all these initiatives contributing to a sustainable reduction in our cost base. As we continue our growth trajectory, we will sustainably step up the level of investment in technology and digital initiatives and people capability to boost scale and efficiency, increase productivity, further remove complexity in our business and deliver the banking experience of the future. We will continue to take full advantage of the growth opportunities before us and drive benefits from the investments we make. We pride ourselves on our commitment to conduct business respectfully and ethically within community expectations. By holding ourselves to the highest possible standard, we have built trust over 162 years in business. We take a holistic view of the needs of our stakeholders, and we make informed and balanced decisions to proactively address relevant and material economic, social and environmental risks and opportunities. We play an important role in empowering everyone connected to our business to achieve success where it matters to them. By providing an inclusive environment that supports our people to be their best, we meaningfully and consistently connect with our customers, communities and partners in ways which enable them to thrive. We are committed to reflecting the customers and communities of modern-day Australia, and we are focused on building a team that is reflective of the diversity of all our communities. We recognize our actions will have impacts on our planet, and we know this also matters to those connected to our organization. We are committed to playing our part in the transition to a low-carbon economy through clear measurable targets and actions and working with our customers and their communities to do the same. And backed by good corporate governance, we offer investors in our banks long-term sustainable returns in a bank they can be proud of. The last 6 months have continued to be challenging, testing the resilience of all Australians. Pleasingly, the depth of the economic contraction has not been as severe as initially expected, which has gone some way to improving the forward outlook. Conditions across the domestic economy continue to improve. And in some markets like the labor market, conditions have improved faster than expected. The revised forecast released by the Reserve Bank of Australia this month reflects the improved outlook for unemployment, GDP growth and conditions more generally. With business confidence and consumer sentiment up, a record low interest rate environment that is here for some time, a housing market that continues to grow and improve, an improving jobs market, continued growth in regional Australia and our customers showing remarkable resilience and adaptability, the immediate outlook is encouraging. However, we always take a long-term view, and we remain mindful of the global and local impacts of the pandemic, international trade sentiment, decisions on government support measures and the ongoing reality of natural disasters and climate change. And as I sit here today, speaking to you from regional Victoria, I am acutely aware of how precarious the health crisis is and how quickly the environment can change for all of us, having a direct impact on the economy and any forward outlook. I will now hand over to our Chief Financial Officer, Travis Crouch, to take you through the financials in more detail. ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Thank you, Marnie, and good morning, everybody. It’s great to be here today to talk to you about the strong financial results we have delivered. I’ll start with an overview of our financial performance, with cash earnings for the half of $219.7 million, which is 1.9% higher than 12 months ago and significantly higher than last half following the recognition of the COVID-19 collective provision overlay back in May 2020. Cash EPS was at $0.414 and return on tangible equity back above 10%. Strong revenue growth and our group-wide focus on making sustainable changes to our cost base means our cost-to-income ratio improved over the half to 60.9%. And as Marnie mentioned earlier, we’ll pay a fully franked interim dividend of $0.235 and a final FY ’20 dividend of $0.045. Our financial results for the half demonstrate the strength of our strategy and business model and our actions to reduce our cost base. When we look at the breakdown of cash earnings, you can see net interest income is up over 6% on the last 6 months and over 5% on the half 12 months ago. Asset growth of the half has again exceeded system growth, led by residential lending up 14% and the active management of margin seeing NIM increase 1 basis point over the half. Other income was maintained in line with last half. Total operating expenses were 3.1% lower than second half ’20 as we made early progress to sustainably reduce our cost base. The credit expenses of $19.5 million was a strong outcome, reflective of our risk profile and was lower than 12 months ago, with a total BDD expense of 6 basis points of gross loans for the half. Total lending was up 9.2% for the half, well above system growth of 0.1% and driven by a 14% increase in residential lending, reflecting strong customer demand and the investment made in our retail and third-party businesses. This growth achieved means we have grown above system for 4 consecutive halves. The residential lending growth is supported by an improvement in activity levels in our retail network and product simplification and the continuation in lending activity following the success of the upfront investment in our third-party business. There was a 9.2% reduction in the agribusiness portfolio, influenced by exceptionally strong seasonal inflows due to harvest proceeds and historically high livestock prices, meaning the loan portfolio reduced. And this is an absolute positive for our customers’ balance sheets after a number of challenging drought years across the eastern seaboard. We do expect the portfolio to grow in the second half, underpinned by continued growth in core markets and seasonal drawdowns. Business lending was 1.1% lower over the half, performing better than system. We saw significant deleveraging of our customers who benefited from government stimulus and the unwind of working capital needs. We expect second half growth to be in line with system through our target business SME sectors. The 14% growth in residential lending can be seen in the significantly stronger settlement activity across both retail and third party. This lending growth was delivered in our core segments of owner-occupied and principal and interest lending. More than 70% of the settlement activity was to owner-occupied lending. And if you look at the split between P&I and interest-only, almost 85% was in P&I. The momentum we saw in FY ’20 continued with applications increasing by over 26% compared to the last half. The investments made in our third-party processing capacity and distribution partners, our retail mobile relationship managers and the simplified retail home loan product launched at the start of the half are all driving this above-system lending growth. The split in applications for the last quarter between our 2 distribution channels shows improvement in activity through our retail network, where they contributed 52% of total applications. Lending activities continued into January, with monthly applications up 21% on January 2020, showing the momentum has continued as we come into the second half of the financial year. Net interest margin for the half was 2.30%, up 1 basis point from the last half and 7 basis points lower than the prior corresponding period. We’ve again included a detailed breakdown on the impacts on NIM for each period. During the half, NIM benefited from a reduction in funding costs through higher at-call deposit growth, lowering of term deposit rates and the drawdown of the term funding facility. The front book/back book pressure on NIM continues across the industry due to competitive new business rates for both variable and fixed lending. There’s a positive impact on lending rates following the repricing decisions made after the RBA cash rate changes in March and November last year. As I spoke to back in August, our hedging generated positive net income, but this was again lower than the last half and represented as a 3 basis point reduction. This first half ’21 contribution is more in line with historical averages particularly in a stable rate environment. The reduction and the impact on NIM from revenue share arrangements reflects the lower rate environment, increased lower-margin at-call deposit flows. And with the integration of the community sector banking business, revenue share was no longer payable from March 2020. Looking forward to second half ’21, the margin outcome will be impacted by the continuation of the front book/back book pressure as the low rate competitive market conditions continue as well as customers’ preference for fixed over variable rate lending. And with a high average balance of our liquids portfolio, it is expected there will be a drag on NIM from these lower-returning assets. Helping to offset some of this pressure will be the positive full period impact expected to come from the lending rate decisions we made following the November 2020 RBA cash rate decrease. While customers’ appetite for at-call deposit remains and with access to the term funding facility and our active management of term deposit pricing, funding costs should provide a tailwind in the second half. Total income was 5.1% higher than the last 6 months and 3.3% higher than the prior corresponding period. Net interest income was higher for the half, up over 6% from last half, with the above-system lending growth achieved, meaning around 2/3 of this increase was driven by higher average interest-earning assets. Total other income was up slightly on the last 6 months. However, it was around $8 million lower than the prior corresponding period as we saw the impacts of COVID in a number of other income lines, including reduction in fee and FX income. We’ve seen this impact in the last 2 halves. However, it is becoming less as wider-ranging restrictions started to ease. Excluding this impact, fee income was slightly down driven by the competitive environment, customer behavior and the product options we offer our customers. This was partially offset by increased lending fees through the higher residential mortgage growth. Trading book and other income were both slightly higher with some seasonality in Community Bank franchise and trading fee income, meaning this was higher in our first half. Moving now to operating expenses and what is another highlight of the result, with expenditure down 3.1% on last half driven by a strong focus on achieving sustainable cost reductions across the business. With the increased investment in technology and transformation and our upfront investment to enable the execution of our strategy, total operating expenses are up on the prior corresponding period. Excluding this accelerated investment spend, OpEx was up only 2.7% on 12 months ago. Accelerated investment in technology and transformation was around $35 million OpEx for the last 2 halves, relating to our investment in customer experience, simplification, automation, risk compliance and regulatory change and digital and cost transformation. As you can see on this chart, underlying operating expenses were down almost $18 million, reflecting a group-wide focus on sustainable reductions in our cost base. Underlying staff costs were lower even after continued investment to drive the revenue growth, enhancing organizational capabilities and higher redundancy costs. With our focus on productivity and org redesign through our transformation program, we were able to reduce FTE by 5.2% between June and December. COVID-19 has continued to impact staff costs due to reduction in lease taken over the first quarter and as resources were required to assist in our response to supporting our customers. The reduction in other operating expenses also reflects early progress on changes made to lower our cost base. Within the half, we achieved reductions through our review of third-party and supplier payments that will carry forward into future years as well as reducing discretionary spend through both our actions and representative of the change in spend COVID-19 has driven. Looking forward to second half ’21 and the full FY ’21 result and as we continue to execute on our cost transformation, we will step up the level of investment in technology and digital initiatives to take full advantage of the benefits that we’ll provide in future periods. Even with this increased investment, the work we have underway on our cost transformation program means we still expect total operating expenses for FY ’21 to be flat or even lower than FY ’20. Turning now to the first of our divisional results. The consumer division’s cash earnings contribution was up 12% delivered through significant growth in residential mortgages in both retail and third party. Growth in at-call deposits of $4.3 billion enabled us to actively manage the pricing and flows through our more expensive term deposit portfolios across the group. The increase in other income was driven by the higher fee income, reflecting the increased lending activity and stronger card and merchant income, although it was partially offset by lower wealth management fees and changing customer behavior. Total operating expenses were down against prior half, reflecting benefits of the transformation program in the corporate branch network and other enterprise cost management initiatives. Credit expenses were only $2.4 million for the half due to a release of non-COVID-19 collective provisions in the last half when credit costs were higher when compared to 6 months ago. The cash earnings contribution from both our business and agri divisions have increased on the prior half. For business, this earnings contribution was up almost 40% through higher net interest income and lower operating expenses and credit costs. The increase in NII reflects positive asset growth achieved by the division, representing the second consecutive half of growth. Improved lending margins driven by lower funding costs also contributed to the NII increase. While business lending portfolio has experienced deleveraging from our customers who benefited from government stimulus, we’ve achieved market share growth in our key target segment of SME. The commercial real estate portfolio also grew after rebalancing its targeted risk appetite settings. This growth was achieved against the backdrop of many of our relationship bankers spending a good deal of the last 6 months working closely with our customers on repayment deferrals where we took a very tailored approach in supporting our customers. Business deposit growth for the half was up over 15%. The impact on other income from COVID-19 can be seen here through lower fee and FX income. Operating expenses were lower than last half driven by a reduction in FTE, the disposal of assets under management, meaning ongoing reductions in OpEx, and the consolidation of the community sector banking business. Credit expenses for the half were materially lower, benefiting from lower specific provisions as a result of decrease in arrears and impaired loans and a release of non-COVID-19 collective provisions associated with a lower risk profile of business loans not on deferral. For agribusiness, the earnings contribution was up over 25% through higher income and lower operating expenses. With the asset portfolio decreasing by 9.2% over the half due to very strong seasonal inflows, the average balance of the half was higher than last half given the strong growth achieved at the end of FY ’20. This higher balance, combined with active management of the cost of deposits, meant NII was higher. Other income is again higher this half with revenue from the government services business. Active management of costs and operating expenses were lower even after the additional investments made to support the growth in government services income. Credit expenses of $5.9 million for the half are more in line with the long-term average for agri, with the second half ’20 benefiting from the write-back of collective provisions for a large single exposure. The level of specific provisions raised during the half was in line with second half ’20. Underlying credit quality remains strong, reflecting improved seasonal conditions across most of Australia and strong commodity prices. Homesafe’s contribution on a cash earnings basis for the half was slightly higher than lower — slightly lower than last half, with the number of contracts completed slightly down but still contributing another $7.7 million in net earnings before tax in this half. On a statutory basis, we recognized a $61.6 million gain for the year. While Melbourne and Sydney property values increased, this was at a slower rate than the last half. And we also recognized an increase in the portfolio valuation in December following the change to the growth outlook. The 6-monthly review of the portfolio valuation meant the growth outlook for the next 12 months was revised upwards, with year 1 assuming 2% property growth. And the outlook is directionally in line with the assumptions on house prices used in a COVID-19 collective provision. We continue to review these assumptions every 6 months, and a key test is how the carrying value of the completed contracts compares to the sale proceeds. The proceeds received on completed contracts during the first half exceeded their carrying value by $1.7 million or 8%. As the unrealized gains reflected in the carrying value of the portfolio are excluded from regulatory capital, property values would need to fall by 41% for the unrealized gains to be reversed and have any impact on regulatory capital. Credit costs for the half of $19.5 million were 6 basis points of gross loans assisted by government stimulus during the half, reflective of our conservative risk profile. We reviewed the collective provision overlay at December. And whilst economic assumptions used in the base scenario at December ’20 reflect improved conditions since June ’20, additional overlays taken to recognize the continuing economic uncertainty meant there was only a small reduction to the total COVID-19 collective provision. Marnie has already outlined a significant improvement in the portfolio of loans under repayment deferrals as a result of COVID-19 impact, down to less than 1% of gross loans at the end of January and off 90.5% since the peak back in June. Overall, total impaired loans for the group decreased by 7.6% in June as a number of property settlements during the half reduced business impaired assets. All core portfolios remain well secured, and the portfolio performance remains sound. The provision coverage at 31 December was 201%, up from 178% 6 months ago and driven by the reduction in impaired assets and additional provisions. Loan-to-value ratios remain low, with the average LVR for residential mortgages at 56%, down from 57% 6 months ago. As I said before, the economic assumptions used in the base scenario at December ’20 reflect the improved conditions since June ’20. However, probability weightings attached to the significant deterioration scenario increased from June to reflect the improved starting position or outlook for the base case assumptions. You can see on this chart on the right-hand side that the improvement in the economic assumptions used in the base scenario, probability weighted with a high chance of a significant deterioration, resulted in an $11.2 million reduction in the modeled outcomes. Although the economic outlook has improved, the uncertainties around an impact of the removal of government assistance, with outbreaks still occurring resulting in local or state-wide restrictions or lockdowns and continued uncertainty in the economic outlook, we considered it appropriate to increase the number of overlays at December with a net increase of $14.1 million. Looking now at arrears. The chart at the top left shows residential arrears rates continued to fall over the half. I mentioned back at our full year results, there was a slight uptick in March as arrears collection activities were temporarily suspended when resources were redirected to assist customers requesting COVID loan deferrals. However, from April, arrears have trended down. Slide 50 in the appendix shows residential arrears across all states improved over the half. In our consumer portfolios, the reason our credit card portfolio increased in the first quarter as collection and recovery activities on cards was temporarily suspended. From October, when this was reinstated, arrears levels have reduced. Arrears for personal loans have reduced since June. Business arrears over the half have decreased, and this is influenced by a reduction in the balance of impaired loans following finalization of a number of accounts. All loans over 90 days, including impaired loans, are actively managed and, where required, are appropriately provisioned. Overall, we remain comfortable with the quality of the business portfolio, and our focus is on working with our business customers through our proactive contact program to help them navigate the challenges arising from COVID-19. Agribusiness arrears were down over the half, with a small number of larger accounts moving back into performing loans. Portfolio is performing in line with our expectation. And compared with this time last year, the conditions of the agribusiness market we lend into are more positive. Our funding position continues to be a strength of the group, providing flexibility to fund our above-system asset growth and ability to manage our overall cost of funding and providing us with an important customer relationship. Total customer deposit balances increased by $5 billion over the half, with at-call deposits increasing by $5.6 billion, meaning we could reprice higher-costing term deposits. This resulted in reductions in term deposit portfolios where we maintained a retention rate just under 90% for our retail customers. Total deposits sourced through our Community Bank network grew by over 20% over the half. Wholesale domestic issuance also continues to provide a reliable source of funding when needed and will be used in the future to lengthen our maturity profile. We successfully completed a $650 million 5-year senior unsecured transaction early December at 52 basis points over 3-month BBSW. During the half, we accessed the remaining $1.1 billion of our initial entitlement of $1.8 billion of the term funding facility. We still have access to $1.3 billion for the supplementary allowance as well as an amount through the additional allowance that will depend on business lending growth but expected to be between $750 million and $1 billion. So our funding not only gives us flexibility to fund the above-system growth we’re achieving through our over 77% customer deposit base, but we’re also well-placed with the term funding facility and able to tap into demand from wholesale markets. Our common equity Tier 1 ratio improved to 9.36% over the half, up 36 basis points from 12 months ago and 11 basis points from 30 June. Our internal stress testing completed sees our capital ratio is maintained above APRA’s unquestionably strong minimums. We continue to target a CET1 range of between 9% and 9.5%, and we’ll reexamine this range again after APRA completes its review of the capital adequacy framework. Marnie has mentioned the Board decision on dividends with the declaration of both the final FY ’20 and our net — interim first half ’21 dividend and a DRP or the 1.5% discount that will be fully underwritten. The Board’s decision today helps support our capital position, our business outlook, including expectation of above-system lending growth and takes into account APRA’s recent industry guidance on capital management whilst balancing our commitment to support our shareholders with the ongoing economic uncertainty that exists. Our target payout ratio of 60% to 80% of cash earnings remains with the 56.8% payout ratio of the interim dividend, reflecting a balance between providing returns to our shareholders with the ongoing uncertainty in the economy. With conditions across the domestic economy continuing to improve, we are buoyed by the outlook. However, we remain appropriately cautious and mindful of the impacts of the pandemic, both local and international. Looking short term at the second half financial outlook, we continue to target above-systems residential mortgage growth. Activity levels over the last quarter give us confidence this can be achieved. We expect positive growth in the agribusiness, reflecting continued growth in core markets and seasonal drawdowns. And we are targeting business SME growth to be in line with system for the half. As I outlined earlier, there are multiple moving parts to net interest margin outcome in the second half, and we do see some headwinds from front book/back book lending rates and higher liquid assets. We do, however, expect some offsetting benefits from our deposit mix, lower cost of funds and the full impact of our lending repricing following November’s cash rate reduction. Other income will continue to be impacted by customer choice and the competitive environment. However, we will look to offset some of these through fees associated with our above-system lending growth. We have restated our commitment that we expect FY ’21 cash operating expenses to be flat or even lower than FY ’20. The progress made year-to-date from making permanent changes to our cost base means that even with an increase in the accelerated investment spend in second half, we expect to deliver on this. Economic indicators are certainly performing ahead of where we expected to be 6 months ago. And while our asset portfolios are well secured and provisioned where appropriate, uncertainties still exist around the impact of decisions around the various and yet to be determined changes of government support. Our target CET1 ratio of 9% to 9.5% remains, and decisions approved by — decisions made by the Board today around dividends and supporting the above-system lending growth with a fully underwritten DRP ensure we continue to balance interest of all our stakeholders. I’ll now hand back to Marnie for some closing comments before we open it up to Q&A. ——————————————————————————– Marnie A. Baker, Bendigo and Adelaide Bank Limited – CEO, MD & Director  ——————————————————————————– Thanks, Travis. So in closing, our results demonstrate the strength of our strategy, business model and ability of our people who moved quickly and acted with care to support our customers and their communities. We continue to support customers through COVID-19 while playing our important role of providing credit to support the economy. Deferrals significantly reduced from their peak in May, including in Victoria. And our strong capital and provisioning position ensures we are well positioned to manage through the pandemic. We delivered on our growth opportunities with lending growth outperforming the industry for the fourth half running and, at the same time, continue to reduce the complexities in our business, improve productivity and take costs out. In August, we said we were targeting total operating expenses to be flat or even lower than last financial year. We have delivered on that this half whilst continuing the level of investment spend needed to accelerate our transformation. And we are committed to returning to target income growth, exceeding cost growth this financial year, as illustrated in our return to positive jaws this half. We are well on track to drive sustainable growth and reduce our cost-to-income ratio towards 50% in the medium term as we align our transformation investment with revenue growth and our vision. Becoming a more efficient business, together with continued profitable and sustainable growth and the retention of flexibility around the quantum of spend on our accelerated transformation program to align with revenue growth illustrates the strength and the execution of our strategy. We know our advantages and market opportunities lie in the strength of our purpose, values, strategy and customer commitment, which remains central to who we are and positions us well for the future. Thank you, everyone, and I will now open up for questions. (Operator Instructions) Thank you, and I’ll hand back over to Miles. ================================================================================ Questions and Answers ——————————————————————————– Operator  ——————————————————————————– (Operator Instructions) Your first question today comes from the line of Andrew Lyons from Goldman Sachs. ——————————————————————————– Andrew Lyons, Goldman Sachs Group, Inc., Research Division – Equity Analyst  ——————————————————————————– Marnie, just a question, firstly, on your capital performance. Despite strong first half volume growth, you’ve delivered a solid capital result in the half, which was above or is above APRA’s unquestionably strong benchmark. Despite this, you’ve elected to underwrite the first half dividend. Can you just maybe talk about what the Board’s thinking is on this front, particularly what it might signal in relation to the thinking on APRA’s review of the capital adequacy framework? I’ve then got a second question. ——————————————————————————– Marnie A. Baker, Bendigo and Adelaide Bank Limited – CEO, MD & Director  ——————————————————————————– Yes. Look, the dividend and the underwriting of it, I think it is — supports our strong capital position. It does support our business outlook, including above-system growth in lending. The dividend itself did take into account APRA’s guidance on capital management. So by way of — as you know, with these things, Andrew, APRA is a part of the consultative process. And we are very comfortable and have not heard from APRA that they have any concerns around the underwritten DRP or the dividends that have been paid or declared, sorry. ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Andrew — sorry, Marnie. Andrew, it’s Travis here. Just to the second part of your question around what it says about the new standards, it says nothing about the new standards. We’re still working through the assessment of what they — what the impact will be based on the new risk weight. So the — underwriting the DRP really reflects our strong growth, our outlook and the Board’s decision to actually support that level of capital and the level of growth. It certainly doesn’t reflect the new APRA standards. ——————————————————————————– Andrew Lyons, Goldman Sachs Group, Inc., Research Division – Equity Analyst  ——————————————————————————– That’s helpful. And then just a second question around the growth in the third-party banking. There’s a slide in the pack that highlights, as far as the approvals are concerned, at least a bias in the third-party banking to fixed rate lending versus the proprietary business. Can you just maybe explain why this might be the case? And what does it mean for the profitability of your third-party banking channel versus the proprietary channel? ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Yes. Andrew, I think historically, the third-party business had some products around the fixed space that actually have always resonated well with customers and the brokers. So I actually think that, that mix reflects customer’s appetite at the moment for fixed lending and really the success that we have in that market through the third-party business around fixed lending. So from a pricing, from a return, we certainly haven’t changed anything the way we thought about that. You would have heard a lot around the competitive market, cashback is on offer through our third-party business. So we’re very comfortable with the level of returns and that sustainable return through the third party. It is a lower-cost model around the third-party business. So certainly feel comfortable with the returns both through the increased growth through third party and through retail. ——————————————————————————– Operator  ——————————————————————————– Okay. Your next question comes from the line of Richard Wiles from Morgan Stanley. ——————————————————————————– Richard E. Wiles, Morgan Stanley, Research Division – MD  ——————————————————————————– I just wanted to follow up on the question around the decision to underwrite the DRP. If you look at Slide 28, it shows the capital generation in the half. And even without a dividend, your capital ratio went up only 10 basis points. This dividend is about 30-odd basis points, close to 40. So what this is telling us is that in a half where you’ve had the margin expand, you’ve had costs go down, your capital generation isn’t sufficient to sustain the dividend that you’ve declared even though the payout ratio is below your target range. So my question is, if you want to achieve above-system growth and have a payout ratio in the 60% to 80% range going forward, do you think that you can do that without having to underwrite the DRP or raise capital on an ongoing basis? Because Slide 28 would suggest that you don’t have the capital generation to do it without raising capital. ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Yes. So Richard, I think from my perspective, the growth we’ve achieved, that is — as you said, that’s starting to come through now in the sense of revenue growth. We have made inroads into the OpEx, into the cost base to actually improve the overall financial performance and return for the business. In my view, that’s why the Board has made the decision to underwrite this DRP. We are returning returns on our business each half. This first half shows that. And the outlook, we’re really positive on the outlook. So from my perspective, the decision to underwrite the DRP is appropriate for this half. We are certainly comfortable with the way we think about our forecast both on an asset growth and from a profitability. So that’s where that decision is made in this half. But I think moving forward, as we increase those returns, that’s certainly going to support the asset growth. ——————————————————————————– Richard E. Wiles, Morgan Stanley, Research Division – MD  ——————————————————————————– So does that mean you think you can achieve above-system growth, 60% to 80% payout ratio but not have to keep raising capital? Is that how you think you can manage the business? ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– That’s how we’re thinking about it, Richard. ——————————————————————————– Operator  ——————————————————————————– Okay. Your next question comes from the line of Brian Johnson from Jefferies. ——————————————————————————– Brian D. Johnson, Jefferies LLC, Research Division – Equity Analyst  ——————————————————————————– Back in October, the 21st of October, APRA issued a pretty scathing review on you guys on the calculation of the liquidity coverage ratio. And they actually said that they await the result of the review before determining whether further action is required. I think I just wouldn’t mind an update on that and potentially what that might mean for the capital. And is that part of the thinking of the DRP underwrite? And then I have another question after that one if I may. ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Thanks, Brian — sorry, Marnie. ——————————————————————————– Marnie A. Baker, Bendigo and Adelaide Bank Limited – CEO, MD & Director  ——————————————————————————– So I think we’re waiting for each other, aren’t we? Travis, did you want to take that? Or do you want me to take that? ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– I’ll jump in first, Marnie. So Brian, that was the findings from APRA. We are working through the review as required by APRA. The decision around the DRP underwrite has nothing to do with that work that’s underway. We are working through that from an LCR point of view, but it certainly has nothing to do with the underwriting of the DRP or future changes in capital levels. ——————————————————————————– Brian D. Johnson, Jefferies LLC, Research Division – Equity Analyst  ——————————————————————————– Okay. The second one if I may, Trav, is that when we have a look at the major banks at the moment, they’re somewhat reticent to actually draw down on the TFF given that they’ve basically — they incur the deposit — the bank levy on it, which you guys don’t. But they’ve already kind of running excessive amounts of balance sheet liquidity anyway. They also seem to be quite concerned about the 3-year maturity hump that it basically creates. Can you just run us through your thinking on the TFF and what it means for that future maturity profile? ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Yes. Brian, I think it’s a fair question. So that access to the TFF obviously certainly provides a cheap form of funding. But I think that’s why we haven’t touched any of the supplementary allowance at this point. We think about access to the TFF just through replacing funding when needed, just using really in a quite even manner over the half. But I think that’s the issue we’re facing at the moment with strong liquidity and strong at-call and customer deposit flows. We are just balancing that and that maturity profile in 3 years’ time. As I said, up to the end of December, we accessed in total up to $1.8 billion. But from a maturity profile, we’re very comfortable with that out 3 years. But that’s the challenge, I think, that all banks have got at the moment. It is good funding, and it’s there with the intent for the industry, but we’ve certainly got strong customer deposit flows. So that’s the balance. ——————————————————————————– Brian D. Johnson, Jefferies LLC, Research Division – Equity Analyst  ——————————————————————————– And Trav, are you parking in that money in exchange settlement accounts, which earn 0 but are riskless? Or is that going into financial securities where there is some risk because bond rates basically rise? ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Yes. No, we’re not parking in the ESA. It is there to support the asset growth. And really, if I think about a normal half, we would do a number of small sort of wholesale transactions. So that’s actually replacing those as well as any maturities that we have coming up. So it’s a combination. ——————————————————————————– Operator  ——————————————————————————– Your next question comes from the line of Jonathan Mott from UBS. ——————————————————————————– Jonathan Mott, UBS Investment Bank, Research Division – MD and Banking Analyst  ——————————————————————————– A question for Marnie on Slide 47. So I’ll give you a second to flip over there. But what this shows is a very strong pickup in lending on the retail lending flows through May through to August. So it slowed down since then. And if you look at the table just above it, it shows there’s been a big slowdown in the proportion coming through the third party, if anything, in that mix. Now that’s come through on a monthly basis. At the same time that if you look at the ABS statistics on housing commitments that have really taken off towards the end of the year, I think it was up very, very sharply every month from about September. So just kind of a bit confused as to why you’ve seen a slowdown in lending applications coming through at the same time the system’s taken off just in recent months. Is this a deliberate decision to slow down the broker loans? I think you mentioned it’s not being price-driven. What’s happened? And why has your lending activity slowed down at a time that the system has really taken off? ——————————————————————————– Marnie A. Baker, Bendigo and Adelaide Bank Limited – CEO, MD & Director  ——————————————————————————– Yes. I think there’s a combination of factors there, Jonathan, partially around — and we had this discussion, I remember, at the last half around others potentially getting their house in order especially when it comes to the broker market. So the share of the broker market there, albeit that we’re very comfortable with the level of applications that we’re receiving but also the additional focus that we had on our retail network over that period as well. And we are looking to manage the balance there. We are very mindful of the balance on our balance sheet and having — and making sure that we sit within our appetite. So there’s probably a combination of things. ——————————————————————————– Jonathan Mott, UBS Investment Bank, Research Division – MD and Banking Analyst  ——————————————————————————– So does that imply that the system pricing has continued to go down especially through the broker network, and you’re not comfortable with the pricing at the moment where the third-party CEOs have backed off to some extent? ——————————————————————————– Marnie A. Baker, Bendigo and Adelaide Bank Limited – CEO, MD & Director  ——————————————————————————– Look, we’re — from a system perspective, we’re very comfortable in the — and we are still getting record levels of applications through from that channel. And Michael said before, we don’t offer cashback through that channel, and it is a highly competitive channel. So we’re comfortable with the pricing that we have there. From a system perspective, it jumps a little bit all over the place through that channel. So… ——————————————————————————– Operator  ——————————————————————————– Your next question comes from Ed Henning from CLSA. ——————————————————————————– Edmund Anthony Biddulph Henning, CLSA Limited, Research Division – Research Analyst  ——————————————————————————– Just the first one, can you just confirm, if you go back to Slide 18, the change in the community sector revenue sharing agreements and just the outlook for that going forward as the first one? ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Yes. So Ed, thanks for the question. So there was that the impact did reduce over from a revenue share arrangement. So that category of revenue share arrangements includes our Community Bank network, our alliance bank network and, as we called out there, previously included the community sector banking business that we’re part of. So we actually bought that back into the bank. So we changed the structure of that during second half ’20, which meant the revenue share arrangements are no longer. So that obviously affected income and expense, but in the sense of the pure revenue share, that’s no longer payable. So we did see that impact the first half ’21 because there was no payments to community sector banking as part of the new structure. That was probably about 1/3 of that impact. The other impact is reflected, like I said, around the lower rates. The strength of our Community Bank network is through customer deposits and raising customer deposits. At the moment, given the lower margins on those customer deposits meant that there was less revenue share payable to our Community Bank network given the current environment. So that reflects the outcome of the half. ——————————————————————————– Edmund Anthony Biddulph Henning, CLSA Limited, Research Division – Research Analyst  ——————————————————————————– So the outlook for that, you wouldn’t imagine it would jump around too much given the low rate environment is likely to continue? ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Yes, that’s right, Ed. ——————————————————————————– Edmund Anthony Biddulph Henning, CLSA Limited, Research Division – Research Analyst  ——————————————————————————– Nice. And then just the second one, going to expenses, you’ve talked about including your accelerated investment spend. Looking forward, I’d imagine this continues to drop off in the future years. So beyond ’21, I imagine you’re anticipating cost to absolutely decline, notwithstanding continued growth on lending you’re actually forecasting? ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Yes. So Ed, what — we spoke about this accelerated investment program, our digital transformation over the last couple of halves. We actually see that program as a number of year program, a multiyear program. So no, I don’t expect that investment to drop off in ’22. I’d expect it to be at similar levels as we go through ’22. And then once we get to ’23, we’ll continue. I mean we’ve got the flexibility with that spend. But with where we sit at the moment, I would have thought we’d have an elevated spend for the next couple of years. But equally, at the same time, that’s the work that we’re doing around sustainable reductions in our cost base. So that is, as I said, for this full year, we’ll increase the investment in the second half, but we’ll look to manage the underlying costs, so we’d come with a flat outcome or a slightly lower outcome of FY ’20. ——————————————————————————– Operator  ——————————————————————————– Okay. Your next question comes from the line of Josh Freiman from Macquarie. ——————————————————————————– Joshua Freiman, Macquarie Research – Analyst  ——————————————————————————– Just one question — actually, 2 questions here for me. So first one is favorable term deposits and wholesale funding repricing kind of more than offset the impact of lower rates on deposits hitting the 0 cost down. We were actually quite surprised with the speed of the reduction in that deposit margin. So just want to check, how do you see the benefit of the reducing term deposit margins looking forward? And do you kind of see it as enough to offset the impact of lower rates on the capital hedge and on 0 rate deposits from the November cut? And I’ll ask my second one shortly after. ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Yes. Thanks, Josh. Look, I think 6 months ago, it was hard to see that growth in that core continuing. And then as a result, the ability to reprice TDs, that has obviously continued across the industry over the last 6 months. So from a funding cost point of view, that certainly provided a benefit. Look, I guess the outlook for NIM, as I said before, is really hard to call. There’s so many moving parts, notwithstanding customer choice as far as how they may look to respond to the environment or where they want to put their cash. What I will say, though, is as recent as, I think, last week, we actually reduced our TD rates again across all our key deposit channels. So we continue to work hard on that funding cost side where possible. So it is a hard one to call. But I do expect that we will continue to drive some benefit through that customer deposit and wholesale deposit pricing and, as you said, hopefully look to more than offset the low rates on the capital side of it. ——————————————————————————– Joshua Freiman, Macquarie Research – Analyst  ——————————————————————————– Okay. And I guess second question is just in respect of Homesafe. I just want to check how you guys see that looking forward and if there’s been any more or renewed interest in the book given improved excitement in the housing market. ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Yes. Look, we continue to see that business as a really good one. It’s such a great product for customers. As you said, with the low rate environment, strong house price outlook, it’s actually a really good product. So we continue to work with external partners. We’ve been very public about that, that we think it is a great product, a great portfolio. And I think given the environment, we’ve certainly got more interest than we probably had previously, which is great. ——————————————————————————– Operator  ——————————————————————————– Okay. Your next question comes from Andrew Triggs from JPMorgan. ——————————————————————————– Andrew Triggs, JPMorgan Chase & Co, Research Division – Research Analyst  ——————————————————————————– Look, a follow-up question on really just managing the growth capital balance. You noted during the period that agri was a negative growth contributor in the half but will return to growth in the second half partly on seasonality. And that is alongside a return to system in business lending growth in the second half. Just your thoughts on whether that is necessary to throttle housing growth just to manage that capital impact as you — I guess you don’t see repeat of the benefiting of an improvement in the capital mix, please. ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Thanks for the question, Andrew. So I mean obviously, whenever the Board makes a decision around the dividend, they certainly go through the capital forecast. And as you’re right, that includes a pickup in agri in the second half. So they would — they declare that dividend knowing the outlook as best we can around an asset forecast, which includes that pickup in the agri portfolio. Just to be clear, when I spoke about the business lending, SME, particularly being in line with the system, we don’t see a whole lot of positive growth in that, but we are hoping to be somewhere around flat to either side. So certainly, the agri — the growth in agri book has been taken into account when you think of capital forecast moving forward and impact of dividend. ——————————————————————————– Andrew Triggs, JPMorgan Chase & Co, Research Division – Research Analyst  ——————————————————————————– And maybe just to follow up on the agri book. CBA, this is one area that CBA is now prioritizing growth within its broader small business bank. Just some thoughts on that and also just the broader competitive environment in the rural bank. ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Look, I think that the feedback I’ve received through the agri team, particularly over the last few months, is that it seems to be as competitive as ever. And I’d actually say some of the rates that are being thrown around by other banks are really hard to understand. So we’ve got no doubt that competitors are going hard for this book and this portfolio. For the same reason, we think it’s a really good portfolio of assets for us to have. So competition, I would agree, is certainly stronger than 6 months ago and probably stronger than 3 or 4 months ago. But we think given our customer base, given our model and given our — the strength of the relationship with our customers, we are comfortable with that outlook for an improvement in the second half. ——————————————————————————– Operator  ——————————————————————————– Okay. Your next question comes from the line of Brendan Sproules from Citigroup. ——————————————————————————– Brendan Sproules, Citigroup Inc., Research Division – Director  ——————————————————————————– I just had a question on the capital position also on Slide 28. Just following to Richard’s question about managing the business where the dividend target payout ratio is between 60% and 80%, are you envisaging getting sustainable to that level based on slowing risk-weighted asset growth? Or are you expecting that the earnings that you’re able to generate from this recent growth will be the bigger contributor to the capital position going forward? ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Yes. Thanks, Brendan. As I said, when the Board looks at dividends, they certainly look at the outlook from a capital, from an asset, from an earnings point of view. And there is no plan — there’s nothing in there to slow the asset growth to maintain that capital. So it is certainly around the expectation of earnings and the mix of asset growth that we’re comfortable with. It’s not around slowing asset growth. ——————————————————————————– Brendan Sproules, Citigroup Inc., Research Division – Director  ——————————————————————————– And just a second question if I could. You had 9 basis points drag from capitalized expenses. Obviously, you’ve got an investment program running at the moment. What’s the outlook for that capital drag looking forward? ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Yes. So at the moment, I continue to see part of our accelerated investment we do capitalize. So that will continue to come through each half as we capitalize a portion of some of that investment. You’re aware, Brendan, that over the last couple of halves, we made some changes to what we do capitalize particularly around reg and compliance projects there. They are more OpEx now. And I think that sets us up for a good position moving forward. But we will continue to capitalize some of that work where there is tangible benefits that will come over future periods. So I continue to see an impact from capitalized expenses as we get through this investment program. ——————————————————————————– Operator  ——————————————————————————– Your next question comes from Brett Le Mesurier from Velocity Trade. ——————————————————————————– Brett Le Mesurier, Velocity Trade Capital Ltd., Research Division – Senior Banking and Insurance Analyst  ——————————————————————————– The cost of your customer deposits were 73 basis points in the half that’s just finished. Can you tell me what the cost was at the end of the period? ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Brett, I’d have to get back to you on that based on the way the average balance sheet is. But like I said, it certainly continues to come down. And like I said, we actually made reductions to our TD portfolios across the group last week. So funding costs are certainly a positive at the moment in the way we’re thinking about it, but we can come back to you on anything like that if appropriate. ——————————————————————————– Brett Le Mesurier, Velocity Trade Capital Ltd., Research Division – Senior Banking and Insurance Analyst  ——————————————————————————– And the — just getting back to this 60% to 80% payout ratio, is that based on an expectation of a 50% cost-to-income ratio? ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– So we are — we have restated both, Brett. So we’ve restated the progress towards the medium-term cost-to-income target towards 50%, and we’ve restated the 60% to 80% payout ratio. So they’re both considered under the same way we’re thinking about future earnings. ——————————————————————————– Operator  ——————————————————————————– Okay. We have just a follow-up question from Richard Wiles from Morgan Stanley. ——————————————————————————– Richard E. Wiles, Morgan Stanley, Research Division – MD  ——————————————————————————– I had a question on costs. I think you mentioned that you made some head count reductions in November and December. I’d just like to know, were they reductions of temporary increases in head count in response to COVID? What sort of roles have you reduced? And do you think your ongoing investment plan means that you will further reduce head count in the future? ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– So Richard, thanks for that question. So the redundancies we called out through the half, particularly in that towards November, December, again, are right across the organization. So part of our cost transformation work around sustainable changes to our cost base include reviewing everything from what I would call our head office or corporate functions to our branch network to our corporate branch network. We’ve done a lot of work through productivity and data and analytics to actually understand, given the change in customer behavior, what’s the right model from the corporate branch network. So it is certainly come across both from a front-line, customer-facing through the corporate branch network but equally from a back-office corporate support area. So while there would have been some impacts from temporary staff, that’s certainly not where we’ve made the savings. There have been sustainable changes to how we both support our customers and how our corporate offices need to be resourced. So it’s not a temporary benefit. We see that moving forward. ——————————————————————————– Richard E. Wiles, Morgan Stanley, Research Division – MD  ——————————————————————————– And do you think, Travis, that your multiyear investment plan will ultimately allow you to operate the bank with a lower cost base but also a lower head count? Is that one of the drivers of the lower cost base? ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Look, I think, Richard, in the sense of the medium term, obviously, automation, simplification, the move to digital for a number of areas will create opportunities from the cost base. Some of that will be staff. A lot of that will be processing systems. So we will continue to look at both where it makes sense from a cost point of view and from a customer and staff point of view. So we certainly haven’t got a target for reductions from an FTE point of view. As we work through the initiatives, we understand the impacts and we go that way. So I see operating savings over the future years coming from the system side as well as the process, and we’ll continue to work through any impacts for our people. ——————————————————————————– Operator  ——————————————————————————– We have a question from Brian Johnson from Jefferies. ——————————————————————————– Brian D. Johnson, Jefferies LLC, Research Division – Equity Analyst  ——————————————————————————– Two questions if I may. Just going back to that slide, which showed the excellent volume growth we’ve seen coming through. If you’re not offering cashbacks through the broker channel and you’re not discounting, and we all know that you’re very nice people and everything, what is driving that above-market share growth? And the second one if I may, just going on to Slide 18. The margin for this period was 2.3%. You’re saying the exit rate is 2.27%. I was wondering if we could get a feel on the bits and pieces that are driving that 3 basis point decline in the exit rate. ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– I’ll start with the second question, Brian. So as we’ve called out in the table there, the margin was impacted pretty consistently again through that front book/back book. I think if I think about the — we certainly — the first quarter was pretty consistent. And then you can see that we actually just started to drop down. So I don’t think that reflects really that continuation of front or back book, the benefits from the variable loan repricing. But then as we get through some of those funding costs, benefits are not coming through quite as strongly. So I think that’s what we saw in the last quarter. But like I said, we’ll continue to work hard on the deposit side, on the cost of funding side to see what we can do around that margin outlook. As far as… ——————————————————————————– Brian D. Johnson, Jefferies LLC, Research Division – Equity Analyst  ——————————————————————————– Fantastic, and the jolly nice people. ——————————————————————————– Travis Crouch, Bendigo and Adelaide Bank Limited – CFO  ——————————————————————————– Yes. And as far as the growth in our third-party channel, in my view — and Marnie, please jump in. But it really is our ability to serve our processing capacity. As you know, Brian, we invested in that upfront over a year ago. So we’re actually able to support the broker network and our partner network through our mortgage management services partners. So they know what they get from us, and we’ve done a lot of work upfront to invest in that business and that capacity to actually deliver a consistent service. So I really do think it’s around that service proposition that we offer. Our third-party partners are very comfortable and know what they get. ——————————————————————————– Marnie A. Baker, Bendigo and Adelaide Bank Limited – CEO, MD & Director  ——————————————————————————– And they’re good people, Brian. ——————————————————————————– Brian D. Johnson, Jefferies LLC, Research Division – Equity Analyst  ——————————————————————————– That’s obvious, Marnie. ——————————————————————————– Operator  ——————————————————————————– (Operator Instructions) Okay. We appear to have no further questions. So for now, I might just hand back to — now to you, Marnie. ——————————————————————————– Marnie A. Baker, Bendigo and Adelaide Bank Limited – CEO, MD & Director  ——————————————————————————– Thanks, Miles, and thank you, everyone, on the — for taking the time on the call today. We’re very pleased with the results and being able to share that with you. And we thank you very much for your our interest and look forward to speaking with you — most of you again over the next couple of days. Thanks, everyone. ——————————————————————————– Operator  ——————————————————————————– Ladies and gentlemen, that does conclude today’s conference call. Again, thank you all for participating today, but you may now all disconnect.