For Release: 05 May 2021

Transcript of podcast with ANZ Chief Risk Officer Kevin
Corbally, ANZ Acting Chief Financial Officer Shane Buggle
and ANZ GGM Investor Relations Jill Campbell
JILL CAMPBELL: Hi everyone. I’m Jill Campbell, the head of investor relations for ANZ.
Welcome to all of you listening to today’s discussion, which accompanies ANZ’s release of its
first half 2021 financial results. As we always do, we’ve released a number of materials
today via the ASX. All of which are also available on the ANZ website in the Shareholder
Centre. Our CEO and acting CFO present the results to the market and a slide packaccompanies that presentation. You might find it useful to refer to that slide pack after
listening to this interview. The presentation which occurs at 10 am is taped and it’s available
for replay on our website. I’m speaking today with our Chief Risk Officer Kevin Corbally andour acting CFO Shane Buggle. Covering some areas of interest to those of you looking todelve a little deeper into several areas of the result. I’m going to start with you Shane. ANZ
announced an increased dividend today. Dividends ultimately are a board decision. Whatkinds of factors do the management team and the Board weigh up in making thosedecisions?
SHANE BUGGLE: Thanks Jill. Look at the outset I think it’s important to say that The Board and indeed management - are very aware of how much shareholders value dividends. We
know that last year the reduced dividend was really hard on lots of our shareholders. In thishalf the dividend decision required the weighing up of a few factors – our capital levels, andwithin that the level of capital generation which reflects how our business is travelling, andof course the level of credit provisions held. This is an important consideration given theenvironment we’re in. We know the market values a level of predictability and sustainability
in dividend flow, so we’re pleased to be able to move closer to our longer term payout ratio
and to fully frank the dividend. The environment though is still unpredictable. We saw
another snap lockdown in WA only recently. And the world is a long way from being out of
the woods. While Australia and New Zealand have come through well so far, someconservatism is warranted. I also want to say that shareholders should see the dividend
announced today as a sign the Group is well placed.
JILL CAMPBELL: Well, last year, and actually a few times now ANZ has returned capital.
Given that the Group is sitting at 12.5% CET1 on a proforma basis, will we do that again?
SHANE BUGGLE: Look, capital efficiency remains a key element of ANZ’s strategy andyou’ve seen the Group’s focus on that over the last five years. And I think we can say we’vebeen a good steward of capital. As you say, our CET ratios are comfortably above APRA’s‘unquestionably strong’ benchmark, about $7 billion dollars above it in fact. So clearly wehave some flexibility to consider capital management if the capital isn’t required in thebusiness or there aren’t reinvestment opportunities. However, there’s still a fair bit ofuncertainty across the various economies we operate in and being strongly capitalised isimportant. For example, we won’t see the full impact of the end of JobKeeper for a few
months and there are parts of the economy that are having a harder time. So we have tobalance a strong capital position and the desire for capital efficiency with where we are inthis cycle. And that balance is something we continue to discuss.
JILL CAMPBELL: Thanks Shane. I’m going to move to you now Kevin. ANZ released a net$491 million of provisions today, credit provisions. It’s quite amazing isn’t, it if you thinkback to this time last year? Can you walk through the thinking behind that outcome?
KEVIN CORBALLY: Sure. And just to clarify that net $491 million provision release that you
refer to is comprised of a $678 million collective provision release, which is offset by a $187
million individual provision charge. And there’s a number of balancing factors here which
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have to be weighed up. We came into this financial year in a strong position both from acapital and provisioning perspective and we’re now at 12.5% Common Equity Tier 1 ratio
and we’ve got $5.1 billion in total provision balances, which includes $4.3 billion in collective
provision balances at the end of the first half. And you may recall last year I mentioned that
we had a relatively new accounting standard – referred to AASB 9 – which applies to allbanks. And it required us to hold provisions for future losses, not only due to circumstances
today, but also due to how we expect the economy to evolve in the future. So that’s more of
a forward-looking assessment and I think I referred to it as setting money aside for the
future rainy day that you may or may not need. Now we put on $1.7 billion of additional
provision charges between March and September last year for that rainy day. And look,essentially it hasn’t rained as much as we thought it might. So through the first half of thisyear we’ve released about a third of that increase from last year. Now the improved
economic outlook – noting that this is relative to what were pretty dire estimates this time
last year – gives us comfort to release some of that build-up in provisions. The economy andthen, by definition, many of our customers both big and small are currently appearing to be
in a much better place than was anticipated at the same time last year. And we also saw
some portfolio reductions in Exposure at Default during the half – largely in Institutional –as well as improved trading conditions across a number of sectors, which have resulted in
an improvement in our risk ratings of both our Institutional and elements of our Commercial
and Retail customer base. Nevertheless though, we thought it was prudent and appropriate
to hold onto a significant amount of the build-up. Given as Shayne just mentioned a few
moments ago, we’re not out of the woods yet.
JILL CAMPBELL: Ok, so let’s go into that last comment just a little bit more, if you could
expand on it. What kinds of things would you need to see? What are you looking for thatwould give you more comfort to perhaps release some more provision in the future?
KEVIN CORBALLY: Sure. Look, remember we struck our provisions estimates at the end of
March. There was then, and quite frankly there still are, a number of uncertainties. So for
example, JobKeeper and JobSeeker had only just finished, the deferral program for
mortgage and commercial customers had just finished, Brisbane had actually announced a
lockdown. And looking back, the volatility in economic outlook over the last year has beenquite extraordinary. I think about this time last year, and even September last year I shouldsay, our economists thought housing prices would decline by 9% this year. Now the
expectation is up by 17%. And as a management team, together with the Board, we have toshepherd through that and strike some sort of balance. And additionally, other factors likethe speed of vaccine rollout, sporadic snap lockdowns and events happening offshore, allhave to be considered. While things are definitely way better in Australia and New Zealandthan they were this time last year, this is an extreme event and there’s quite a bit yet toplay out. So we want to exercise some caution notwithstanding the strong capital andprovision balance that I mentioned before.
JILL CAMPBELL: Ok. So with banks like ANZ, or any of the big banks and small banks, they
have what are called internal risk models that have to deal into these kinds of situations.
How does a model deal into this?
KEVIN CORBALLY: In what I suppose I would call normal or relatively benign economic
conditions, the models that we use to calculate our expected credit loss work well for our
provision estimates. But the models were not calibrated to deal with the extreme economic
movements that we’ve seen in the last 12 months. We moderated our economic scenario
weights so there was reduced weighting to the base case, which is – our base case issomewhat at the optimistic end of consensus forecasts. And we increased the weightings to
the downside with some additional provisions that we held onto to reflect the higher risk
associated with our models under those volatile economic conditions. We also took a small
increase in our management overlays to reflect the fact that our modelled delinquency
numbers don’t reflect that the substantial deferral support packages that have assisted ourcustomers. And we re-evaluate the effectiveness of the modelled delinquency peaks every
quarter and in this case we took an additional $50m increase to overlays that are held
predominately for our Mortgages and Small Business books. So stepping back and thinking
about where the economy is at, especially relative to last year, how many of our customers

have returned to normal payments post the payment deferrals. But also the level ofvolatility and uncertainty that still exists, we believe our current provision levels are prudent
and appropriate and we’re comfortable with the level of the release.
JILL CAMPBELL: Thank you. So most of what we’ve just talked about is really about what
we’d call collective provision. If we talk a little bit now about individual provision becausethat tends to be the money you do lose. It was quite a bit lower this half and we saw this in
the quarter as well than the longer term, how should we think about that?
KEVIN CORBALLY: The first step is to think about the composition of the individual provision
charge, it’s actually an aggregate of provisions taken for newly impaired exposures,increases in provisions that we hold for existing impaired exposures and then any write
backs or recoveries that we receive as part of our workout activities. And essentially in thehalf, write backs and recoveries were basically in line with the last two halves andsubstantially offset provisions that we raised for new impaireds. Increased impaireds were arelatively small component of the provision charge for the half. There’s no question this isabnormally low. For example, over the last seven or eight halves we would average around$400 million in a half. I think this reflects a few things. Importantly, it reflects the fact that
our larger customers are in a much better financial position and also unquestionably I think
it reflects the ongoing work on reducing our risk profile and improving the credit quality ofour book - not just in our Institutional business - over the last number of years. In addition,
it clearly also reflects the government support by way of various programs over the courseof last year and early into this year. And also the deferral programs that the banks provided.
And these last two factors provided customers I think with valuable time to navigate thefirst stages of the crisis.
JILL CAMPBELL: Absolutely. Thank you. Shane I’m going to go back to you now we’ll talkabout margins. Good margin performance in the first half, when you look through it, what
were the drivers?
SHANE BUGGLE: Thanks Jill. Look it is a good margin performance, in fact this is the best
margin performance in a decade. Margin was up 6 basis points in the half or 3 basis points
to 160 basis points on an underlying basis. And importantly, the margin was up in each ofour divisions. This outcome is in line with the outlook provided at both the Full Year 20
Result and the First Quarter Trading Update. And so over the period we’ve had to manage
across a number of competing factors. Now the trading environment both helped and hurt.
Now there’s a chart in the pack which will step you through what I’m just about to talkthrough.
JILL CAMPBELL: Right.
SHANE BUGGLE: I recommend people have a look at that. So we saw a negative 3 basis
points impact from low rates on capital and replicated deposits, net of repricing after the
standard and variable cash rate change. We also saw a negative 3 basis points impact
arising from holding higher liquid assets. The higher liquids meant we were able to reduce
our reliance on the RBA’s committed liquidity facility and so while negative for margins, it’s
actually a positive for returns. Asset margins improved 2 basis points and that was theoutcome of better Institutional lending margins, somewhat offset by competitive pressuresin home lending. There was a mix benefit primarily in liabilities and specifically we saw
higher at call deposits which were up 5 per cent on average. And finally we benefited fromgood deposit management pricing across all business as well as lower wholesale funding
costs. Together, those two items drove a 4 basis points benefit.
JILL CAMPBELL: The drag on margins that comes from, what gets called in the industry,
replicating deposits, has been pretty persistent and this is for the sector, not just ANZ.
You’ve mentioned it in your commentary that it might be lower in the next half, can you
walk through why?
SHANE BUGGLE: Yes, that’s a really good question. So just standing back thinking aboutthat portfolio, the tenor of that portfolio is three to five years and so the sector has seen aheadwind arise as maturing tranches are replaced by new tranches at lower interest rates.
We called out, as you said, a 3 basis point impact for the first half 21 and that’s precisely
where we came in. In the second half we think the impact will be more like 1 basis point andthat’s for a couple of reasons, the first is the impact of the older tranches rolling off relative
to current investment yields is reducing, so the delta between the two is reducing. And
secondly, with rates moving higher recently there’s been an opportunity to invest deposit
growth over the last 12 months at better yields out of the five-year swap which reduces the
NIM drag. We’ll update on how we’re seeing FY22 at the Full Year results.
JILL CAMPBELL: Sure. The area of deposits looks like it’s been a benefit and again, this is
the sector, not just ANZ. Is there much more that you can do in that space?
SHANE BUGGLE: Yes, you’re right. Deposit growth in the system was strong last year off theback of the high level government assistance. And the lockdowns limited people’s activity as
well. So we’ve seen our customers, and that’s pretty much across the board, behaving
conservatively and responsibly and building up buffers if you like. You would have toimagine sector deposit growth, given its coming off that much elevated base, will moderate
in the second half. Although households will see the benefit of tax refunds and it’s possiblethat stronger credit growth will assist businesses. Opportunities to do more repricing indeposits are reducing, although we will see the full half benefit in the second half from
repricing done in the first half.
JILL CAMPBELL: Okay. If we go to costs now. So still with you Shane. Another good cost
outcome, and this has become something that ANZ’s built up a bit of a track record on,when you look at the results travel through this half, what do you see, how does that work?
SHANE BUGGLE: Well you’re right, strong cost management has been a key element of
ANZ’s broader strategy since the start of financial year 16 and through that period we’vedelivered consistent absolute cost reductions in expenses – that’s over the five-year period.
So the way we think about it is to focus on continuing to reduce the running, what we callthe running of the business costs so that we can increase investment in what we call our
accelerated strategy, without increasing the overall cost base. And if you adjust for FX, total
costs were down 1 per cent for the half after absorbing around $25 million of inflation. Thatsavings that we generated in running the business costs, helped us absorb an increase inpeople costs as we responded to extra demand related to COVID, which was additional callcentre staff for example. And some higher leave costs that included granting extra leave tostaff as recognition for their efforts through COVID. As I mentioned, we’ve continued toinvest through the savings we’ve got from the running of the business and we’ve invested indigital channels, process automation, optimising our property footprint, and simplifying end
to end processes. Broadly, if you think about it, this is the work to be able to deliver faster,better, cheaper services to our customers over time and a better experience for our teams
and staff.
JILL CAMPBELL: And just finishing up, when you think about the $8 billion cost baseambition that ANZ has, are the drivers of that – so I guess the path from here – are they
any different to the way that the costs have been structured over the last five years? Or is ita case of just building on what we’ve already done?
SHANE BUGGLE: Yes, the last one. The premise is exactly the same – continue to work
away on reducing running the business costs so we can invest. We have, as you said Jill, areally good track record on this, a real discipline in the organisation. It is now after five
years, part of the DNA of the organisation.
JILL CAMPBELL: It’s a thing.
SHANE BUGGLE: It’s a thing. So, finding headroom to increase investment is important as
this drives real benefits and not only in terms of costs, but importantly in customer
experience and operational risk and reducing operational risk. The more automatedprocesses are and the more straight through they are, the less manual intervention isrequired and so the less chance of an error or a delay. Our customer’s expectations havecontinued to evolve and we are evolving along with them. We want banking to be an easy
experience given it is such an important part of our customer’s lives.
JILL CAMPBELL: Absolutely. So thanks to both of you and that’s the end of our session
today. As I’ve mentioned to those of you listening, there’s quite a bit of material available
on our website around the results, so please make sure to have a look at that. Thank you.
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