21 August 2020
Market Announcements Office
ASX Limited
Level 420 Bridge Street
SYDNEY NSW 2000
Transcript ANZ 3Q20 Trading Update
Attached is a document titled Transcript ANZ 3Q20 Trading Update. It has been
approved for distribution by ANZ’s Continuous Disclosure Committee.
Yours faithfully

Simon Pordage
Company Secretary
Australia and New Zealand Banking Group Limited

Australia and New Zealand Banking Group Limited ABN 11 005 357 522
ANZ Centre Melbourne, Level 9A, 833 Collins Street, Docklands VIC 3008

TRANSCRIPTION
Company:

ANZ

Date:

19 August 2020

Time:

9:00am (AEST)

Duration:

1:08:46

Reservation Number:

10008587[START OF TRANSCRIPT]
Jill Campbell:Thanks operator and good morning everybody. It’s Jill Campbell here I’m
Head of Investor Relations for ANZ, for those of you I haven’t met. Welcome
to the conference call and audiocast for our 3Q20 trading update. This will beavailable also for replay later in the day. We’ve released a number ofmaterials today, including two slide packs which were released as one
document. For the purposes of the session this morning, it’s the discussion
pack that we’ll be referring to, we won’t be taking you through the pack, but it
will be helpful if you’ve got that handy.
I also apologise if at any point there’s a little less clarity in the sound thanwe’d like, we’re in a Stage 4 lockdown in Melbourne and so we’re working
through all of the logistics issues that come with that.
We haven’t done a Trading Update for a while, in fact not since 2017 and so a
reminder about how this will work. Our CEO, Shayne Elliott and CFO,
Michelle Jablko, will speak for between 5 and 10 minutes. We’ll then go to
Q&A. The operator has already explained to you some instructions about how
to do that, but I’ll come back with a little bit more housekeeping before we
start.
Also in the room with us today, we have our CRO, Kevin Corbally, and on thephone, the head of our Australian Retail & Commercial business, Mark Hand.
I’ll hand over to Shayne.

Shayne Elliott:Thanks Jill and thank you all for joining us this morning. Now as Jill said, thiswill mainly be an opportunity for you to ask questions, however I do want tomake a few initial comments and then I’ll ask Michelle to provide a couple ofobservations. Firstly, it’s very clearly a difficult and unusual time and ourthoughts are with those that have been impacted either from a health or afinancial perspective. I want our customers to know that we will continue to do
all that we can to support them through to the other side of the pandemic.
You only need to look around the streets of Melbourne to understand theimpact of COVID, not only on the way we go about our daily lives, but also on
the economy more broadly. Even in New Zealand, a country that on every
measure had this virus beat, recent days demonstrate this virus is going to bewith us for some time to come. As a community, as an industry and as abank, we need to adapt to a COVID way of life.
Governments will continue to manage the health and macroeconomic
response and it will be up to the banks, like the ANZ, to support customers
while balancing the interests of our shareholders, as well as the safety andwellbeing of our employees. I don’t want to sound overly pessimistic or
unrealistic. Sure, Victoria is doing it tougher than other states at the moment,
but Western Australia is ticking along with iron ore prices holding up. Parts ofQueensland not exposed to tourism are already showing signs of recovery,
particularly in the agricultural sector and even in Victoria, there arebusinesses and sectors of the economy that have adapted and are doing
okay.
This is going to be a very difficult environment to navigate. It’s fast-changing
and the impact varies from state to state, industry to industry and customer tocustomer. It requires us to have the capacity, flexibility and the experience tomake decisions and manage that change in real time and I’m pleased to saythat to date, we’ve navigated this difficult environment effectively. As a bank,
we entered the crisis in great shape, with an incredibly strong balance sheet,with record levels of capital and liquidity.

The work done over several years to simplify the Bank means we’re now only
focused on the things that matter, our people are more engaged than ever
and we are able to quickly adapt to the challenges the future holds.
Put simply, we’ve never been in better shape to support all our stakeholders
through what will be one of history’s great challenges. But it’s not just luck, it’s
a combination of decisions that we’ve made over many years to focus on thethings we’re good at, strengthen our foundations and invest for the long term.
There is no doubt we’re also benefiting from a strong regulatory regime andswift and decisive government intervention. You’ll see from the Media
Release and the Chart Pack that we posted an unaudited Statutory Profit for
the third quarter of $1.3 billion and a Cash Profit of $1.5 billion. Common
Equity Tier 1 capital is strong at 11.3% on a pro forma basis, without having
to raise additional capital from shareholders. This is a good result in difficult
circumstances. Our operational and balance sheet strength allowed us toprovide significant support to customers and our people, while also providing
a fair return to shareholders.
Now it’s worth noting that not all banks have the same exposures. Sadly, theSmall Business and Commercial Property segments are where much of theeconomic pain is currently being felt. Relative to others, our loans to thesesegments are much smaller. But despite that, we took the prudent step ofadding to our credit reserves in the quarter.
Our performance and strong balance sheet position developed the confidence
in our ability to navigate this crisis and it’s meant we’ve been able toannounce an interim dividend of $0.25 per share fully franked. As you know,
we delayed this decision from April, however we believe it was in the longterm interests of the Bank and its owners that we waited until we had more
information and given all that has happened in the last month, this has provento be prudent.
Turning to the underlying business, during the quarter we outperformed inAustralian home lending, growing well above system. Customers acted very
prudently by strongly increasing their savings and paying down credit card
debt. Institutional customers also acted prudently and repaid loans in thequarter, particularly in our international franchise, which delivered a capital
benefit to the Group.

Markets activity was also higher as customers sought to increase currency
and rate digits and as a result of strong customer flows and underlying
volatility, our markets business revenue was up 60% on the first half quarterly
average.
In fact, as the impacts of the health crisis became better understood, theperformance of our Institutional and international business highlighted thebenefit of maintaining a diverse and well-managed portfolio of businesses.
We have taken the foot off the accelerator when it comes to simplifying ourbusiness, with the sale of UDC in New Zealand to Shinsei Bank and ouroffsite ATM fleet in Australia to Armaguard.
Costs were down 1% for the quarter (compared to the first half quarterly
average). This is a very pleasing outcome, which is a result of thoughtful anddisciplined cost management in the environment. It wasn’t a kneejerk
response to COVID or from underinvestment. In fact, we invested record
amounts this quarter to build a better bank for customers and staff. Despite
this, we expect annual costs to remain broadly flat on a FX-adjusted basis forthe year.
The biggest feature we’ll call out, however, has been the work we’ve done tosupport customers through the pandemic.
In many respects, you have to remember this crisis is only five months old. It
seems an eternity ago that we were all free to go about our business, or here
in Melbourne, even venture outside our suburbs. I don’t know what the futureholds, nobody does, but what I do know is that we are better placed thanwhen we entered the GFC to identify changes and quickly adapt. We’ve madeprudent investments in big data and real-time monitoring systems, that allow
us to spot trends quickly and respond to customer needs promptly. But I also
know that our people have stepped up and it’s been our company’s purposeof shaping the world where people and communities thrive that has guided
this response.

Great companies step up when it really counts and while challenges clearlystill remain, we’ve already supported around 200,000 customers in Australia
and New Zealand with their loans, which will go a long way to carrying people
to the other side of the crisis. Finally, while this is an investor briefing, I would
like to acknowledge the terrific work of our 40,000 people across the world.
From our hubs in Bangalore and Manila, through to our contact centres inAustralia and branches in New Zealand, they’ve all done a great job for
customers in very difficult circumstances, with people productively working
from home despite competing priorities for a long period. They’ve also done
their best in keeping costs under control, with everybody playing their part inmanaging our annual leave balance. This has been a meaningful contribution
to our cost work and I thank them all for their efforts.
I’d also like to acknowledge the passing of our former chief executive, Will
Bailey, last week. Will was chief executive between 1984 and 1992, having
started as a teller in the Oakleigh branch at the old ES&A Bank in 1950. I did
have the pleasure of meeting Will, but I never worked with him. But I know he
was a mentor to many of ANZ’s leaders and made significant contribution inbuilding the ANZ we all know today over many years, particularly in his efforts
to modernise the Bank through the use of technology. On behalf of everyone
at ANZ, I’d like to pass on our condolences to his wife, Dorothy and his
daughters Alison, Robyn and Merryn as well as his extended family andfriends.
With that, I’ll now pass to Michelle to make a few comments before opening
up for questions. Michelle.
Michelle Jablko:Thanks Shayne. I’ll just make a few comments, with a focus on how we’vestrengthened our balance sheet and capital over the quarter. If you’ve got it
handy, I’d point out slide 2 of the investor discussion pack that we released
today.
You will see here we finished the June quarter with pro forma CET1 of 11.3%,
which is around $50 billion of CET1 capital in dollar terms. This means in a
pro forma sense we were able to generate 47 basis points of capital over thequarter, which is equivalent to a $2.1 billion capital raising without
shareholder dilution. Let me take you through how we did this.

Firstly, pre-provision profit added 43 basis points and was up 6% for thequarter. We haven’t provided granular detail on this, but I’ll point out that
Institutional benefited from geographic diversification and our markets
business achieved revenue around 60% higher than the average of the twoquarters. Margins were impacted by low rates, as we foreshadowed at thefirst half and also higher liquids and mix related impacts.
We manage costs really well. Absolute costs were down 1% compared to theaverage of the first two quarters. We diverted resources to where they weremost needed in response to COVID and we continue to benefit fromproductivity across the Bank, as well as savings like lower travel costs. We
were able to manage costs down, even though we invested more in ourbusiness this quarter than we ever have, so we were able to benefit from ourongoing focus on simplification, which drove productivity in the quarter, plus
we took tactical action, but not at the expense of good customer outcomes orbusiness investment.
Now while we grew PBP, we didn’t consume additional risk weighted assets
in doing so. In fact, we released 12 basis points of capital on an underlying
basis. This is consistent with what we told you at the first half result. Youmight remember we said we supported customers with liquidity in the earlystages of the crisis and we told you this was largely timing. Since then, manyof our customers have not needed this level of liquidity, which has released
capital. Most of this was in our international business and we’ve seen thistrend continue in July.
In terms of credit impact, this was 21 basis points for the quarter, split roughly
50/50 between the increase in credit provisions and risk weight migration. We
increased our collective provision by $234 billion to $4.65 billion. If you recall,at 31 March we based our EPL modelling on some very grim economic
forecasts, including a 13% peak quarterly fall in GDP and 13% peak
unemployment in the June quarter.
While more recent economic forecasts have not be as negative as that, we
increased our collective provisions. We believe this was appropriate given thelevel of economic uncertainty, so for example, we added further overlays forsmall business and mortgage deferral.

Our risk weight migration today has been less than we originally anticipated,
especially in our Institutional portfolio and we’re very well progressed on all
our wholesale customer reviews. We thought migration might have beencloser to 20 to 25 basis points this quarter, instead of the 10 basis points weactually experienced.
A key reason for this is that our customers have been proactively managing
their own balance sheets, they’ve been managing their own costs and somehave also raised capital. It’s too early to call out whether this means our risk
weight migration to the end of 2021 could be lower than the 110 basis points
we previously said with our base case. We’ll provide much more detail at thefull year and of course consider the economic outlook again at that time.
We’ve had strong capital generation this quarter, even after credit impacts
and then of course we’ve announced the sale of UDC, which is on track tocomplete in the coming weeks. All of this has given our Board the confidence
to pay a prudent first half dividend of $0.25 per share, fully franked andwithout a discount on the DRP. The dividend is 46% of first half statutory
earnings, but 30% of earnings if you add back in impairments we took at thefirst half of AmBank and Panin which were capital neutral.
We think this decision is sensible right now. We know we have shareholders
that depend on us for part of their incomes and we’ve balanced this withkeeping our capital position strong and not [unclear] shareholders. It also sits
comfortably within the APRA guidance.
I’m now going to hand back to Jill for questions. I’ll point out, we’ve got quite a
bit of information in the slide pack on our customer support packages, so ofcourse we’re happy to talk to any questions.
Jill Campbell:Thanks Michelle and thanks Shayne, I’ll hand back to the operator in asecond. As I mentioned, we have our CRO, Kevin Corbally with us today andMark Hand who is our Group Executive for Australia Retail and Commercial isalso available. If you can please just try to limit your questions to two, the IRteam are available after this call to help you with any additional questions that
we don’t get to. To any media dialling in, thanks so much for participating andwelcome, but if you could please direct your questions to the media team.
With that, I’ll hand back to you, operator, to start the questions.

Operator:

Thank you. If you would like to ask a question, please press star then one on
your telephone and wait for your name to be announced. If you wish to cancel
your request, please press star then two. If you are on a speakerphone,please pick up the handset to ask your question. Our first question is fromRichard Wiles of Morgan Stanley. Please go ahead.

Richard Wiles:

Good morning. Could you provide some more commentary on net interest
income, particularly the impact of liquids on average interest earning assets
and the margin, the impact of competition and whether the strong markets
income meant the underlying decline in margin was different from theheadline decline please?

Shayne Elliott:Thanks Richard. I think it’s best that Michelle take you through the numbers.
Michelle.

Michelle Jablko:

In relation to liquids, that had about a two basis point impact on margin. I think
we increased liquids by about $13 billion for the quarter. In terms of yourquestion on the difference between the underlying and the headline its one
basis point.
There was some other ups and downs. We’ve called out the main ones,
which were really low rates, which was six basis points as we'd previously
told you, liquids as I've mentioned, and then mix. On mix, the main things
were a shift from variable to fixed home loans which has gone up a bit thisquarter and also just we had more Institutional relative to the rest.

Richard Wiles:

Thanks, Michelle. Could you also comment on competition?

Michelle Jablko:

Yes. In terms of competition, I'd say the impact of competition was broadly
the same as its always been, but we had some offsets to that. Because if you
recall, we had some high Institutional lending margins through the quarter. So
I would say in terms of competition, similar to the trend First Half

Richard Wiles:

Okay, and if I could just ask a second question, please. Do you have somesense about what proportion of your deferred home loan customers anddeferred small business customers may seek an extension of that deferral foran extra four months?

Shayne Elliott:

I mean the short answer to that, Richard, is no we don't actually. I think it's
just a timing issue. We're right at the point actually where we're going to startto know. We've obviously been in contact with all of our customers. But I
might just ask Kevin. Do you just want to talk where we are in terms of that
contact program and when we will have better insight into the numbers thatwill be seeking the extension, or any colour you can give Richard on that?
Kevin Corbally:

Sure. Look, at the moment we're contacting every - but I think home loans
first. We're contacting every deferral customer either digitally or, alternatively,
via phone or letter as the case might be. That's to ensure they understandwhen those payments are actually due to restart and what the payment will be
and what their options are. We've also given them the opportunity, and somehave done so, to schedule a discussion closer to the end date. Or
alternatively, they can speak to someone sooner if they need to.
What we're doing in terms of the process, from a call-in perspective(telephone perspective), is we're actually checking in on those portions of thedeferral group who have the characteristics, if I can describe it that way, thatsuggest they might need some more help - they're possibly higher risk, e.g.
they've had a material drop in their income or they're unemployed.
What we have seen, which is really interesting, is that two-thirds of thecustomers who sought the deferral, actually their income level has either
improved or it's stable. In addition, a quarter of the customers who sought
deferral have also made a repayment. Notwithstanding the fact that they wereactually on a deferral during this period, they still continued to make a
repayment. More than half have at least three months or better in terms of
payment buffer.
So that's essentially the process. At this stage, we've contacted in the order ofabout two-thirds of our customers on the mortgage side. On the commercial
side and the small business side, slightly different in that you have to opt intothat process. We spoke with every customer prior to them actually taking up
the package, so they understood exactly what it was that was on offer.
We're not required to do the same three-month reviews as we are formortgages. However, we have started contacting those customers in any
case and we have continued the normal credit and portfolio monitoring that
we would have as well.

Within the Small Business and Business Bank, some of what we've seen
there is that 60% of them have actually, interestingly, got higher cash
balances than at the same time last year, and for 45% of them, their cash
inflow is actually greater than the same time as last year.
One of the key things commercial customers have been trying to do is figureout how they can reduce their cost base. About a third of them have actually
decreased their cost base by more than 30% which is quite significant. So
that's where we’re up to.
Shayne Elliott:

The other thing I would add to that, Richard, just to give you a bit of colour
clarity on that, over two-thirds of the home loan customers where Kevinmentioned where their income is stable, that's quite a broad definition. So thatmight still be down, it might be down 10%, 15%, but it's not fallen off a cliff. So
just to be clear on that, it doesn't mean it's necessarily flat.
The other thing I would just add there, I made a reference in my opening
about the data investments we've had. That has really shone through.
Compared to the GFC, our ability to actually, literally in real time, going
through, getting all the customers who've got a Jobseeker payment in theiraccount, getting all the customers who have seen their income levels fall, andour ability to be able to respond and target, is just at a massively different
level than it was in the past. I think that's enabled us to be much moretargeted in the way that we respond and reach out. It's not perfect because
we don't have everybody's operating account, but it's really been a massive
advantage I think this time.

Operator:

Our next question is from Ed Henning of CLSA. Please go ahead.

Ed Henning:Thanks for taking my questions. Just two questions from me. You talked
about the trends continuing in July around the pay down of the Institutionalborrowers. Can you just run through how much more you think has got to playout here? Could the fourth quarter be the same as the third-quarter impact, or
you think this is falling?

Shayne Elliott:That's a really good question. Obviously, we don't know yet. But, look, let's
just back up a little bit here. What happened at the end of the first half, March,
right in the heat of the moment, COVID really heavily hit the shores not only

of Australia but the United States and parts of Europe. That's where a lot of
our multinational customers are based.
What did they do? They did what they're supposed to do. They shored up
their balance sheets, they hoarded cash, they drew down liquidity, etc. We
saw that more than others and we made sure we were getting paid for that.
So people were basically behaving as you’d expect.
In the third quarter, things started calmed down, capital markets continued tooperate. People realised they could raise equity, and we saw that on a
massive scale here in Australia, in particular, and also internationally.
Treasury, generally, calmed down and realised - I don't need this expensive
debt - and they started repaying.
So we stayed at a reasonable clip in the third quarter. If we look at the period
between 30 June and today that trend has continued at about the same pace.
So even today it's lower. I don't know from here. I think it really depends on
the state of capital markets and the general economic sense. But if you werea betting person you'd have to say it's probably a worst case of flat andprobably continue to come down.
Which from our perspective isn't a bad thing really, it releases capital. But
we'll continue to support our customers as necessary. But I'd say it's probably
flat to down would be a pretty decent estimate.
Ed Henning:Thanks. Just the second one. Markets income was obviously very strong
during the period. Can you just touch on what's happened in July and August
now you've seeing that going forward?

Shayne Elliott:

So let's get back to why it's strong, it's coming from a couple of things. Again,
our markets business, I think it's worth pointing out, is quite different to someof our local peers in particular. More than half of our markets business isinternational. It's not in Australia. In fact, some of our biggest operations arein Asia, for example, in Singapore, and also in London and New York. That
goes for that international franchise we had.
Actually, there has been – the really strong performer has been offshore. It's
been strong everywhere, but out performance has really very much been in
our international franchise, and for the reasons that I mentioned. Underlying
volatility, what happens? Well, there's a bit of spread, a little bit on volatility.

You get a little bit more activity from customers who are seeking to hedge. Allof those conditions have continued from the third quarter into the fourth
quarter. So the basic conditions persisted, but probably not to the same
degree. It's not as volatile as it was. Spreads are not as wide as they were.
But it's still a pretty buoyant environment for global markets businesses.
Again, just to be clear, our business, what do we do in markets as opposed toothers? Our franchise is a very big foreign exchange franchise and a rates
and credit franchise. Our commodities business is tiny, we don't do equities,
etc. So it continued probably at a slightly more modest pace though, but still
looking pretty good.
Ed Henning:

Okay, thank you.

Operator:

Our next question is from Andrew Lyons of Goldman Sachs. Please go
ahead.

Andrew Lyons:Thanks and good morning. Just a question on slide 11, just around yourbusiness loan deferrals. On slide 11, you note 94% of your SME book ondeferral is fully or partially secured. Can you perhaps provide a bit more detailabout what this collateral is, and how you'll ultimately balance the needs ofyour customers versus the needs of your shareholders as we go deeper into
this cycle and you may have to start accessing that collateral in a fairly
significant way?

Shayne Elliott:

Yes, look, I'll start with that, Andrew, and I'll ask Kevin to give a bit more detailon that. Starting at a little bit high level, but philosophically what we're saying
here, for the most part the reason that these small businesses have gotten
themselves in harm's way is through no fault of their own. It's not that they
had bad business models, it wasn't that they were over geared, it wasn't thatthey made bad decisions.
They have been caught in a general - their business was essentiallyprohibited by government. So the good thing is fundamentally goodbusinesses can, in the right circumstances, quickly get back on their feet.
Now, those circumstances, unfortunately, are outside of their control. They'relargely due to government policy. So we take the view that the best thing we
can do here, the best people to run those businesses, whether it's amanufacturing business or a restaurant or whatever it might be, are thepeople who currently do.
So giving them time is the right thing to do. So that's the approach we'vetaken. We are very fortunate, the cost of giving them time is a hell of a lot
lower than it would have been in the GFC or in any other normal financial
crisis. So the cost to them and cost to us of giving time is lower.
But we know, sadly, that even if tomorrow morning a vaccine is discovered
and governments open up everything, not all of those businesses will havethe wherewithal to get back on their feet, you're quite right. Sadly, at the righttime, we're going to have to take some hard decisions. That's what we do or
that's our role in the economy. But again, I think we've taken that view that thebest thing to do is to give as much time as we can. It's in their interests andit's actually in our interest that these people get back on their feet.
So I think we are being more tolerant in terms of - and really focus on that
customer care in terms of that balance. The cost to the shareholder is actuallyquite low of giving that time. That's got to be a really, really important factor
when you're doing this. So this idea of a cliff that in some magic state when
all these things happen we're going to act irresponsibly I don't think holds
water for all sorts of reasons.
Kevin, do you want to add anything, it is true there's a lot of security behind
there.
Kevin Corbally:

Typically it is secured by either residential or commercial property. There aresome other assets that businesses have as well but the vast bulk of these isthat. When you look at the security for SBB typically it is over 100% secured
and partially secured is a bit less than 100% but it is predominantly residential
and commercial property.

Shayne Elliott:

But obviously we’ve run models and our analysis considers what if the badthings happen to large chunks of that? What is the dimensions of that?
The good thing - and the bad thing about it, obviously, is that you really haveto make some pretty difficult decisions and you might argue well, a lot of that
security is the same category. On the other hand is, it tended to be pretty welldiversified and so…

Kevin Corbally:On that point, Shayne, you’re absolutely right. When we -determine the risk
rating on a customer, we actually run sensitivities on the value of thatproperty. So the property data is sensitised so- we have very different
scenarios and those scenarios will drive an outcome in terms of the risk or
security rating that we then provide to the customer.

Andrew Lyons

Thanks so much.

Operator:Thank you. Our next question comes from Jonathan Mott of UBS. Please go
ahead.

Jonathan Mott:

Thank you, I’ve got a question on a dividend. Really, why did you see theurgency to pay it now? It seems very unusual to have a delayed or belated
dividend. Why didn’t you wait until the full year result in three months’ time
when the economic outlook is going to be a lot clearer?
Especially when you haven’t seen the full impact of procyclicality, you haven’t
seen the deterioration going through and if you look across Victoria andAuckland, you’ve got 10 million of the 30 million people in Australasia lockedin their houses at the moment. Why not wait and see how the economy isgoing, rather than pay a dividend out on a belated basis?

Shayne Elliott:

Yes, fair question. Just to put it into context, Jonathan. We generated preprovisions 68 basis points of capital during the quarter and what do we do?
We used around a third of that for credit costs, provisioning etc. and thedividend we paid out is 15 basis points of that capital we paid out and that’s
why we used the word modest.
We’ve got a really strong capital position. Could we have retained it so wewere even higher? Yes, well of course. I mean - and there will always be - thisis a judgment.
The judgment that our Board took was, this is about balance. Our business is
profitable. It generates profits every day. Not as much as it used to but it’s still
profitable and that’s generating organic capital during the quarter. You saw
that in this quarter and you’ll continue to see that.
That allowed us to put away some more money for a rainy day and increase
our credit provision again. Yes, despite the fact that actually on somemeasures, economic outlook is better today than it was at 31 March. At thehalf. But nonetheless, we’re prudent and we’ve topped up our credit provision.
We’ve strengthened our capital ratios again and we’ve been able to pay amodest dividend to shareholders.
We think that balance is the right thing to do. You can always kick the canfurther down the road and wait for more and more information but we thinkthat was a fair thing to do. Then also, I think - look, we also have a role in the
broader economy and we know that many of our shareholders are retirees
and depend upon that income and that really weighted. We thought that it
was a fair decision to make.
But again, I think the more - the most important point of all of that is let’s put itin context. It’s 15 basis points here. I think that on any description, it’s prudent
and modest.
Jonathan Mott:

Okay, can I just ask a second question if I could? Probably to Kevin. You spatout a lot of positive statistics about the 12% of the mortgage book which is stillon deferral, like a two-thirds haven’t seen a fall in income. Can you give us well we all know in banking it is tail risk. We’re not worried about the twothirds that haven’t seen a fall in income, we’re worried about the one-third thathave.
Can you give us some statistics about the tail? How are they looking? What
are they seeing in their income and what prospects have they got of gettingback on their feet and repaying their debt?

Shayne Elliott:

So I’ll start, Jon and I think your observation is spot on and I - in myexperience, that’s even more the case in this crisis than it is in a normal one.
The pain of this crisis has been felt disproportionately by a relatively small
cohort.
The more impacted part of the economy has tended to be lower-skilledworkers, more casual workers and sadly more females, more low-income
cohort and therefore that’s disproportionately the renter population as
opposed to the homeowner population but nonetheless, you’re right andthere’s a tail risk.
We do have some colour on that, Kevin can you talk to the proportion there.
So for example, a number of people that are home at the moment are on

JobSeeker the proportion who actually aren’t employed is small, as you canimagine. But do you want to give a bit of colour to that?
Kevin Corbally:

Yes, look, a couple of things I’d say with one really important one, An
important one to remember is that every customer who we offered a homeloan deferral to had to be current with their loan - when the deferral was
granted.
Each of the Banks has done this slightly differently. Not everyone used thatapproach in terms of who they granted the deferral to. We know we’ve been alittle stricter than possibly some others. That’s the approach we did take.
It’s very difficult to see who is getting JobKeeper but we can see JobSeeker
and that’s a single digit percentage of those that are on deferrals.

Jonathan Mott:

Just in terms of trying to compare that to comments from one of your peers, I
think it was NAB came out and said they’re seeing a disproportionate numberof people who are in the private bank and had mortgages over $1 million ondeferral. Are you seeing a very, very different cohort on deferral and having
financial stress?

Shayne Elliott:

Yes. I think - I don’t - obviously, don’t know their book as well as ours – but I
imagine that some of that is to do with their business mix. Because a lot ofsmall business people could be private bank customers we have not had thatexperience.
There is a slight skew to slightly bigger mortgages but that is on averageslightly higher. That sort of makes sense because as you know, they’re
averages and in our total book, there’s a whole bunch of people who have got
a $50,000 mortgage, probably don’t need to get a deferral but they’re only
small. So no, we don’t have that same skew at all. We wouldn’t - we wouldn’t
have identified that as a trend within our book.

Jonathan Mott

Thank you.

Operator:Thank you. Your next question is from Brian Johnson of Jefferies. Please, go
ahead.

Brian Johnson:

Good morning and thank you very much for giving us the opportunity to ask
some questions. I have two questions. The first one is the slide where you’ve
got on your home lending, the growth. New sales, $10 billion, new sales ex.

re-fi $10b and then net of Refi $5b, then repay down $15b, which is telling usthat the growth is basically the redraw and the interest.
The first question is, can you confirm that basically what has grown yourbook, how much of that $4 billion is the deferred interest that you - the interest
that you’ve accrued on the deferred home loans?
The other point about it is - Shayne, is that I know that you’re very positivethat it’s starting to turn around. Is that performance good enough? Then I
have a second question, if I may.
Shayne Elliott:

Yes, look I’ll answer it. I’ll get Mark Hand who is online to give you a bit morecolour, Brian. Of the - so the technical answer to your question, of the $4
billion in redraw and interest, it’s about 10% of that relates to the deferralsthat you mentioned.
We had some issues a year ago with things like processing etc. We spent a
lot of money - I’ve talked about record investments and part of that has been
to get our home loan processing back into shape.
We had a big campaign a year ago, which was very, very successful (David
Hasselhoff). That really gave us the ability to test some of our processes. So
then, what we’ve been doing this year, actually just as COVID was starting,
was we went out with a very, very sharp fixed rate offer in market.
I - we were stunned by the response. We - you might have thought that in a
COVID time we would just sit on our hands. What we saw was a massive
uplift, you know across the industry in terms of refi. So we were in the rightplace at the right time. We got completely smashed with volumes – goodthing. Did mean our processing times blew out again. We saw levels of
application at multiples of what we have seen in our history for an extended
period of time which is a good thing. Those things are still being worked
through.
You are not seeing the benefit of that volume yet because, as you know,
there is a time delay between the funds are approved and drawing down. So
in the third quarter numbers here, you’re just starting to see some benefit butthat will be something that will be much more evident in 2021.

We do absolutely think we are doing enough. The volumes have stayed
relatively high. So higher than normal for us. We know we continue to pick up
share. We’ve made a judgment to our pricing etc. to make sure that our we’re in the market getting a fair return for the risk.
We’ve been very targeted about the kinds of loans that we want because
clearly, there’s a heightened risk at the moment. But Mark Hand, you’re muchcloser to it in terms of just giving Brian and the others a bit more colour on thehome loan business.
Mark Hand:

Yes, probably the only other thing to add is, in that repayment bucket,
because of the COVID environment, we’ve seen significant deposit growth
and that’s included in off-set accounts, for instance. Customers that have are-draw capability at their- I guess their mortgage, have paid against thatmortgage, knowing that they can withdraw it and that is effectively their buffer.
So that minus 15 number, I’d suggest is a little bit elevated.
Then, as Shayne said, this is up to 30 June where we saw really goodvolumes late last year, right through that period this year but a lot of thosedeals have hit the balance sheet you’ll have seen from the APRA stats in thelast couple of months and we expect to see that to continue.
Our re-finance out continues to improve so I wouldn’t call it a flight to quality
but there has been a significant flight to the major banks throughout thisperiod. So where we expect to see continued growth and some of that
repayment response because of COVID will ease.

Brian Johnson

Thank you.

Brian Johnson:

Yes, the second question, Shayne, when we have a look at it and you mightrecall, I complained rather loudly about what I thought was the relatively poor
disclosure and I’d just like to reiterate that point. But on the loan losses - on
the provisioning and the capital intensity.
But as far as I can work out today, you’ve lifted your provision coverage toexposure at default from basically 42 basis points to 45 basis points whereas
your peers are all sitting at 60 basis points.
You’ve had a higher historical, basically rate of loan losses than your peers,and you acknowledge that in your expected loss disclosures.

We can also see that in your housing book, you have a much higher
proportion of greater than 90% LVRs. Can we please get a little bit moredetail on what you’ve done in changing the economic scenarios? What haveyou actually done in the provisioning and the probabilities that you’ve
basically assigned to the base case and the undisclosed downside case?
Shayne Elliott:

Yes and in a moment, I’ll get Michelle to answer and Kevin to add to that but
just going back a little bit before we get into detail. I think again, we have togo back to the fact that our businesses are very different. As you know andconstantly criticise us for, we have a much bigger Institutional business thanour peer group.
The reality is that today our Institutional book is 86% of Investment Grade. Try
as we might, when you look through this crisis, at this stage - and I don’t think
we’re alone, this does not appear to be a crisis that has done adisproportionate impact to the Institutional side of the business. As you know,
the Institutional bank, just the normal course of business, has a much higher
risk weight in the first place when you’re booking business. It is very very
different than a business that might be exposed to for example the SME
sector which as you know we’re not. So there are differences in this. Michelle,
do you just want to talk through some of this …

Michelle Jablko:

Sure.

Shayne Elliott:…and importantly the ECL function.

Michelle Jablko:

Yes and we will provide additional information at the full year as well. The way
we thought about it, if you go back to what we provided in March, mycomments - we had a pretty grim view of the economic outlook at that point
in time. We can debate the various assumptions around that but we had apretty grim view of the economic outlook.
What we have done now is while the economic outlook is still negative, at theend of June it was less adverse, but what we did was increase the ECL. We
did that through a few means.
Partly through changes in the probability weight and partly through overlays.
Again, I am happy to provide much more detail at the full year with all thedisclosures then taking on board your feedback, Brian.

Brian Johnson:

Sorry, the other question, Michelle, was on the capital density. Previously you
said 110 and I can see in the slide there seems to be about - would I be rightin thinking 10 of the 110 has happened in the quarter?

Michelle Jablko:

So, 10 in the quarter, we had seven in the second quarter as well, so 17 of
the 110 has happened so far. What I did say is it's a bit early to predict this.
What we are seeing – we are really well progressed in terms of our wholesale
review, as of June, we were about half way through and today on institutional,
for example, we're probably about two thirds of the way through and we're
well progressed on Commercial as well.
What we’ve actually seen in our customers, and clearly we don’t do this onceand set and forget. Our actual outcomes are tracking more positively thanwhat we'd anticipated might have happened this quarter, but I don't want tocall out yet a sensitivity to the 110...

Brian Johnson:

Michelle, your ECL provisioning that you say that you've changed theeconomic forecast and made them slightly more adverse, are they still morebullish or, sorry, less adverse than the RBA's August restated base casescenario.

Michelle Jablko:

Sorry, again, the way we have done it, I don’t want to make it so formulaic
we've got overlays, et cetera, in there. The way we did it is in our March
forecast, which we disclosed, they were in some ways more adverse than the
RBAs on slightly different, probably more adverse up front, but on a slightly
different track in terms of how things improved, but broadly speaking about
the same. What we have done today is despite the economic forecast being a
bit better and clearly that changes all the time and we will update it in
September, we have added to the provision and we have done that through amix of, as I said, probability weights and overlays.

Brian Johnson

Thank you.

Operator:

Our next question is from Brendan Sproules of Citi. Please go ahead.

Brendan Sproules:

Good morning. I have a couple of questions. My first question is just on youroperating expenses for the quarter. In the first half you actually called out
three notable items in expenses. I was wondering if you could help us
understand how much a change in those notable items has contributed to thisquarter's result. Then I have a question on your provisioning as well.

Shayne Elliott:

I'll give you the generic answer and then Michelle can talk. Brendan, really
importantly what we have done through this is look, clearly COVID is
overwhelming and there's a lot of things that we need to adapt to, but wehave not given up on our long-term ambitions and our strategic desire tosimplify the bank and make it more efficient. That will continue at pace. We
have been more thoughtful about how we are implementing those changes
because of the impact on people and just generally your ability to get stuff
done working from home, but that does continue.
That transformation is just, a lot of it, is dividend to the business, it is justbetter productivity and a lower/flat cost. So that will just continue with a wholeraft of detail in there and so the important thing is that the performance of thequarter was not a kneejerk reaction to COVID, let's go and hack out costs, ,let's go tighten people or anything like that. We didn't do that at all.
What we did do is we quickly went back and looked at our cost base and said
what are the things we can manage differently and more tightly. Obviously
you get a tail wind or trade-off, I mean if you don’t do anything it probably juststops right. We continued in terms of our productivity work to get that costdown. The other thing I will mention is that this is not come because we've
slowed down in business, so our investment in new technology, newplatforms, new features and functions, actually increased in the quarter. It
was the largest investment quarter we have ever had in our history. That's agood thing because those things will drive benefits, not only in productivity but
better outcomes for customers in terms of some of the new platforms.
Because of COVID we brought forward some of that investment, for example,
e-signatures, the ability to do things digitally that might have been features on
our backlog. We brought those forward because they're more appropriate.
Michelle you want to talk through the large / notable bit …

Michelle Jablko:

Yes, and Brendan when we talk about expenses being down that’s excluding
large / notables. You’ll see in our media release that our large/notables areabout $100m and third of that was expenses, bunch of little things but nothing
really big to call out.

Brendan Sproules:

Thanks and just on your CP charge for the quarter, could you help us
understand what you've taken specifically around the deferral packages?

Obviously in three months' time when the holidays do expire there's going tobe quite a bit of movement across the portfolio so I'd be interested in what
you've taken now relative to what we'll need to look at later in the year.
Michelle Jablko:

Why don’t I start here

Shayne Elliott:

Yes, okay.

Michelle Jablko:

You would have seen in the pack our 90 days past due were elevated and we
spoke about that in terms of customers that we did put on deferral packages.
So that's had an increase in the provision as well as we’ve applied an overlay
across all portfolios actually looking at the deferral packages and then on topof that we applied an additional overlay for Small Business.

Kevin Corbally

So, one way Brendan of looking at this is that the majority of the increase thisyear, this quarter I should say, in expected loss reflects the deferral
packages and the higher risk segments within commercial.

Shayne Elliott:

I mean I think the obvious answer there is as the quarter unfolded it became
more and more apparent where the pain was being felt and we can see it in
the data, it is the SME sector sadly and we were able to do more work on thatand figure out what we thought was a more appropriate number. It obviously
is not a sector that lends itself to individual risk review so that's why we used
the overlay to account for that.

Brendan Sproules:

Thank you.

Operator:Thank you. Our next question is from Andrew Triggs of JP Morgan. Please go
ahead.

Andrew Triggs:

Thank you and good morning everyone. Shayne, I just had a question, a
couple of questions. Firstly, just on the rate environment in New Zealand. A
number of economists, including your own, now expecting negative rates lastyear. I know this was talked about at the last result, but just the expectation
for the margin impact perhaps on FY21 if that were to come through.

Shayne Elliott:

Yes, good question. It's still pretty early days, Andrew. Look, as you know theReserve Bank there made that announcement to prepare the market for
negative interest rates, banks have to be operationally prepared to do that by
December, I think. It is worth pointing out that we are - and again just for the
point of clarity - that's the wholesale rates in New Zealand, not retail deposit

rates. That is not been moved by the Reserve Bank, so we are talking about
wholesale rates.
You're right, our economists are considering that wholesale rates may be go
to minus 0.25%. Michelle, have we done work of what that might mean forpeople it has an impact on?
Michelle Jablko:

I mean it's a bit hard to predict exactly what it's going to mean because it
depends on where rates go.

Shayne Elliott:

Yes.

Michelle Jablko:

What the number is and what the customer behaviour is in the market
response. So, it's a little bit hard to give an exact number.

Shayne Elliott:

Yes.

Michelle Jablko:

But as Shayne has said, we are preparing for it so…

Shayne Elliott:

I think that's a fair question and something we should be more forthcomingwith at the full year. We will have had time to think that through a little bit
more. The other thing I’d say in NZ that there will be a lesser reliance on
Wholesale in NZ. A fair question Andrew and we will give some thought about
how we can give a better answer at full year.

Andrew Triggs:

Thanks Shayne and just a follow up on I guess the messaging that
institutional will perform more strongly this cycle than previous cycles. Just
back to the collective provision coverage discussion with Brian. I mean the - I
think you have 125 basis points of CP coverage of credit risk weighted
assets. CBA and Westpac are sitting at 170 basis points. There was ameaningful collective provision charge in the last half, 42 basis points of grossloans annualised. Just interested in some comments on that. It would appear
that there was a top up taken for that book in the previous half but is themessage that I guess it's no worse than what you had first modelled on thatside of things.

Shayne Elliott:

So, I think again, going back to something I said before, I think we don't know
the processes of other banks, we only know what we do. We know we run areally robust process around that. We know that our business looks different
to the others and we also know that in a lot of these models there's anassumption that the relative credit risk weightings are good indicators of true

risk and we don't necessarily believe that that’s always the case. As I
mentioned, we know in Institutional which we have a skew towards, high levelof investment grades, high risk weightings in the normal course of business.
And the nature of this crisis looks like it’s going to be disproportionally felt at
this stage in other parts of the sector. So I’m not so sure this raw comparisonof ratios is necessarily helpful but as we said we know our processes arerobust. So Michelle …
Michelle Jablko:

Andrew, just on your numbers, I think you're comparing total provision charge/CRWA with CP charge (CP/CRWA), so just the like for like is not exactly as
you said, but there is a difference. As Shayne said, look our books are notnecessarily the same. We hold more capital for unexpected loss throughinstitutional because that's the way that will work and so you would expect thedenominator composition to be slightly different

Shayne Elliott:

Yes and the business, the book that holds the least amount for unexpected
loss is homeowners and on a relative basis we have got a smaller proportionof our book allocated there and the two banks you refer to have a higher, so I
think there's a reason. There’s a mix issue if you will, and that has to do withthe difference in capital and expected losses and the provision for expected
losses.

Andrew Triggs:

Thanks sorry Michelle, that was an apple versus oranges comparison on the
CRWA versus total provisions but thanks for the answers.

Shayne Elliott:

Yes, thank you, Andrew. Next question?

Operator:Thank you, the next question is from Victor German of Macquarie.

Victor German:

Good morning and thank you for taking the time to answer my questions. I
just was hoping to follow up on the revenue trajectory. If my math serves meright, it looks like markets contributed about $900 million or slightly more than$900 million in the third quarter, implying that revenue excluding markets wasunder $4 billion, which appears to be well below markets' expectations.
I'd be just interested in perhaps a little bit more colour as to what drove that.
I'm assuming partially driven by margins, so any more colour on margin
trends and any potential volatility in that margin would be I think useful.

On a related subject, Michelle you've guided for a 6 basis point impact fromlower rates. It looks like that 6 basis points actually has fully come through inthe third quarter. Does that mean that 6 basis point guidance is actually going
to be bigger for the full half or is fourth quarter not going to be impacted?
Shayne Elliott:

I’ll just make a very generic obvious statement. The revenue environment istough Victor. Let's face it, margins are under pressure, very very competitivemarket. We're also seeing a continuation of a trend which was the removal
and reduction of fees-based income over long periods of time, there's still a there's still a headwind of that - there's still a tail of that coming through thebusiness.
Despite that, we are growing market share in home loans and doing it
responsibly and at a reasonable return. You’ve got to pedal real fast when
you’re booking P&I loans. You've got the headwind of low rates - low rates,
then that puts pressure on revenue, et cetera.
It's not a great environment, and we’re not going to kid ourselves and that's
why we've been really focused on things like productivity, about capitalefficiency and other things, that's not new. I think the margin pressure has
actually become more intense, and our ability as you know very well, toreprice is much more constrained today than it would be historically becauseof low rates and even on the deposit side, we're reaching some sort of naturallimit to reprice there. That's not true in institutional. You've got an ability to dothat and we get a little bit of a boost there but the outlook is really really
tough.
The only - the tail wind we're going to get on revenue if you will, there will besome volume growth in our home loans business as we mentioned. That will
start to come through now and there will start to be a little bit of a tail wind on
the volume side into 2021 but boy it’s not going to be hugely meaningful.
It is a tough environment and I don't think we should shy away from that. But
on the other hand, that's when - this is the type of environment when market
businesses shine and they should. We shouldn't be surprised that they're
having a good time. If we go back over long periods of time, they arecountercyclical businesses. In times of volatility they do well. That's thebenefit of having that diversification in our book but I'm sure Michelle will give
you more colour.

Michelle Jablko:

Yes, so deposits margins, in terms of the other impact from revenue, it's
mainly to do with what I’ve heard others say - in terms of what are transaction
volumes. On margins themselves, the 6 basis point I referred to at the half
was for the second half and that hasn't changed.
As you look further out, depending on what happens with rates from here. If
rates were stable the impacts on deposits is largely true, the impact of ITOC
and capital will continue about that and there’s a slide at the back that shows
you how that will progress.
Otherwise on margins, what’s sort of the negatives and the positives. In termsof potential positive, the deposit mix is probably improving a bit, that's
potentially positive. On the negative side, we'll get - we've still got mix that willcontinue to change, asset mix will change a bit in the fourth quarter.
We've got lower credit card spending and we've got continued conversion of
fixed home loans and then we've got the drawdown as the TFF.

Shayne Elliott:

Yes.

Michelle Jablko:

There's probably less benefit – and we had a very small benefit from
Bills/OIS, that probably will be a bit less. So we’ve had few ups and downs.

Shayne Elliott:

A little point that Michelle made is that for cards - it's good, customers are
doing the right thing, paying down cards, I think that's actually been surprisingand counter to what we've seen in other markets locally. People are actually
being pretty cautious, sure they’re not spending; they're not using the credit
card to buy flights and go on holidays, so those balances came down andtend to be a higher margin business.
Little things like that again will slowly chip away and - but the outlook is tough.
Next question?

Operator:Thank you. Our next question is from Brett Le Mesurier of Shaw andPartners, please go ahead.

Brett Le Mesurier:Thanks. Two questions; firstly, am I right in assuming that the larger notable
items impact - the $99 million adverse impact, that was largely in income, thatlargely occurred in income, is that correct?

Michelle Jablko:

That's correct, yes. It was…

Brett Le Mesurier:

Okay.

Michelle Jablko:…it was, yes.

Brett Le Mesurier:

The second question I had was looking at the pillar three, the impaired loans
from March to June fell from $1.5 billion to $1.3 billion in the write-offs, andI'm talking about corporate impaired facilities, fell from $1.5 billion to $1.3
billion from March to June and the write-offs increased by $65 million - from$65 million to $241 million. Am I right in assuming that the reduction in
impairments was because you wrote off the loans?

Shayne Elliott:

Yes.

Brett Le Mesurier:Can you comment on the industries in which - to which those write-offs
related?

Shayne Elliott:

I can’t remember. Kevin?

Kevin Corbally:

It's a range, one of them is what’s been mentioned previously - in thecommodity trading sector.

Shayne Elliott:

Right, yes.

Kevin Corbally:

Would be one of the bigger drops.

Shayne Elliott:

Could you hear that?

Brett Le Mesurier:

Okay.

Shayne Elliott:

Did you hear that?

Brett Le Mesurier:I heard bits of it.

Shayne Elliott:

Yes, because it's - the largest - there's a portfolio, but it's not a single but alarge part was in the commodity trading sector and we referred to a charge
we took in the first half and that was potentially written off.

Brett Le Mesurier:Okay, great. They're all the questions I have, thank you.

Shayne Elliott:Thank you.

Operator:

Our next question is from TS Lim of Bell Potter, please go ahead.

TS Lim:Good morning, guys. Thanks for the opportunity. Just going to slide number
10, you have some commercial customers having higher cash inflows andsome having lower cash inflows; are these net of JobKeeper payments? Mysecond question is, how can a bank protect itself from businesses that
actually fiddle their books to get JobKeeper payments?

Shayne Elliott:

The question - the first question you've given was I think how much of thatcash inflow was JobKeeper; the answer is, we don't know.

Kevin Corbally:

We know that roughly about a third of our Commercial customers arereceiving government assistance in the form of JobKeeper, so we do knowthat and those cash numbers, they will be inclusive of JobKeeper payments
as well.

Shayne Elliott:

The second question I think - I don't - again, I think second question whether
our customers are, I think the word was fiddling - fiddling their books…

Kevin Corbally:

Obviously, one of the things we look at when we take on board any customer
and we lend to any customer is the character of our customer so that is partof the assessment process that we go through. Outside of that is individuals
within that company and their activity and we've seen and we saw even at thehalf it can be sometimes quite difficult to pick that up in where those results
are being then audited by major accounting firms as well. It's a challenge forall of us.

Shayne Elliott:

What I will say on that TS is that there's a - as you know, there's a small
program where it's - there are small businesses apply for JobKeeper withbank will actually fund that before they get payment from the ATO. That stuff
though is pretty low-risk from our point of view because it's well documented,
it's well supported by our data is likely to be approved etc..
I think from a risk perspective in a classic sense, I don't think that's a risk but
your point more broadly about the word fraud, that is obviously a very
complex for us to look at.

TS Lim:All right, thanks.

Shayne Elliott:Thank you.

Jill Campbell:

Operator, I think at that point, we're through the questions. Everybody, thanks
for persevering with the Stage 4 lockdown sound. I realise that some of what

we've been talking about could have been a little harder to hear than wewould like, so we are doing a replay later today but also we will be lodging atranscript and so hopefully that will help make up for anything that you may
not have heard clearly as we would have liked you to. The IR team andmyself are obviously available through the afternoon if there were any
questions we didn't get to and with that, thanks to everyone and stay safe andwell.

[END OF TRANSCRIPT]