News Release
For Release: 18 February 2021

Transcript of podcast with ANZ Chief Risk Officer Kevin
Corbally, ANZ Acting Chief Financial Officer Shane Buggleand ANZ Head of 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 podcast which accompanies
ANZ’s release of a trading update for the first quarter of financial year
2021. We’ve released a number of materials today including a slide
pack and we’ll refer to that at points during this podcast. The materials
were lodged with the ASX, they’re also available on the ANZ website in
the shareholder centre.
I’m speaking today with our Chief Risk Officer Kevin Corbally and ouracting CFO Shane Buggle covering some areas of interest to those of
you looking to delve a little deeper into the update.
I’ll start with you Kevin. Let’s talk a little about credit quality andprovisions. ANZ announced a $A173 million release of collective
provision today. Can you walk us through some of the aspects ofdetermining that?

Kevin Corbally:

Jill, look thank you. There are a number of things to think about here.
We came into this financial year in a strong position. We’re very well
positioned from both a capital and a provisioning perspective at 11.7%
Common Equity Tier 1 ratio and also we had $A5.6 billion of total
provisions. And, included within that there was about $A4.8 billion incollective provision balances at the end of that first quarter.
So if you think about it this way, we put on roughly about $A1.7 billion
in provision charges essentially in 6 months last financial year and what
we’ve done is we’ve released about 10 per cent of that uplift today. And
the outcome was a mix of some portfolio reductions together with therelease of some of the build-up in the provision balance as theeconomic conditions have improved since last year.
If you think about it, the economic outlook has really improved relative
to what were pretty dire estimates that we had last year and also both
Australia and New Zealand, I think have really handled COVID better
than almost every other country in the world. If you think for example
that at September last year, we were forecasting a contraction in
housing prices of nine per cent this year. Now what we’re saying in thisupdate is that we’re forecasting growth nationally of about five percent. And similarly we’re expecting GDP to return to pre-COVID levels ayear earlier and we’re also forecasting a much lower unemployment
level than we were last year.
At the same time though, this is still a delicate period for the economy
as evidenced by recent issues in Queensland, NSW, Western Australia

Australia and New Zealand Banking Group Limited
9/833 Collins Street Docklands Victoria 3008 Australia
ABN 11 005 357 522

and even more recently in both Victoria and in Auckland. We are also
mindful that there’s still quite a bit of support in the system – fromgovernment in the form of JobKeeper, JobSeeker etcetera. And alsothat banks through things like mortgage and commercial loan deferrals
have also supported the system and it’s sort of unclear what happens
when all of that support falls away.
So, if I was to step back and think about where the economy is at
especially relative to last year, how we’re set up with less customers ondeferral than many of us thought was going to be the case last year –we’ve got roughly about 1% of our home loan customers in Australia
and New Zealand that are still on deferrals – but also counter that withthe level of volatility and uncertainty that still exists, we feel that ourcurrent provision levels are prudent and are appropriate and we are
comfortable with what is a relatively small release.
Jill Campbell:Ok, thanks. So when you think about that total provision charge that’s
obviously a combination of whatever the outcome was for the IP orindividual provision and the CP, collective provision outcome. The IP in
the first quarter finished at $A23 million and that’s substantially lower
obviously than the average for, if I think back over the last couple ofyears. So how should we think about that? Is it timing, is it somethingelse, have we struck a new normal?

Kevin Corbally:

Look if we step back, it’s worth remembering that the Individual
Provision charge is actually an aggregate of new impaired charges,increased impaireds and any write backs and recoveries that we might
have. So essentially in the first quarter what we saw was write backs
and recoveries were broadly in line with the average of second half oflast year. And new individual provisions and write backs and recoveries
largely sort of offset each other and in addition the increased impaireds
were actually lower across the portfolio.
So in terms of your question, ‘is this the new normal?’ I think we’resome way off normal conditions and we haven’t really had a normal
quarter for some time right? So I don’t think we are yet to see theimpact of the removal of the support that I mentioned earlier fromgovernment and the banks. We do expect that that will start to flow
through in the second half of this financial year and also into 2022 andwe will therefore see an increase in IP. But I think it’s important toremember that during the course of last year we built up a large
collective provision balance and that was built up with an expectationthat we would ultimately then release that as credit quality deterioratedor, alternatively some of our customers became delinquent. And theother point I’d make too is that the lower Individual provision charge
for this year also reflects the fact that our larger customers are in amuch better financial position and it’s important to bear in mind that’s abigger impact for us because our Institutional business is a bigger
element of our book than maybe some others. But it’s also a reflection
on the fact that there’s been unquestionably a lot of work on reducing
our risk profile and improving the credit quality of our book, not justwithin Institutional actually, over the last number of years.

Jill Campbell:Ok, thank you. You mention deferrals as part of one of your answers
there. When you think about the deferral cohorts today, what are thekinds of things you’re thinking about?

Kevin Corbally:

What we’ve seen and what people will have seen in the trading updateis that we’ve had an 84% reduction in our Australian mortgage deferral
cohort from the peak to the end of January. We’ve also had an 88%
reduction in our Australian commercial customers that were on deferral
and a 92% reduction in New Zealand Mortgage deferrals. Or anotherway to think about it actually might be that approximately 1% of ourhome loan customers in Australia and New Zealand remain on deferral
and there’s a meaningful portion of that - those that are remaining ondeferral - that are due to roll off in February.
So that backs up part of the initial view that in large part, and we’vebeen saying this throughout, these were customers who just needed
time … given the impacts of COVID, customers who were performing
well prior to the lockdowns etcetera and would highly likely return toperforming once they emerged from these lockdowns.
And it’s important to remember, I think this is really important, that wehave been in regular dialogue with these customers throughout thedeferral period and will again contact them several weeks out from theend of their deferral period to discuss how they’re tracking. And theindications are that those that need more help will be relatively small
and therefore it will be manageable. Now we’ll obviously have to work
really closely with those customers and look at what options areavailable to them and that includes the ability if we want to restructurethose loans without capital penalty right up until the end of March.

Jill Campbell:Ok, so when you think about, sounds like most of these (deferrals) aregoing to be gone before the end of March but there will be somecustomers who remain. When you think about that tail, how do you
deal with that, how do you think about that?

Kevin Corbally:

If you look at those remaining on deferral post the end of January,
there’s probably not really many surprises in terms of the composition– so where they are geographically, what businesses they’re in - 60 percent of our commercial loans that are on deferral are from Victoria. And
if you combine our exposure in cafes and restaurants and retail trade
that’s about 44 per cent of those that are left.
So as we approach the end of March, the tail, as you described it, thenis likely to be small, we think it will be manageable particularly relative
to the level of provisioning that we’ve already taken to date.
And maybe the key point is that delinquency trends for the sector,
more generally have been favourable and they’ve been favourably
impacted by the deferral cohort because basically anyone who was ondeferral is treated as current. Having said that we’ve, as I said earlier,we’ve been in regular dialogue with all of our deferral customers
throughout the deferral period. We are going to do so again a few
weeks before their end date. And our experience has been that inalmost all instances those saying that they will resume payment haveactually done just that.

Jill Campbell:

Right, thanks for that. We’re going to move on now to talk to you
Shane about margins, I think that will be a bit of a hot topic today. Sothe Group margin up 5 basis points, can you walk us through thecomponents of that?

Shane Buggle:Thanks Jill. We’ve included within the trading update support pack aslide (slide four) which provides a useful step through of themovements in the margin. And you can see that the Group net interest
margin or NIM increased 3 basis points, on what we call the underlying
basis, that excludes the Markets balance sheet activities. Pleasingly themargin grew in each of our divisions which will be the first time in quitea while.
The impacts from low rates on our replicating portfolio and liquidity
books did come through as we said it would and competition continues
to remain intense.
The relative improvement arose from improved wholesale funding anddeposit pricing. Some improvement in the mix which was came fromstronger growth in our mortgages book relative to our Institutional
lending book and some benefits from asset pricing and that’s where we
repriced the Institutional front book in the second half of 2020 and we
see that flowing through.

Jill Campbell:

So when I look at that waterfall chart that you’ve talked about, there’s
four basis points of funding cost and deposit pricing and another twobasis points of asset pricing. Is that now in the NIM or is there more
upside from here?

Shane Buggle:

I think essentially it’s embedded in the NIM now. We may see somefurther upside on deposit pricing as TD rates and savings might comedown. But they’re also asset competition headwinds and we expect
those to continue.
If you think about the home loan market there are incredibly sharp
fixed rate offers in the market now and we expect to see customerswitching and back-book repricing to persist. The front book/back bookmargin differences and higher margin maturities will also be aheadwind.

Jill Campbell:

So when you think about all of that, and this is the impossible question,
but how are you thinking about where margins will be at the end of thehalf?

Shane Buggle:

Well Jill, as you know we don’t provide forecasts. But you could think
about it this way.
On volumes the mix benefit of the faster growing retail and commercial
book vis-a-vis our Institutional book is likely to continue given themomentum we have particularly in the mortgages book. On pricing, thebenefits as I mentioned from funding and deposit pricing are largely
embedded. So offsetting that we continue to have the lower rateenvironment and that impacts our replicating portfolio and impacts ourliquidity book and competition continues to remain persistent.
So thinking about all of that we would expect that on an underlying
basis margins to be slightly up compared to the second half of 2020.
How much depends on customer behaviour.
Jill Campbell:

So that’s slightly up on the 159 basis points?

Shane Buggle:

Measuring by reference to the underlying 159 (bps 2H20), yes.

Jill Campbell:

Last question which is one for you Shane still, on expenses, another flatcost outcome. How should we think about expense management in thequarter?

Shane Buggle:

Well I think it’s been a consistent story from ANZ on expense
management for the last five years. Our position hasn’t changed andwe aim to continue to reduce cost in absolute sense. That comes fromseeking productivity improvements on our business as usual costs andalso to invest in the future of the business and partially through thesavings from the productivity benefits and partially through ourinvestment spending.
We have - and I just want to remind you – said many, many times thatthe journey is unlikely to be linear and that we will not go into
underinvest just to hit a number. So we might see some bumps along
the way but it continues to be a very tight focus on business as usualand productivity.

Jill Campbell:

Right and it’s been quite a few quarters in a row now so I think we candefinitely say there’s a theme.
So that was all the questions I had for both of you. I think we’ve
covered most of the main topics. There will be a transcript of thispodcast available online if you want to check back on any of the things
that we’ve talked about and of course the Investor Relations team isavailable to have a conversation with you as well. So with that, thankyou to everyone who has listened. Thanks to Shane, thanks to Kevin.

For media enquiries contact:
Stephen Ries
Head of Corporate Communications
Tel: +61 409 655 551
Approved for distribution by ANZ’s Continuous Disclosure Committee