News Release
For Release: 13 November 2023

Transcript of bluenotes video interview with ANZ Chief
Financial Officer Farhan Faruqui
BRETT FOLEY: Farhan, thanks for joining us on the morning of the result. Both you andShayne talk about the benefit of a diversified portfolio. With the CFO lens, how has thatdiversification specifically contributed to this result?
FARHAN FARUQUI: Well, I would say, Brett, that diversification has probably been neveras, or the benefits of diversification, have actually never been as evident as they were thisyear. And I think in particular this half as well. Basically, when we think about
diversification, we think about it in the context of taking advantage of the benefit of thescale of each of our businesses. The mix of geography and customers, and our ability tocapture opportunities that come across each of those businesses. And I think that's
particularly relevant in a time when we've seen very different trends across our fourbusinesses in this year. We've seen an Australia Retail business, which has been intenselycompetitive and has seen drags on margins, et cetera. But at the same time, we've seen
the benefits of our large Institutional business because of its geographic and customer mix
and product mix, benefiting greatly in this diversification, through this period ofuncertainty and volatility. So, you sort of have the ability to balance your portfolio, how
you allocate capital, how you manage the investment during this period of time, and how
you can actually create opportunities to either offset any part of our business, which ispotentially going through a difficult cycle, through capturing opportunities in other partsof the portfolio which are benefitting. So, we've had that benefit this half and for the fullyear, and we've seen our Commercial business doing really well, our Institutional businessdoing really well, our New Zealand business performing well and some challenges aroundthe Australia Retail business. But the portfolio mix actually provides great impetus forgetting great return outcomes and growth as well.
BRETT FOLEY: So Farhan, the Institutional business is a fundamentally different business
today in terms of how it makes its money and where, can you tell us a little bit about thattransformation?
FARHAN FARUQUI: No, absolutely, Brett, I will talk about, the earnings profile is very
different to what it used to be, but I think it's important to state upfront that it is ademonstrably less risky business than it used to be seven, eight years ago. It is a higher
returning business and a far more resilient and sustainable business as we look forward.
And the reason for that, is that when we started the journey about seven years ago aroundtransforming the Institutional business, the first order of work was to look at ourcustomers, and understand the riskiness of those customers, and understand the valuethat we were delivering to them and the value that they were attributing to what we weredelivering to them in terms of our product, in terms of our network. And that led us toeffectively reshaping our customer portfolio. So, over the period of time between then andnow, we have reshaped the customer portfolio to be, to have gone from 27,000 customers
now down to about 7,000 customers, with a skew towards higher investment grade, higher
proportion of our customers in financial institutions and sovereigns, which are less risk interms of long run loss rates relative to some of our corporate customers. And withincorporate, a much greater degree of investment grade, shorter tenure, more secured. So,
it's a much, much better quality portfolio, and that has happened over years, so it's not
something you do overnight. So that's one big change that's happened to that business
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and that discipline is still continuing. The second thing that we did while we werereshaping, is that we invested in the business and we invested in particular aroundtechnology. We looked at cash management, our payment systems, our FX and rates
platforms, and we made sure that we built effectively what was a seamless, connected
experience for our customers – no matter which part of our geographic network you wereoperating in. And that is what we call a digital backbone. So, whether you're sitting in
Hong Kong or you're in Singapore or you're in India or you're in Australia, or New Zealand,
you effectively face into the same system and you're able to operate seamlessly acrossthe network because many of our customers do use us in multiple countries and they wantthat seamless experience. And I think that's just been a long journey to get there and I
think that's really helped us to reshape the quality of our business. Where the outcome
has been, that we now have three parts of the Institutional business all equally weighted.
So, we have our lending activity, which is roughly about $2 billion of revenue. We have
our transaction banking product suite, which includes trade and cash management andpayments, which is also about $2 billion. And then we have our markets platform, whichis FX, rates, commodities, capital markets, et cetera, also roughly about $2 billion. That's
the first time that we've achieved that outcome, and that's been driven by the reshapingof our portfolio and the investment that we've had in our technology. And as a result ofthat, it is sustainably a higher returning business, well above cost of capital, across all
three products, as well as across all three geographies – Australia, New Zealand and ourinternational business. And we are very confident that this is something we can sustain
going forward.
BRETT FOLEY: You spoke about the investment in Institutional. We're also now seeing
investments in ANZ Plus and into the Commercial division – are there greater synergies
kind of emerging from the investments in all those different areas?
FARHAN FARUQUI: Yes, there are. So, if you think about the payments business, weactually had great success with the payments business because we sort of… the lesson welearned was that we basically took that business and built it centrally, i.e., in a centre ofexcellence, and to serve the entire bank to provide a reliable service that had a greatcustomer experience associated with it. And we invested appropriately in it to ensure thatit aligned with our intent and ambition. And as a result of that, that business today serves
the Institutional bank, the Commercial bank, as well as retail capabilities around
payments. So, it's built as an enterprise function rather than as an Institutional productcapability. So, an example of that, Brett, is the fact that today 70%, near 70%, of theusers of our cash management platform are actually Commercial bank customers. So, it
is an investment that we've leveraged across the enterprise. Now, there are other things
obviously, that we're looking at in terms of building out similar sort of capabilities. ANZ
Plus, which is a great example, which is our now new retail, digital retail bank is actuallybuilding incredible capability, including things like onboarding or product management.
And we want to take some of those learnings and apply them on an enterprise-wide basis
as well, so that we have a common service approach to our entire set of customers acrossthe enterprise. And those allow us then to be efficient, in terms of cost, but it allows us todeliver a really good experience to our customers and equally importantly, if not more, by
virtue of creating that uniformity of common services, it allows us to reduce non-financial
risk in our business. So, this is an important focus for us and one that we will continue tocome out with new common service platforms going forward.
BRETT FOLEY: So, we've seen some pretty extreme movements in interest rates andinflation in the last 12 to 18 months. How do you think about that and how did ANZ sortof navigate those trends?
FARHAN FARUQUI: Yeah, so look, I mean, I think there is obviously a human side of thisissue as well because obviously there are, there is stress in households across the country
in terms of the challenges we’re facing with inflation and rising cost of interest. But theexperience that we've had from a portfolio standpoint is that our customers have actuallybeen a lot more resilient facing into this. Now, you would argue that four to five per centrates are not particularly high in the context of history, but it is the speed with which that
acceleration took place, which I think is causing a little bit of imbalance between theabilities, ability of the households to reorient themselves to the higher level of rates after
having enjoyed a lot of low rates, a long period of low rates for some time. So, I think that
there is that human element which of course, the country and households are adjusting
to, but they’re coming off a strong, resilient base, which is why we haven't seen any
portfolio, significant portfolio degradation as a result of the rising rates. But having said
that, Brett, we said about a year and a half ago when rates first started to rise that look,
you know, typically what happens in these environments is that your cost as a bank gets
impacted first, because you pay your people and you have to pay them in line with thesort of inflationary challenges that they're facing into, just as households are. So, there'swage increases, which of course puts pressure on cost. The benefits of revenue comingfrom higher rates do come through, but we also said that those benefits do get competedaway and we started to see that in the course of this year with some of the benefits ofraising rates have sort of gotten competed away. And then the third, is a period when
there will be some more risk and credit losses simply because of the fact that households
are having to face into a tough time and those who are not able to make that transition intime to the higher rate environment from a cost of living perspective will face into somechallenges. So that's sort of the normal history of how these things operate. It's nodifferent this time, and we've seen costs rising. We've seen rate benefits sort of startingto fade. And while we haven't seen risk play out yet, there will be a time when, you know,
in the next 12 months or 24 months when there'll be some increases in the cost of credit.
Our focus in the context of this, is A) support our customers to get through any hardshipsthat they might be facing, B) manage our cost. I don't think this is a one-off issue. I think
the banking industry as a whole has to continue to make itself more efficient. And that's
a journey we've been on, and we've shown a long track record of having delivered on
productivity and cost out ambitions, and we're just going to continue doing that as well as
we have done in the past. And the third thing, of course, is to make sure that we are usingthat diversified portfolio to get the benefits on the revenue side by counteracting where
there might be pressures and where there might be opportunities in certain other parts ofour portfolio.
BRETT FOLEY: ANZ tends to talk about risk adjusted margin, can you talk us through why
that's such an important metric?
FARHAN FARUQUI: So, risk adjusted margins versus net interest margins, which is where
I think there's a lot of focus across the world from an industry standpoint. You know, it's
an interesting question because, you know, I think NIM is important. I think it's important
to measure net interest margin. But the reality is that net interest margin, from acorrelation point of view to return on equity, there is almost no correlation. You can actuallygrow your net interest margin without having an impact on ROE. In fact, you can degrade
your ROE while you’re expanding net interest margin, and that's because net interest
margin doesn't measure risk. It also doesn't measure operating expenses. So, to someextent, it is an important measure to look at, but it simply does not tell the whole story.
And with the risk adjusted margin, you are able to benchmark the return you aregenerating in the context of the risk you’re taking. And I think that's a really, really
important measure for banks, particularly as we enter into the uncertain environment that
we are facing into. And we've actually seen our risk adjusted margin expand continuously
over the last six, seven years, over the net interest margin. And that actually shows that
we are performing and delivering returns on a risk adjusted basis, which is really what ourshareholders care about, that we are not taking undue risk and we are getting paid
appropriately for the risks that we are taking. So, we think that risk adjusted margin
actually helps us measure our real performance, and it also helps us to make sure that weare driving the right behaviour, in terms of the kind of risk and returns we're generatingin our business.

BRETT FOLEY: Farhan, thanks very much for your time.
FARHAN FARUQUI: Thank you very much, Brett.
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