Cushioning the country through the crisis | Australian major half year results FY20

Growth “For the Commonwealth to be successful, we need to be successful. We have complete alignment with policy makers, regulators and government… The fate of the banks will ultimately rest on the speed of the economic recovery. If there are too many businesses permanently damaged, that makes recovery that much harder, which will flow right into the financial system. None of us have seen anything like this in our lifetimes.”Matt Comyn – CEO, CBA7

Major banks: 1H 2020 results

Cash Profit from continuing operations 1.0 1.4 1.4 4.5 (AUD Billions)

-69.9% -60.4% -51.4% -4.3%

Cash ROE % 2.94 4.70 5.30 12.70 roth -749bps -730bps -640bps -110bps 1bps 1bps

NIM % 1.69 1.78 2.11 2.13

-11bps -1bps 2.5% 2.3% 5.6% 1.3% Average Interest Earning Assets 773 813 857 875 (AUD Billions)

Note: Banks’ comparative positioning here is based on approximation. Cash Profit and Operating Costs have been stated on a continuing operations basis including large notable items. CBA’s first half ended 31 December1,540bps 2019 and therefore967bps no provision was made for the890bps impact of COVID-19. 110bps

IndicatesCost increase/decrease to in numbers with respect to the previous corresponding period. No arrowIncome indicates ratio no %change from the previous62.4 corresponding59.6 period. 53.7 43.7

Source: 1H 2020 Results and Investor presentations for ANZ, CBA, NAB and and Deloitte analysis.

1.3% 4.3% CashEfficiency profit and total operating income The CommonwealthFTEs (spot) Bank of Australia’s (CBA) 1H 2020 results The ANZ’s cash profit from continuing operations was down 42,137 37,834 35,245 34,199 (for the half ending on 31 Dec 2019) were declared in February 60% to $1.4bn. This was due mainly to significant COVID-19 this year. Hence, the results were not significantly-0.9% impacted by related impairment provisions of $1bn and the $815m write-off 22.2% 2.6% 28.1% 5.5% the widespread outbreak of COVID-19 and related provisions. of investments in its Asian businesses. It was also as a result of a decline in operating income and increase in operating expenses. The CBA, however,Operating recorded Costs a fall of 4.3% in its cash profit for ANZ’s net interest income decreased by 1.1% despite a 5.6% 1H 2020 as a result(AUD Billions) of higher operating expenses6.2 ( 2.6% vs 5.4 5.4 4.6 increase in interest earning assets. This was primarily due to 1H 2019), which included $83m for bushfire related claims and a decrease of 11bps in NIM to 1.69%. The increase in ANZ’s higher loan impairment expenses of $649m (up 12.5% vs 1H 2019), interest earning assets was driven by a significant increase in which in turn included $100m provisions for42bps drought and bushfire. 27bps 19bps 5bps its non-lending interest earning assets (cash and other liquid Its topline incomeCollective was flat Provision (vs 1H 2019), with the increase in net assets), which comparatively earns lower interest. interest income/CRWA of 1.7% % offset by a 4.6% reduction in non-interest 1.40 This was partially offset1.21 by its growth1.17 in its business lending 1.08 income as a result of bushfire related claims, the removal and portfolio. The decline in operating income was also partially repricing of certain fees in the wealth management business 0.9% 13.3% offset5.7% by an increase in Trading Income (14.5%). When large 7.3% and realised losses on the hedge of NZ earnings.

notable items and the credit impairment charge is excluded, Total RWA The CBA’s home and business lending grew by 4% and 3% ANZ’s core earnings before tax declined by 3.1% compared (AUD Billions) 449 449 444 433 respectivelyQuality with its home loan volumes growing faster than with 1H19. system.& Risk This was offset by a reduction in institutional lending (down 9% vs 1H 2019). 11.7% 1.6% 1.8% 5.5%

Credit RWA (AUD Billions) 386 375 369 365 06

53bps 40bps 23bps 2bps

Impairment expense to GLA (annualised) % 0.62 0.53 0.38 0.17

17bps 90bps

CET1 ratio % 10.39 10.80 10.81 11.70

-1bps -70bps 100bps 400bps 400bps 300bps

Capital & Funding NSFR % 113 116 117 118

300bps 600bps 200bps 1600bps

LCR % 134 136 139 154 Cushioning the country through the crisis | Australian major banks half year results FY20

The ’s (NAB) cash earnings declined Australia has been so far successful in controlling the spread by 51.4% compared with 1H19 as a result of a significant increase of COVID-19, but the prolonged lockdown, rising unemployment, in impairment charges of $807m relating to COVID-19. NAB’s lower for longer interest rates, falling business and consumer total operating income declined primarily due to lower ‘Other confidence, widespread bankruptcies and high household debt, Operating Income’. This included a decrease of 56% or $420m are likely to significantly impact the banks’ top-line growth and in trading income as a result of valuation losses in its high quality cause structural challenges to longer-term profitability of the sector. liquids portfolio. Although the length and depth of the economic Net interest income increased by 1.9% with a 2.5% increase in interest earning assets, which partially offset the decline in contraction is difficult to predict, the combination income. NAB’s core earnings before tax declined by 9% compared of anaemic revenue growth due to the loss of with 1H19. Australia’s economic momentum and the lower Westpac’s cash earnings declined by 70% to $993m compared for longer interest rate environment, points to with 1H19 as a result of a significant increase in operating expenses (22.2%) and impairment charges of $2.2bn. Westpac’s total a very challenging outlook for the banking sector. operating income increased by 2.4% to $10.3bn as a result of a 3.3% increase in net interest income. The growth in Westpac’s net interest income was supported by a 2.3% increase in average interest earning assets as well Key questions as 1bps increase in NIM. Westpac’s Return on Equity (ROE) declined significantly to 2.94% from 10.43% (1H19). Questions the Executive should consider include: 1. How do we balance the economic downturn, Divisional performance regulatory compliance with lending standards, All the banks split their divisional results slightly differently. CBA’s and the need to continue funding the economy services division increased by 4.6%. After excluding and grow the business? the COVID-19 impairment charge, ANZ’s Australia retail institutional 2. Are we focused on the right activities to drive strong and divisions all declined significantly. NAB had a customer relationships and growth? significant increase in its consumer banking and New Zealand divisions of 26.4% and 6.4% respectively (excluding COVID-19 3. Do we effectively manage customer transition points impairment charge). NAB’s institutional division declined owing e.g. life events, contract expiry etc.? to valuation losses from its liquidity portfolio. 4. Do the promises we are making to our customers align with their expectations and our capacity Westpac’s consumer bank dropped by 13.8% and its business bank to deliver? and institutional bank fell by 51.2% and 67.8% respectively. Within Westpac’s institutional division, total customer revenue declined 5. Are we effectively using our analytic tools and are by 8% which was partially offset by an increase in trading revenue. they the right ones? In response to the government’s approach ‘to protect lives and 6. Can we improve our understanding of the drivers livelihoods’, the majors have assumed a front line role, cushioning of customer pressure, churn and switching? the country through the crisis. They have amplified the impact of 7. Do we tailor our sales and marketing programs fiscal and monetary policies by proactively extending support to to specific customer segments? households, small businesses and corporates in the form of loan 8. Have we adopted strategic pricing programs? deferrals and reducing repayments. 9. What platforms are we using to meet customers’ However, following the Hayne Royal Commission from last year, needs and should we refresh our alliances to 2020 will be another testing year for the domestic banking industry. continuously improve our products and services delivered through these platform? 10. Are we allocating investment to increase digitisation and making business model updates to enable innovation in new products, new services and new ways of doing things?

07