Bendigo and Adelaide Bank Aktie

Good day, and welcome to the Bendigo and Adelaide Bank 2026 Half Year Results Briefing. [Operator Instructions].

I would now like to hand the conference over to Sam Miller, General Manager, Investor Relations. Please go ahead.

Thanks, Rocco. Good morning, everyone, and thanks for joining us for Bendigo and Adelaide Bank's 2026 Half Year Results Briefing. Let me begin today by acknowledging the traditional owners of the lands on which we meet today, the Gadigal People of the Eora Nation. I pay my respects to their elders, past, present and emerging. And I also extend my respects to the Aboriginal and Torres Strait Islander people who are present on the call today.

Moving towards the agenda. There's been a minor change to our presentation today, and we will broadcast audio and slides only. Our CFO, Andrew Morgan, has tested positive to COVID, and our CEO, Richard Fennell, will present the first half 2026 results with Richard and I handling the Q&A.

I'll now hand over to Richard.

Thanks, Sam, and good morning, everyone, and appreciate you taking the time to join us today. Our half year result reflects a period of intensive strategic execution, disciplined margin management and a significant reduction in operating costs in the second quarter of the half. We've taken a patient approach to deliver against our strategic priorities, which is strengthening our business. These actions are delivering momentum that is building and is expected to deliver stronger balance sheet growth in the second half. Our customer numbers continue to grow strongly and are expected to reach 3 million in Q4. This growth is supported by our Bendigo Bank and Up Net Promoter Scores that are respectively, 25 and 42 points above the industry average.

During the half, we saw the benefits of our deliberate strategy to focus on growing our share of lower-cost deposits, which grew by 3.6% to now represent 53.8% of our total customer deposits. Our investment in digital capability is a key driver of this outcome with digital deposit sales accounting for 41.4% of total deposit sales, an increase of 7.4% for the half. On the lending side, we are regaining momentum in residential mortgages with strong application flow in December and positive growth for the month of January. The more balanced approach to residential loan growth follows the decision to exit our legacy mortgage partner business, allowing us to deploy our capital into higher returning channels. This decision has led to higher discharges in that channel, which has been offset by 6% growth in our digital channel. Meanwhile, application momentum in our higher returning channels is building, placing the bank in a stronger position over the long term.

Our second quarter expenses were 6.4% lower than the first quarter, reflecting higher seasonal cost drivers in the first quarter, such as the annual salary adjustment process. A highlight for the half was our digital bank Up, achieving its first month of profitability in September, more than 6 months ahead of schedule. This is a significant milestone and tangible evidence that our investments in digital are creating value and continue to contribute positively to the group's competitive position. As we announced back in November, we are acquiring RACQ Bank's loan and deposit books. This is a valuable opportunity for us to grow our business in Queensland and welcome a new group of customers to the fold.

Finally, towards the end of last year, we identified and self-reported the shortcomings in our management of AML/CTF risk. We continue to engage proactively with regulators and are developing a comprehensive action plan to address the issues identified. We are committed to strengthening our processes and meeting our regulatory obligations, and I'll have more to say on this matter later in the presentation.

Returning to execution. The first half was a period of intense focus and significant process on the delivery of initiatives aligned with our strategic pillars and enablers, which we shared 6 months ago. I covered some of these strategic achievements at our investor update in December, so I'll only briefly recap them here. In just 3 months, our digital and technology engineering teams rebuilt and delivered our in-app digital onboarding capability, which is delivering significantly increased new customer flow through this channel. We finalized the full rollout of the Bendigo lending platform with it now being available across all of our retail branches. And we migrated 180,000 Adelaide Bank customer accounts onto our core banking system, delivering on our long-held objective of 1 core banking system and 2 main customer-facing brands.

One aspect I didn't speak to at length at our investor update last December was our new 5-year partnership with Google. This partnership will provide enhanced cloud capability, access to enterprise-wide AI tools and industry-leading cybersecurity defenses. Over 2,200 of our people are already utilizing the Gemini AI tools with early adoption showing significant productivity benefits. Examples such as generative AI for hardship detection, improving timeliness of engagement, accuracy and productivity are supporting improved customer outcomes. These initiatives I've highlighted are tangible examples of the early progress we are making to deliver on our 2030 strategy.

I'm excited by the benefits we're starting to see flow, which I'll walk through shortly in our progress update. But first, I'd like to turn to our financial performance. For the half, cash earnings of $256.4 million were up 2.8% on the prior half, driven by a 3.7% uplift in total income. Notably, this is the first half in the bank's history that we have delivered more than $1 billion in income. Income benefited from a 4 basis point improvement in margin as we focused on delivering a more favorable mix of lower cost deposits following a moderation in lending growth. Operating expenses increased by 4.2%, reflecting expected increases in software costs and amortization charges, additional workdays during the half and higher remediation expenses.

Our investment spend declined by 19% for the half as major technology projects such as the rollout of the lending platform came to an end. And finally, in credit expenses, we saw a $2.4 million write-back for the half as collective provisions reduced, reflecting lower overall loan balances, together with the repayment of some larger impaired loans. The overall credit portfolio has remained resilient, and we remain focused on helping customers that face difficult choices due to cost of living and other pressures.

Turning now to our divisional performance. Our Consumer division delivered strong earnings growth of 5.9% for the half, with net interest income increasing by 4.9%. This performance was largely driven by an 8 basis point improvement in margin, supported by the previously mentioned strong growth in lower cost deposits. Residential lending declined by 2.6% for the half. As noted, this reflects our strategic decision to exit less profitable legacy partners in our third-party originated channel, which contracted by 7.4% over the half. However, our digital lending channel grew 6%. This deliberate shift in focus towards more profitable channels is expected to continue to lift the returns for our Consumer division over the longer term.

Our Business and Agri division's cash earnings decreased by 1% with higher net interest income largely offset by higher expenses. Higher NII benefited from higher average interest-earning assets and additional workdays, while expenses were impacted by the ongoing investment in our business lending platform. While overall loan growth was largely flat for the half, we have a strong pipeline of business coming into the second half with momentum building across our broker channel, agri business and equipment finance.

At the FY '25 full year result, I shared 3 areas of focus for the next 2 years that will be critical to progressing towards our ROE target. As I said then, at each half and full year result, I will update you on the progress we're making across each area of focus. And to recap, these areas are optimizing our deposit franchise, enhancing productivity and delivering sustainable growth.

Let me step you through the progress we've made this half. We've previously highlighted that we'll be taking a deposit-first approach to growth, targeting lower-cost deposits as the primary source of funding for our lending activity. To enable this deposit-led approach, we've strengthened our digital deposit franchise through the refresh of our in-app digital account opening capability for Bendigo's new-to-bank customers, and we've enhanced app functionality to deliver improved digital experiences for all our customers. We're now seeing weekly volumes of 400 to 500 new customers joining us through this digital onboarding functionality. Our frontline teams are proactively engaging with our existing Bendigo customers who don't currently have a Bendigo transaction account. And we've also continued to upskill the sales capabilities of both our frontline and virtual banking teams. These initiatives have already delivered benefits with lower cost deposit growth of 3.6%, particularly in the EasySaver and increased digital deposit sales of 7.4% for the half.

Up's Grow & Flow product drove an additional $190 million of lower cost deposits over the half, and we expect this momentum to continue as highlighted at the investor update, and we are targeting digital deposit sales of 45% by the end of the financial year. Following the announcement of our productivity program in August, the outcome of the first phase is evident in the half year results. Investment spend has reduced, supported by a 48% reduction in contractor numbers over the half. Our full-time equivalent employee numbers have reduced by 5% on the prior corresponding period and 4% over the half. This is a result of several support function and technology division restructures.

But let me highlight a couple of the outcomes this half. Through our focus on operational excellence within our operations teams, we've successfully realized a $9.6 million benefit this half. And we're elevating our AI and automation program in partnership with Google, which continues to empower our people to self-drive productivity and process improvements. Our entire workforce has access to the Google AI suite, and we're seeing organic people-led innovation outcomes. Our productivity program has now entered its second phase, which comprises 2 key initiatives. The first initiative is a new information technology partnership for which we are now in advanced negotiations and the second focus on business processing where planning activity continues. Together, these initiatives will enhance our technology and operational capabilities, drive innovation and support our guidance of keeping business as usual costs no higher than inflation through the cycle. We'll provide further updates to the market through the course of this half year.

Our third area of focus is maintaining a disciplined approach to capital allocation to drive long-term sustainable growth that exceeds our cost of capital. This discipline is reflected in our NIM to credit risk-weighted asset ratio, which despite slightly moderating this half, remains well above the level of 2 years ago. Our recent decision to exit less profitable legacy mortgage partners is another example of this discipline in action. By prioritizing growth in our higher-returning channels, we're actively managing our portfolio to improve returns. We expect decisions like this will continue to support our NIM to credit risk-weighted asset metric over the longer term. In Business and Agri, we saw the usual agri seasonality with high loan repayments driven by strong yields for our grain growers, particularly in WA and New South Wales. This seasonality is expected to reverse as funding is redrawn down in the second half. In addition, growth in the business portfolio remains robust, particularly across portfolio funding and business lending with a strong pipeline heading into the second half.

Finally, I'd like to take a moment to provide an update on our approach to addressing the deficiencies in AML/CTF risk management at the bank. We recently appointed a new highly experienced Chief Compliance Officer and Head of Financial Crime Risk, Steve Blackburn, to lead our response. We've now received detailed recommendations, actions and a road map from Deloitte, which we're using to guide our remediation and uplift program with a focus on enhancing our enterprise-wide AML/CTF risk management, including transaction monitoring. Our current expectation of the total cost over a period of up to 3 years will be $70 million to $90 million, of which we expect an initial cost of $15 million will be incurred in the second half of financial year '26. These expenses will be contained within our existing 2026 investment slate. In parallel, Deloitte are also completing an additional root cause analysis across our broader nonfinancial risk management.

I'll now move to the financial results in more detail. This result reflects improved momentum across a number of metrics following our first quarter trading update. We've slowed the decline in residential lending and expect to return to growth into the second half. We've also seen an improved funding mix with stability in transaction accounts and continued strong growth in savings accounts. This has enabled us to deliver a lift in net interest margin in the second quarter despite the lower cash rate. We've also carefully managed pricing decisions to stimulate growth in key target segments. And we've tightened our management of business as usual costs in the second quarter with quarterly costs reducing over 6% on the first quarter. Our operating performance was 2.8% higher than the prior half, mostly due to strength in income and cash earnings of $256.4 million are 2.8% higher than the prior half. Our balance sheet is in a strong position going into the second half, reflected in strong capital, funding and liquidity.

On this slide, we show you the usual reconciliation of cash to statutory earnings. You can see that the Adelaide core consolidation was in line with the higher end of the flagged range and most of the restructuring costs booked in the first half was in relation to the productivity initiatives, which I mentioned earlier. Growth in house prices in Sydney and Melbourne boosted Homesafe unrealized income. And going into the second half, we expect a very small amount of residual costs associated with the Adelaide Bank core consolidation. We also expect to incur further restructuring costs in relation to the next phase of our productivity program and also preparation work for the completion of the RACQ transaction.

Turning now to total income for the half. Income of $1.01 billion was up 3.7% on the prior half. Net interest income increased 3.2%, reflecting a slight contraction in average interest-earning assets and an improved margin. This was further bolstered by stronger other income, which was up almost 7%. Other income, excluding Homesafe was up 6%, reflecting improved wealth and cards income. Homesafe income was up 8%, reflecting 5% growth in completed contracts on the prior half and a stronger average profit per completion. In respect of key considerations, as previously flagged, income from the Homesafe portfolio will reduce over time, subject to the rate and profit on contract completions. This half saw the number of open contracts reduced by around 3%, which is a rate consistent with the last 2 halves, whilst the average life of contracts completed through the half was around 8 years.

Turning now to net interest margin. Compared to the prior half, our NIM was up 4 basis points to 192 basis points. Asset pricing negatively impacted 3 basis points, which was due to a combination of front book pricing pressure in residential lending and ongoing retention pricing pressure in business and agri. Deposit and funding pricing improved 3 basis points, mostly reflecting the benefit of term deposit repricing and mix provided a 4 basis point benefit, reflecting a combination of improved funding mix and improved asset mix. Income from our replicating portfolios was flat as expected as was revenue share. Our exit NIM was slightly higher than the second quarter average.

Looking forward, key considerations for the second half of '26. We think it likely that a further cash rate increase will happen later this financial year. And we expect a small amount of NIM pressure as lending volumes improve into the second half following some selective repricing during the second quarter. We also continue to see customers rolling off fixed rates and mostly favoring variable rate mortgages. First half maturities were around $2 billion, and we expect around $1 billion of further maturities into the second half of '26. And higher swap rates could see replicating portfolio contribution turn from flat to slightly positive. The unknown factor as always, is the degree of price competition on both sides of the balance sheet.

Turning now to residential lending. Settlement volumes in aggregate were down 15% on the prior half, particularly in third-party channels. Discharges were also elevated, mostly due to the closing down of one of our partner channels. We continue to prioritize the deployment of capital into channels where both the economics are compelling and growth opportunities exist, being self-serve digital mortgages and broker intermediated mortgages through our new lending platform. This half, almost 50% of new settlements came through our physical network, 1/3 through broker intermediated channels and 17% through direct digital channels, including Up. We do see further growth opportunity in our physical network following the completion of the rollout of the new lending platform, which was completed in November 2025.

The positive trends in our mortgage book continue. First, around 40% of new loans are below 60% LVR and almost 90% of new loans are below 80% LVR. Second, the average credit risk weight on new mortgages has continued to improve. And third, critically, the ratio of NIM to credit risk-weighted assets on new business as a proxy for risk-adjusted returns is up strongly on 12 months ago. Momentum in the book is improving. Applications per day steadily improved over the second quarter, and we saw the strongest volume of applications per day in December and expect these loans to settle during the third quarter. Discharges have also slowed progressively over the second quarter. So with this momentum in mind, we are targeting growth around system towards the end of the second half of FY '26.

Our deposit gathering franchise remains an ongoing strength and is improving. Across both our proprietary network and community bank partners, we delivered growth of just under 2% on the prior half, and we continue to see good momentum in digital deposits. In our Up business, digital deposits increased 24% over the half, whilst Bendigo digital deposits grew 13% over the same period. Whilst deposit growth over the half looks modest at 1.1%, deposit mix has continued to improve. We continue to see strong growth in EasySaver accounts, which were up 7% on the prior half and overall savings accounts up 5%. Following a dip in the first quarter, transaction account balances had a strong second quarter, finishing marginally higher than the prior half. And partly as a result of tax receipts, we saw offset accounts rise 5% over the half.

Through careful management of our funding requirements, we also managed to reduce term deposit balances, which were down 4% on the prior half. The overall picture on deposits is that lower cost deposits increased to almost 54% of total deposits, up from 52.4% just 6 months ago. And critically, our household deposit-to-loan ratio remains strong at 77%, which is 9 percentage points higher than the industry average.

Turning now to operating expenses. Total costs increased 4% for the half as previously flagged, second quarter costs came in 6% lower than the first quarter. Business as usual costs, excluding the increase in remediation costs, grew 5% over the half. Inflation software license fees, amortization and 3 additional workdays impacted our BAU costs, contributing 6.1% to overall cost growth. Spot FTE were 4% lower than the prior half, reflecting a number of restructuring activities through the half. In respect of second half costs, we are targeting to manage total BAU costs to no higher than the first half. And longer term, we reiterate our cost guidance, which is to keep BAU cost growth contained to no higher than inflation through the cycle.

I want to spend now a few minutes on our investment spend, including its composition and how we think about investment spend for the second half of the year in the context of the recently disclosed AML/CTF issues. As a reminder, coming into this financial year, we had said we expected cash investment spend to be roughly the same as last year or around $230 million, plus noncash spend of $30 million at the upper end of the Adelaide core migration. So in total, around $260 million. Around half of the $230 million cash spend was expected to be expensed. For the first half, we spent just under $89 million on cash investment spend with 65% of that expensed. In addition, we spent $35 million on noncash investment spend, mostly on the completion of the Adelaide Bank core migration.

Our early-stage estimate for the AML/CTF uplift program is that it will cost approximately $70 million to $90 million and will run over the next 3 years. The remainder of this year will be about mobilization and early-stage activity, costing an estimated $15 million in the second half, and then the work will ramp up into the next financial year. We intend to cover the cost of the AML/CTF program inside our previously flagged FY '26 cash investment spend and expect expensed investment spend in the second half to be slightly higher than the first half.

Moving to credit quality and credit expenses. Our key credit metrics remain sound, and we continue to carefully watch trends in the industry and within our book. Through the half, we booked a net write-back of $2 million, mostly reflecting reduced collective provision on the lower residential lending portfolio. Gross impaired loans have remained stable at 15 basis points of gross loans and arrears across the book remain low, but are increasing. 90-day arrears in residential lending have increased in the low single-digit basis points in the last 6 months to 85 basis points. In agri business, arrears have been stable over the half and the dollar value of arrears has reduced. The technical issue that we described at full year around expired facilities has not yet been fully resolved, though we do expect third quarter arrears to return to more normal levels.

Whilst asset quality remains sound and arrears are at relatively low levels, we do expect bad debts to trend upwards over time. Our funding and liquidity metrics remain strong and well diversified. Our average liquidity coverage ratio for the second quarter was strong at 135%. The proportion of customer deposits to total funding improved on the prior half to just under 80% and our coverage of household deposits to loans at 77% is well above the industry average. Through the half, we retired some wholesale debt, bringing the proportion of our funding needs met by wholesale down to 21%. And our Community Bank partnerships importantly provide us with a net $15 billion of funding, which provides further diversification and a relatively cheaper funding source than wholesale funding.

And finally, turning now to capital and dividends. Our CET1 ratio increased 37 basis points to 11.37% over the half, and this reflected lower capital consumption through reduced lending. Our capital remains well above the Board target of above 10%. On a pro forma basis, our 1 January capital position reduced by 18 basis points, reflecting the inclusion of the $50 million regulatory capital overlay. Directors have determined to pay an interim dividend of $0.30 per share, which will be fully franked. This represents a 67% payout ratio for the half and on a cents per share basis is flat on the prior comparative period. As a prudent measure, this half, we will be underwriting around 70% of our dividend, which will, in effect, mean we retained 31 basis points or approximately $121 million -- sorry, $120 million of our CET1, CET1 following the payment of the interim dividend, further strengthening our capital position. So in summary, we are in a strong capital position going into the second half.

I'll now open it up for questions.

[Operator Instructions].

Thank you. I'd like to go to our first question. We have Annabel Ross from Barrenjoey.

I just had one on expenses, specifically BAU costs. So turning to Slide 20, when you talk about you're targeting to limit business as usual expenses to no higher than inflation through the cycle, I'm wondering, do you mean 2.5%, which is the RBA target or 4%, which is the current inflation rate? And then just a second part on BAU costs as well. So they were down -- in the first quarter, they were $299 million and then in the second quarter down to $280 million. And should we extrapolate from that second quarter number when forecasting and going forward?

Thanks, Annabel. In relation to inflation, the reality is that we face the inflationary environment that exists in the economy. So we obviously recognize the RBA is targeting 2% to 3%. But when we're sitting more in the 3% to 4% range, that's the inflationary environment we're operating in. And that's the basis upon which right now, we're focusing on trying to keep our BAU costs no higher than that inflationary environment. Clearly, over time, if the RBA is successful in getting that down within its range, then our target will likewise reduce to that 2% to 3% range rather than where inflation sits at the moment at 3% to 4%. In relation to looking forward to the second half of '26, the guidance we are giving on costs is to keep our second half BAU costs no higher than the first half BAU costs. So rather than looking at quarter-by-quarter, if you look at the cost numbers for the first half, that's the target we've set ourselves to not exceed in the second half.

Our next question comes from Kelsey Bentley from JPMorgan.

Just looking at the NIM walk on Slide 17. Could you please describe what drove the 3 basis point headwind of lending pressure just given the fact that there was negative credit growth in the period? And then just as a follow-up per your guidance point, how much should we expect margin to come under pressure as growth builds as you said, it has already begun?

Yes. Thanks, Kelsey. Look, a couple of factors on the lending pricing pressure. The reality of the fixed rate lending that is expiring is a lot of that was written at a time during the COVID period when funding costs were at all-time lows. And so the margin on those loans as they then roll into variable rate loans often has a slight headwind. We're also seeing on the business and agri side of it, there is intense competition. So the competition to retain and write new business is continuing to have a slight impact on margin through that channel. So overall, the B&A side was about 2 basis points of the 3 basis point contraction. So they're probably the 2 key factors there.

Looking forward, the pressure in the second half, look, it's going to be an interesting one to see how that plays out. We're comfortable with where our pricing sits right now on the lending side of it. But the reality, if we do see continued growth in application flow leading to stronger growth in the second half and if we're able to get up to that expected level of around system growth by the end of the half, we will need to fund that growth. And the reality is moving from little or no growth to stronger growth, we may need to look at utilizing some other funding sources such as wholesale or term deposits, which are slightly more expensive. So that's really what we're pointing to with some potential impact with some slight margin pressure from that higher growth. The reality is there are going to be a lot of moving parts as there always are with NIM, with the higher cash rate. That obviously has generally some positive impacts. And also with the higher swap rates as well, we expect to see some slight positivity from the replicating portfolio versus what we saw in the first half when that was no positive impact.

Thanks, Kelsey. Our next question comes from Sally Hong from Morgan Stanley.

So on margins, what benefit do you expect to get from higher rates? Like what's the sensitivity for every 25 basis point increase in the cash rate on your unhedged deposits?

Yes. Sally, generally, it's around 2 basis points, maybe 1.5 to 2 basis point range for every 25 basis point move. The interesting aspect, though, as always, with interest rate moves in either direction is what the price setters in the market. And obviously, with us sitting here at a couple of percent market share, we don't have that luxury of being a price setter or what they choose to do on both sides of the balance sheet as far as passing all of that through or not. So yes, I think a decent rule of thumb that we have traditionally used is around that 2 basis point level. But as I said, the competitive dynamics will always be interesting to watch as the cash rate moves up or down.

Just a second question. So you had a 3 basis point benefit from term deposits. Would you see that as a one-off benefit? Or do you expect to get further benefits in second half '26? And do you think the deposit mix benefit of 2 basis points can continue if the loan growth improves?

Yes. Look, the term deposit, we have a really strong deposit franchise, as I know you understand. And over the last half, with less demand on funding, we haven't needed to price our term deposits as sharply as some competitors have done. The reality is, as we move to stronger lending, I don't think we'll have that luxury again, and we'll probably need to make sure that we are priced more closely to where our competitors are. So I don't expect that TD benefit to play out again.

From a deposit mix perspective, I'd love to sit here and say yes, we will continue to see stronger growth in our savings accounts and lower cost deposits in generally. That's the reason we've invested to improve our digital deposit gathering capability, but it's very hard to make that sort of commitment with a forward view, again, given the competitive dynamics and also with the expectation that we'll be growing the balance sheet in the second half. So look, I'd be -- I'd love to say, yes, that's what's going to play out in the second half, and I'll be delighted in 6 months if we can report that. But I don't have a strong level of confidence that we'll see a similar benefit in the second half.

Thanks, Sally. Our next question is from Andrew Lyons from Jefferies.

Richard, just a question that somewhat relates to what's been asked already around margin, but maybe from a higher level. If you look at your divisional revenue performance on PCP, your Consumer division saw strong revenue growth in the face of a shrinking loan book, while your Business and Agri division saw strongly negative revenue growth, I think, minus 5% or 6% in the face of what was pretty strong loan book growth on the PCP. Now while I accept you can't shrink to greatness that infinitum, from a high level, what does it say about the state of the business when the cost of loan growth seems to be such significant revenue margin pressure. And I think it's particularly relevant given you are looking to accelerate growth into the second half.

Yes. Look, it's an interesting conundrum, isn't it, Andrew? What we need to do is try and get this balance right. One of the reasons we -- I guess, or that influenced the lower growth in the residential side or the consumer side of things, well, there's 2 factors there. One of those was what I spoke about earlier with exiting one of the third-party channels, which has seen accelerated runoff in the back book there. But the other factor is we really did want to wait until we had the functionality in place from a digital perspective to see stronger growth in our lower cost deposits before we felt comfortable to, I guess, move back to a more competitive position and hopefully drive stronger growth going forward. And the reason we did it that way is so we can hopefully keep that balance in check between in the consumer business, the lending side and deposit growth so that we don't face the margin crunch that we saw on the back of the finalization of the government support on the back of COVID when margins got crunched pretty badly.

On the B&A side of things, when rates fell, our low rate-sensitive savings accounts really did get a -- took a hit in that space. B&A, the deposit business in B&A is heavily skewed towards those transaction accounts, those lower rate accounts. And so they are more sensitive to moves in interest rate. And look, I would be hopeful then we'll see some improvement from a margin perspective with higher interest rates and not quite sure how high they will go. Also, I'm not sure -- I'm trying to think back, I've been in this business nearly 20 years now with this bank. I'm not sure I've seen such competitive pressure in the business and agri space during that time. And the reality is that's a challenge. We want to retain our book. We'd like to grow our book. We've got a good offering, but the reality is we've got to be priced competitively in that space. We'll be doing our best to maintain a solid NIM in that book going forward. It is a NIM that has a reasonable premium over the consumer business. We don't want to give it all away, but it's the ongoing challenge we face, and it's a challenge for the industry as a whole.

Yes. Great. And Rich, just that comment on business and agri being as competitive as ever. Is that a comment on both sides of the balance sheet? Or is it particularly in that space biased to one element?

Look, it -- they tend to be related because if you do a good job of bringing a B&A customer onto the books, hopefully, you get both sides of their balance sheet. But the reality is the competition actually is manifesting as much as anything in the competition for business and agri lenders and business and agri business managers. And so look, we've seen these things happen from time to time again. I do suspect that will ease at some point. But right now, it seems to be a flavor of the month. One of the other aspects that I think will help us although it's still probably a little way away. Once we finish the build-out of our consumer digital onboarding capability, we swung that team now across to start looking at building digital onboarding capability for our business and agri customers.

That's a more complex build because, as you can imagine, onboarding the complexity of a business customer versus an individual, there is -- it is by its nature, more challenging to do that in a digital environment. But that's some work we've kicked off, and we think that will help us continue to grow the deposit side of that business once we've got that in place. I'm not going to be able to give you an exact date. It won't be this half, but I would hope that to be up and running during FY '27.

And then just a second question just on expenses. Your overall expense -- sorry, investment spend guidance is broadly unchanged from what you said in August. But since then, you've had 2 additional things that you've got to effectively include within that envelope being the AML and then the RACQ acquisition, which does somewhat imply that you are sacrificing, I guess, investment spend to grow the business in inverted commerce. So like are you really in a position to allow this to happen in an environment where your major bank peers are ticking up investment spend and reshaping it more towards growth? And you've obviously got what's going on just in the broader revolution in relation to AI. Just keen to sort of understand the decision to hold investment spend in the face of additional costs. Yes.

Yes. Look, it's -- one of the real positives that we've been able to deliver over the last 6 months is actually a significant increase in productivity in the technology development space. And a really great example of that is one we've probably banged on about a bit, which is the build of the consumer digital onboarding capability in just 3 months for about $0.5 million, we expected that to take a lot longer and cost a lot more. We are in the process of materially changing our technology development operating model. That was one of the first areas operating under a new operating model. So we're seeing greater efficiency and productivity coming through that space, which has actually freed up space in our investment slate for us to then reallocate funding to AML/CTF and also RACQ.

Now the other aspect that actually has allowed us, as we've been generating this productivity, that has allowed us to free up contingency that historically we haven't necessarily been able to free up because we've had to use it on major projects. So again, I'd like to say this is a foresight of what we'll continue to see with a significant improvement in productivity, and that includes the use of AI tools in the development of new functionality and coding and the likes, which is actually having a positive impact in our tech productivity space. So that's -- we don't think reallocating funds to these areas are going to impact our growth agenda. We think we've got it enough to allocated to those aspects that will drive growth, such as the digital onboarding for B&A. But the reality is you're always making tough choices when it comes to the investment slate because there is always an excess of demand over the amount that we're prepared to allocate.

Thanks, Andrew. Our next call is from Tom Strong from Citi.

A couple of questions. Just going back to the TD pricing. I mean you have lagged your peers considerably over the last few months and sits below them. I mean, is there a point of catch-up regardless in terms of getting back into flow? Or is it more just contingent on the sort of growth dynamics between your digital deposits and low-cost deposits versus getting back to system?

Yes. You're right, Tom. We have deliberately lagged some of the pricing there. We did make a move in our 12-month TD I think it was late December or January, I'm trying to remember exactly when we did make a change, but that has put us -- we found with that 12-month one, which has become positive again as the curve has moved higher, we had to move back to a more competitive position there. And look, we will continue to monitor the different terms across the TD profile to make sure that we've got certainly 1 or 2 competitive rates out there, generally one in the shorter terms, sort of sub-6 months and generally one more around that longer term of around a year. And I think from memory, we did make some other tweaks just going back in the last week or so as well just to make sure we've got competitive positioning there. Obviously, that also reflects the cash rate change that happened a week or so ago and locking in a higher curve where everyone is adjusting their TD rates to reflect that.

Great. And just a second question on capital. You mentioned the strength of capital, which is popping up further. You did get a considerable benefit in this quarter from the cash flow hedge and some of the reserve movements. Can you just touch on the sustainability and what's driving that?

Yes. Look, that's -- this is one that I'll probably normally throw to Andrew to give me all of the detail on this. But the cash flow hedge reserves, I mean, they are -- the movements there do depend on when those hedges have been set and obviously, movements in rates. I don't expect you're going to see an additional tailwind in the second half. But look, maybe to give you a fulsome answer on that, we might pick that up in our one-on-one discussion later today because if you'd ask me 6 or 7 years ago when I was sitting in Andrew's seat, I would have been all over it, but I must admit it's not one that I've necessarily focused a lot of attention on that specific point.

Thanks, Tom. Our next question is from John Storey from UBS.

I just want to go back to your deposit franchise, right? And one of the things that definitely sticks out to me, obviously, you've got a fantastic offering there. And obviously, you've got a great client value proposition as reflected by a very high NPS score. 27% of the deposit base, if you're going to have a look at it, is effectively at a cost of 0% to 1%. I'm just thinking kind of more structurally, as your client base becomes more digital, how price sensitive would this client base be? And how sticky are those deposits within that context?

Sorry, that -- was that -- you just got a little bit muffled there. Was that in relation to the Bendigo business or the Up business or both you're talking about?

No, that's in relation to both, Richard. Yes, absolutely.

I got it, yes. Look, the -- on the Bendigo side of things, it is interesting. Most of our customers who do most of their banking with us will have a transaction account and the savings account, and they will actively move funds between the 2. As I mentioned earlier on the call, one of the important elements of our business banking franchise is actually a pretty significant transaction account balance where you generally see a higher float being held in the transaction accounts. So just because they're moving to a digital channel, what we're seeing interestingly from the -- I'm trying to remember how many thousand customers we've already onboarded through the new digital capability from -- through Bendigo Bank. We're seeing them then bring -- open a transaction account as their first account and then open additional accounts, often a savings account. And so there is a mix then of funds sitting in those 0 or very low interest rate accounts and then also putting money into savings accounts. And in some cases, in fact, actually then going on and taking out lending with us.

On the upside, the move to the new Grow & Flow product has actually been really positively received by their customer base with significant increase in funds going there. Now from memory, the flow rate is around 1.5% or thereabouts and the grow rate is above 4%. So again, it's a reasonable mix. There are some specific requirements such as no withdrawals from your Grow account to get that higher interest rate. But again, what we're finding with the customers, and I was talking to my son about this over the weekend about how to manage his cash flow so we can maximize the amount in his Grow account versus his Flow account, which pays 1.5% is to -- they end up having funds in both. So I'm not sitting here overly worried that we're going to see a significant reduction in those lower cost deposits on the back of the digital channels.

And I think, Richard, the aspects you talked about at Investor Day with the emotional drivers and the strong NPS, this seems to be coming to fruition.

Absolutely. No, we've been really encouraged by the early customer flow we're seeing through that new digital channel. I mentioned 400 to 500 a week. We're hopeful that we can get that up above 100 a day in the near future with some targeted promotion and marketing. And it's been really pleasing to see the customers voting well, I was going to say with their feet, but really with their fingers in taking up those digital accounts.

Great. Maybe just quickly on my second question, just around lending growth and obviously, your ambitions to try and accelerate that in the second half of the financial year. Maybe you could just comment around the ability of Bendigo to lean on some of its proprietary channels to try and drive growth. And it looks like as you've kind of mix -- as the mix has changed more towards proprietary, obviously, your new business volumes have come off pretty substantially. And just thinking about it from a volume margin trade-off, if you can drive lending growth through proprietary, obviously, you'd be able to hold margin a little bit better. But if you're reliant more on third-party channels to try and accelerate growth, particularly in the second half of the year, arguably, there would be more of a margin impact. Just how do you think about those dynamics there?

Yes. Thanks, John. I'm really quite positive about what we can do in our proprietary channels this half. We didn't actually move our largest geography by customer, Victoria onto the new platform until I think it was late November or even early December last year. Now getting on to that new platform drastically reduces the amount of time a lender needs to work on actually delivering a home loan and processing for a customer that home loan. It literally takes it from many hours down to minutes. And on the back of that, we're looking for an increased flow through our lenders out in the retail network. The other element historically, we've seen a disappointing percentage of applications to settlement. And roughly through our retail channel, we were seeing only about 60% of applications settling. And a large reason for that was the amount of time it was taking us to get to unconditional approval, in many cases, many weeks.

Now unconditional approval or conditional approval is within minutes. unconditional approval tends to be dependent on the customer getting any additional information back to us. But at the moment through the retail channel, that's down to about 7 days on average from, as I said, weeks. And on the back of that, we have the early signs of the loans going through the lending platform through retail are seeing a higher proportion of applications settling. And so that's a significant productivity and also growth improvement opportunity for us.

Thanks, John. Our next question is from Matt Dunger from Bank of America.

Richard, if I could ask you around the residential lending flows on Slide 36. I understand that the value of third-party flows is more than halved versus the first half of '25. And you've talked to the net interest income to credit risk-weighted asset improvement. Just wondering how you can maintain this? How much of this do you expect to unwind in the second half as you return to growth? And what sort of cost of capital targets are you going to set? Will you be able to maintain the improvements that you've got through from pricing discipline?

Yes. We are certainly hoping that we can hold out our margin and therefore, the returns we're generating through our residential lending book in the second half. The reality of that drop-off in third party, I expect that on a percentage basis, it not to rebound all the way because I do expect we'll probably continue to see some elevated runoff in some of those third-party channels that we've closed. But I do also expect that we may well see some additional new business flow as we have moved some of our price points in some of the higher returning points across the competitive market into a position where we are price competitive.

Look, it's going to be -- that's the real challenge in front of us to hold that return in new business through our margin. The one thing, though, that does help us is the significant productivity benefits we are now getting through that new lending platform. So the cost of manufacture of a lot of those loans is a lot lower than where it was a couple of years ago before we had that platform. So the price points we've got there are above our cost of capital across those different products. The challenge, though, as I mentioned earlier, is as we get that higher growth is to not give that margin back through funding. And that's the art and science of this business. As I said, we've now got more capability from a customer deposit perspective in that digital space. Up is making a positive contribution, a net positive contribution with its deposits as well. We're going to be working damn hard this half to not give back margin as we start to see growth come through.

That's very helpful. And if I could just follow up on the cost side, and thank you for quantifying the $70 million to $90 million of AML and CTF costs. Just wondering if you could talk to the scope and composition of this spend. Why is this the right number? And does this Deloitte program have scoped out the work? Does that draw a line in the sand?

Look, the way we've come up with that number is through working with Deloitte, who have the experience of working with a number of other banks have gone through similar processes. And one of the few positives out of this experience is that we're not the first bank to experience this. And so we can leverage the experience of others. They have identified from the review they undertook, which we obviously identified to the market late last calendar year, they have then done work to map out the actions they believe we need to take over the next few years. And they've also given an estimate of the cost to do that.

We've worked our way through that. We've also assessed each of those actions against what we believe our capability is to deliver on those and then done a bottom-up analysis of the potential contingency around the different actions we need to take. And so that's where we end up with a range whether you've got it with or without contingency. As far as drawing a line in the sand, look, we would -- we are very hopeful that this time frame and this investment will get us to a position of addressing the shortcomings that we've identified. Steve Blackburn, who I mentioned, who's just joined us, comes with the experience of working or doing the same role with one of the major banks when they went through this process and also another large listed organization, not in the banking sector who went through a similar challenge.

He's only been with us a couple of weeks now. He's now working his way through a review of that estimate. Early days, he's only been with us a couple of weeks now. He thinks it looks reasonable, but there's still more work for him to do and his team to really forensically assess whether that's the right plan and the right cost. But we thought it was really important, given we've got this initial estimate to get it out there. It may change. But if it does change, we'll certainly keep the investment community abridged of that. I'm very hopeful that we're allowing sufficient funds and sufficient time to fix the issues we've identified.

Thanks, Matt. Our next question comes from Ed Henning from CLSA.

Just following on from the question from Matt there. On the $70 million to $90 million, does that include there's still analysis going underway of the root cause? Is there potentially any add-on from that and change of scope?

Yes. This is specific to the AML/CTF, Ed. Yes, as we've identified, we're doing an additional piece of work to see if there's any read-through from the shortcomings. We've identified on AML/CTF to our broader nonfinancial risk management within the organization. That will report back to us late this half. And we will see what comes of that. If that requires further activity to be undertaken to improve our nonfinancial risk management, then we'll address that. We've already been doing work for some time to uplift our capabilities in that space. So if anything, that would probably see a continuation of that work, which is already work that is included within our existing slate. So we'll just have to wait and see what comes and what findings come from that work and then if there's additional activity that needs to be undertaken. I would hope that, that would again be something that we could manage through a mixture of BAU costs and slate -- existing slate.

Okay. And just further, just to confirm, I think you said during the presentation that you'll expense 65% again in the second half of your investment spend. Was that right?

I'm just trying to get exactly the words so I can -- we were certainly guiding to above...

Greater.

Yes, above more than half. For the first half, 65% was expensed. In the second half, we're expecting the expense ratio to be more than half. I wish we could forecast with exactly that level of precision, but -- so we're being a little bit more general in saying we expect more than half to be expensed, but we'll have to wait for a few things to play out, but it was 65% in the first half.

Okay. That's fine. And then as you know now with the AML program and you're talking about investment spend of around $230 million for this year or broadly a bit under that. Is that what you expect going forward, including the AML spend as well?

I'd love to sit here and be able to confidently say we'll be reducing that into FY '27. That's something we'll know further have a better feel for later this half. We highlighted that we're in advanced negotiations in relation to a new partnership in the technology space. That's going to be an important factor in our ability to continue to drive efficiency in our ongoing development. So I'm hopeful, but I'm not going to be able to sit here today and give you guidance on that one.

All right. And just one final one, just another clarification. You've talked today about getting back to system on the mortgage side. You got a benefit during the half on the asset mix side. Do you think that reverses or it just becomes more of a neutral going forward? How should we think about the margin on the asset mix side, please?

Yes. I think asset mix will probably be more neutral in the second half, I'd expect. The benefit -- there was some benefit from the runoff in the lending book versus growth in average interest-earning assets on the business and agri side of things. If those 2 are running more in line, then the mix shouldn't see a significant movement one way or the other. Clearly, there are some tailwinds, though from a margin perspective coming into the second half. As I mentioned, the replicating portfolio should have a slightly positive impact and the rate leverage with higher rates. So -- and not that I want to make a big deal of it, but our exit NIM at the end of the year was slightly higher than the average. So again, it gives us some positivity around margin in the second half as we move into what we expect to be a slightly higher growth. Well, certainly a higher growth on the resi lending side of things.

Thanks, Ed. Our next question is from Carlos Cacho from Macquarie.

I was just curious on the capital side and your decision to do the effectively small $120 million raising. When you announced the RACQ acquisition, it was fully funded by cash reserves. With a 31 basis point raising, it's now largely funded by new capital. I guess curious that you can talk us through what changed since December. I mean, obviously, the APRA overlay is added, but the potential for that was probably known at the time. Is there something else that you're concerned about? What shifted there?

Yes. Look, thanks, Carlos. When we announced the AML/CTF issue in concert with the RACQ piece, we weren't aware of the $50 million overlay from the regulator. Now in hindsight, should we have expected that? I don't know, but we weren't aware of it. So that is one element that has changed. I think also, as we are looking forward with some growth levers available to us, I think the Board has decided, let's make sure we're in a strong capital position, knowing that we've got that RACQ drag of pretty much the same amount that we're underwriting here so that we know that we have plenty of capital available for whatever comes up in future periods. So it really is making sure that we maintain our very strong capital position, both pre and post the RACQ acquisition completing.

Great. And then just on the deposit side of things, you have spoken to the strong growth you've seen in lower-cost deposits. But we've seen incredibly strong system growth over the last 3 to 6 months. And so your growth, if we compare it to that, has probably been a bit on the softer side. I understand you're shrinking in TDs, but still it's been half system overall in the housing book. How much capacity do you think you have to get back towards system growth in deposits? Because it would seem that without that, the risk is that the mortgage book growth you're hoping to achieve potentially becomes a negative for returns and margins.

Yes. Look, I think we will continue to hopefully see strong growth through these digital channels I've spoken about. We only went live with the digital onboarding, I think it was in October. In fact, I do recall, it was October 2 was a birthday present to me. So that's only been in place for a quarter, and the volumes are increasing through that channel. Having said that, we do know that we will need to see some growth in term deposits. And I guess our flagship deposit product of EasySaver continues to grow above system. And that continues to be a really attractive product for our customer base. And so we'd hope to see that continue. But look, your question is a fair one. As we start to grow the lending side of things, we need to make sure that we maintain our deposit-led approach to lending and not let that lending get to a position where the funding of that is going to have a material negative impact on margin.

Thanks, Carlos. Our next question is from Brendan Sproules from Goldman Sachs.

Richard, congratulations on doing the whole presentation by yourself, the process of answering questions. Look, I've got a question on Slide 40 around the composition of your business lending mix. I mean, 18 months ago, Bendigo came to the market with a new strategy around business lending. But what we've seen since then is growth really in equipment finance, and we haven't really seen the growth in those 4 target areas of micro SME, property and agri that you outlined. In terms of the equipment finance, you have had one of your competitors say that they're exiting that market, citing very low returns on equity. Can you maybe talk about the returns on equity in that part of the business? And then secondly, around when we should start seeing some growth in those 4 target areas that you outlined 18 months ago?

Yes. So look, equipment finance is an interesting one. We actually see really strong returns there, but we are not generally offering -- our book is not dominated by distribution through third parties. And so we often see it as actually a great first product for a relationship with a business customer that allows us to then build out from there. So it's a really important part of our offering. And certainly, the direct returns for equipment finance have been strong. On the -- and that actually goes not just for business, but agri as well. On the agri side, we've actually seen growth customer numbers through the agri business. And prior to the seasonal runoff that we saw with the paybacks in November, December, the book was actually in a really strong position.

And if you look where it is versus a year ago, it's slightly higher than where it was at December '24. I would be really hopeful that we'll continue to see good growth there as we continue to build out the mix of agri subindustries that we're seeing growth come from and being a little bit less reliant on the cropping and livestock side of things. So I'm really positive on the agri business. As I said earlier, it is damn competitive though. But one thing I do know about agri is it is a really important relationship business. People remember you if you stick by your customers through the good times and bad. And unfortunately, there have been some challenging times in South Australia and Western Victoria and then throw on some floods in Queensland, we have got a good reputation amongst that customer base. So hopefully, we can continue to grow that.

SME is one that is -- this is one where I think it's going to be really important for us to build that digital deposit capability. A lot of SMEs we're seeing now in the market are looking to use digital channels in how they look to interact with their bank. Less and less of them are cash reliant. And so that's where we see a real importance to build that digital capability to allow us to grow, again, what is often the first product for an SME customer being a deposit product and then potentially moving into the lending side of it. So look, there's a number of factors there. We are seeing some growth on the business lending side. As I said, I'm pretty comfortable that the agri side is in a good place. We need to enhance our digital offering. We did consumer first, now focused on business and agri. And I think that will hopefully then in the next 12 months, we'll see continued growth in business and agri. And certainly, the team -- I caught up with them not just a few weeks ago. They're pretty excited about the half year ahead.

Thanks, Brendan. Our next question comes from Brian Johnson from MST.

Thanks, Richard, and well done on a great result. Richard, a few questions. The first one is if we have a look at the slide on the AML program, I think I asked this question last time, but I'm just wondering, can you explain to us exactly what happened in very simple language? And the other one is, could you talk about us -- talk to us about the prospect of a fine? And then I have a few other questions.

Okay. In very simple terms, Brian, we identified some suspected money laundering occurring through one of our branches. And we identified that early last calendar year. We reported that to the appropriate authorities, both the regulatory authorities and law enforcement. We worked with those authorities over a period of time until action was taken. I've got to be careful how much I'd speak to here because these legal matters are not an area of great expertise for me. But once that action had been taken, we then pretty much immediately assigned a third-party, Deloitte, to come in and review the root cause of the issue that we had identified. They undertook a review of several months to look at the underlying -- or the issues that we'd identify and the underlying root cause. They identified deficiencies in our AML/CTF risk management, the way we were doing that, that had allowed this to occur. And -- that's as soon as we got that report and the report was finalized, we self-identified that and self-reported that to the market.

On the back of that, and as you can imagine, through that whole process, we were in regular contact with the regulators to keep them informed of the process we're undertaking to make sure that was an appropriate process. On the back of that, just before Christmas, the Prudential regulator imposed the $50 million capital overlay and asked us to undertake a broader nonfinancial risk management review, which is underway. And AUSTRAC initiated an enforcement investigation. So if you like, there are 3 streams of work going on at the moment. The AML remediation, the $70 million to $90 million that we've kicked off, there is the nonfinancial risk management review that we're undertaking for the Prudential regulator. And we are working with AUSTRAC to provide them with all the information they need to complete their enforcement investigation. What comes out of that enforcement investigation, I really don't know, and I don't even know the time frame.

So Richard, that this was facilitated by Bendigo staff.

This was not -- look, I'm not -- actually, I'm not going to go there, Brian. There was clearly a breach of AML/CTF activity going on, and it went through one of our branches. And that's, I think, all I can say. If and when law enforcement activities are completed, then I'll be happy to make public anything that is made public through that. But I just -- I've really got to be careful what I do and don't say.

Now Richard, the other one is just on the net interest margin slide. Very cautionary outlook. But then if you have a look at the considerations, we're talking about cash rates rising, but you're talking about some margin pressure. You're talking about returning to growth perhaps in the fourth quarter. You're telling us that the exit rate is actually higher than the December rate, which was higher than basically the September quarter. That kind of sounds to me as though you're telling me in the next quarter, the NIM is up and then it falls quite dramatically in the quarter thereafter. And then when we have a look out in the year after, are we talking about this 3 basis point decline on the asset side that we see coming through each quarter going into '27?

Yes. Look, you're right, there are some tailwinds, but it is really hard to be that precise to -- I mean, if I could precisely forecast our NIM in the fourth quarter to the basis point, I'd probably be in a different job or retired. But look, the -- yes, there are some tailwinds for this quarter, absolutely. The challenge we're leaning into is to not see significant margin degradation as we return to growth. Now you can all form your own judgments as to our ability to deliver on that. I hope in 6 months, I'll be sitting here hopefully alongside Andrew, so I only have to do half the presentation and talking about maintaining our NIM in parallel of seeing some stronger growth come through.

Richard, the final one for me, just the slide on capital and dividends. If we have a look at the pro forma capital ratio, 11.19%, but then we've got to take out RACQ out of that. And so we've got the operational risk overlay. We've got the dividend comes out, and then we've also got basically RACQ comes in. What is interesting is that you guys keep on talking to a greater than 10% core equity Tier 1, whereas your direct peer, Bank of Queensland actually talks to greater than 10.25%. I see where that figures in the ROE. Can we just get a feeling a little bit more precision on that greater than 10%? Does it actually mean greater than 10.25% like your peer? Or if it is, in fact, just greater than 10%, why is your capital requirement lower than your immediate peer?

That last question is one I'm not -- I can't answer. But our Board limit is 10%, and our Board requires us to keep our common equity Tier 1 ratio above 10%. Now clearly, any time you pay a dividend, then that has a negative impact. So we need to run a significant buffer above that 10% running into dividend period assuming we're not going to be underwriting a DRP every time. But 10% is our Board limit, and we're required to keep it above that from a risk appetite perspective. I can't comment on our Northern neighbors.

So Richard, just on the 11.19%, when you think about all the bits and pieces, can we be relatively confident this has got any APRA or any AUSTRAC fine that may be incorporated that you could fund it basically without resorting to another capital raise?

As I said to your earlier question, I have no idea what potential penalty, if any, will apply. And we'll cross that bridge when we get to it. We -- post RACQ and dividend, I think our adjusted common equity Tier 1 ends up around 10.70% or something ex-div. That clearly provides about $270 million of capital buffer above that 10% limit. I'd love to think that's all going to be available to drive value-creating growth. But we'll continue to make sure that we're in a conservative capital position, and we think that's the right way to run this bank balance sheet first.

Fantastic. And congratulations again, Richard, great operational performance during the period.

Thanks for that, Brian. I appreciate it.

Thanks, Brian. Our next call is from Christian Mazza from Jarden.

Two questions, if I may. Firstly, as discussed, we've seen FTEs fall over the recent halves as a result of your productivity initiatives. What -- where exactly are these employee reductions coming from? And if we include contractors, are FTEs still down?

Yes. Thanks, Christian. The FTEs have come -- let me -- I guess I'll talk through a number of factors over the half. Early in the half, we did a number of reviews of our support functions. And so across a number of support functions, there were headcount reductions, employee reductions. Then in the -- following that work and following the relatively recent appointment of a new Chief Technology Officer or Chief Information Officer, there were significant reviews undertaken into our technology organization that has seen reductions in both employee numbers and very significant reduction in contractor numbers during the second quarter of the half. That's been probably the biggest impact in the half. Contractors have not been replacing employees that have been reduced. In fact, the contractor reduction has been more significant than the employee reductions. Those contractors have generally been contractors that have been employed on the investment spend.

And again, as I spoke about earlier, one of the real positives we've been seeing lately as we've changed our technology development operating model is greater efficiency in that space, and that has allowed us to reduce the resources needed to be applied in our investment slate. Where we've gone first is to reduce the contractors in that space because they are generally more expensive than our employees. And to be frank, I'd rather retain our employees who have made a commitment to our organization if we can.

Yes. Perfect. That makes sense. And then secondly, reflecting on your Google partnership, it's clear that recent norm has been to migrate data systems to the cloud. However, if AI reaches its potential, is there a risk we have to U-turn and bring back core elements of data infrastructure back to on-premise just to protect that data?

Yes. Look, again, I'm probably edging into an area outside of my limited areas of strength, but on this one. But everything that we know is at this point in time is that the level of security that is available through leading cloud providers such as Google and the way those cloud services are established, managed and protected certainly doesn't nothing in our forward view sees us needing to bring significant workloads back on-premise to on-premise data centers. And so that's not currently in our plans. Again, I haven't done a lot of broader research in this space. So again, probably not an area of strength for me, Christian.

Thanks, Christian. We have our final question from Richard Wiles from Morgan Stanley.

Your answers to the questions from Carlos and Brian on capital raised some extra questions about how the Board is thinking about capital management. APRA has imposed an overlay on every bank that has had an AML issue in the past 10 years. So I don't know why you expected in October that, that wouldn't be the case when you announced the RACQ acquisition. Even if we put that aside, the pro forma is 11.2%. You yourself just said that after taking account of the acquisition and the DRP underwriting, it will be 10.7%. That's a buffer of $250 million, $270 million. It does raise the question as to whether that 10% target is appropriate. That seems like a very large buffer. It also raises the question as to whether you have confidence in your capital generation.

On Slide 24, we see that you've got a 16 basis point RWA benefit from the runoff in the loan portfolio. You also got benefits from deferred tax assets and then other factors such as the movement in reserves. Without that, you wouldn't have generated any capital, even taking into account the runoff of the loan portfolio. So do you have confidence that if you get the loans growing again, if the portfolio grows on the back of an improvement in mortgages, that your capital generation will be positive? And do you have confidence in that 10% capital target that the Board has currently outlined?

I'll go to the last bit first. I've got no indication that there is any intention to change that 10% target from the Board. Now we obviously have management targets also that provide an additional layer above that. So although that's the Board target, we then have a management target that builds in some buffer above that, that we operate towards. And the reality is that we feel that it is more appropriate right now to take a more conservative position with our management target as we're moving into a period of time where we expect to grow the balance sheet. Now there are other actions we are taking, and I talked about earlier in the presentation, the second phase of our productivity initiative to look to drive higher returns. And if we can, therefore, keep a relatively stable margin as we grow through those partnerships, generate greater productivity.

So more of the revenue we write falls to the bottom line, then over time, we'll hopefully move to a position where we're generating more capital organically. That's not going to happen overnight, I get it. But in an environment like this with a lot of moving parts, I certainly was very comfortable and as a Board member, supportive of moving to a more conservative capital position.

So Richard, can you tell us what that management buffer is? There's a Board target, then there's a management buffer. In practice, that means that the management target is your capital constraint. Can you tell us what that buffer is?

Look, we don't disclose that.

Is it 50 basis points?

As I said, we don't disclose that, Richard. That is a dynamic target. So it does change from time to time, but it's not something we'll be disclosing publicly.

Richard, that was our final question. I might hand back to Richard Fennell to do some closing comments.

Thanks, Sam, and looking forward to a couple of minutes of not talking in a moment. But in wrapping up, hopefully, over the half, you've seen that we've demonstrated our strong execution capabilities as we've really delivered some significant progress on our refreshed strategy. Our customer numbers are growing, supported by the customer advocacy scores across both our key brands and also improved digital capabilities. We've increased the share of low-cost deposits. We're regaining momentum in our lending businesses and our productivity program is going to drive sustainable long-term benefits. So I want to thank all of our people who work so hard to deliver great outcomes for our customers and value for our shareholders. Thanks, everyone, for joining us this morning, and look forward to talking to many of you over the next day or so.

Thank you.

Thanks so much for joining us and welcome, everyone, who's on the conference call, and thanks so much for those who came in person. We really appreciate it. Let me begin today by acknowledging the traditional owners of the lands in which we meet here in Sydney, the Gadigal people of the Eora Nation. I pay my respects to their elders past and present and pay my respects and extend my respects to the Aboriginal and Torres Strait Islander people here today and on the call.

So today, we have Richard Fennell, our CEO, who will provide an overview of our strategy thus far and our momentum that we're building. We also have Andrew Morgan. He will look at our business momentum with our normal 3 focus areas of optimized deposits, sustainable growth, productivity, both in the long term and the short term.

Richard will include in his section an update on the announced RACQ transaction. We'll then head into Q&A, where Richard will also give a quick overview of our AML announcement last Tuesday.

In the Q&A section, we have members of our executive who are here to help with Andrew and Richard and answer questions. Just a few logistics. Our bathrooms are outside to the right. If there is a fire alarm, please follow the instructions from the concierge. I'll hand over to Richard.

Thanks, Sam, and good morning, everyone, and welcome to those joining on the conference call as well. I'd like to begin by addressing the announcement we made last Tuesday. I recognize that as an organization that works hard to deliver on its purpose, we've fallen short of the standards we set for ourselves and that our stakeholders expect.

The Board and senior management are fully committed to prioritizing a comprehensive uplift of the program of work required to rectify the AML issues that we announced last week. I'm going to give an overview of where we're at just before the Q&A session. But what has become even more clear through this information over the last week or so is that our key enablers are critical components of our strategy.

We had already started an AML uplift program, but we'll need to do more in order to future-proof our risk management. But at the same time, we will continue to pursue the initiatives necessary to deliver on our strategy. So this will require a parallel focus. Our recent progress is the direct result of being patient and deliberate in the foundational work that we've completed over the past 6 years.

So what I'd like to do now is highlight some of the progress we've made, in particular, since our full year result announcement. By this time next week, we will have completed our core consolidation program of work, going from 8 core banking systems 6 years ago down to 1 as we finalize the transition from the Adelaide Bank core banking system to our Bendigo Bank platform over this weekend coming.

In undertaking these system rationalization programs, we've developed repeatable customer migration capability. We've also deployed our new Bendigo in-app digital onboarding capability for customers, who can then use this to join in a far more efficient way and also able to be used by our frontline staff as a fast and safe method for customers to be onboarded to our bank.

Our market-leading Bendigo lending platform is now in use at our over 400 branches right across the country in addition to being used by our broker partners and our white label partners. And our recently announced 5-year partnership with Google is going to ensure that our people and customers have access to the benefits of the latest AI capabilities digital skills and importantly, cybersecurity defenses.

And in September, our digital bank, Up, launched a new deposit product structure called GrowFlow and this has resulted in significantly stronger inflows of deposits to Up. And last but certainly not least, our balance sheet remains in a very strong position. Our capital position is well above our Board minimum.

And as at 30 September, we have $360 million in excess capital ex-dividend. Our customer deposit funding ratio is 77%, and our loan loss rates remain at historically low levels. So these strengths will continue to allow us to take advantage of strategic opportunities as they arise, build our growth momentum as we, in parallel, address our required AML uplift program.

I'll now take you through some specific details relating to the key sources of our strategic momentum, including Up, why customers are continuing to choose Bendigo Bank and how the Up and Bendigo teams have worked together to build new capabilities for the Bendigo offering. So let me start first with our long-term strategic investment in digital innovation, Up.

I'm delighted today to confirm that our approach to support Up's independent development and operation is continuing to deliver strong results. And specifically on the back of the Grow Flow initiative, Up achieved its first month of profitability in October, more than 6 months earlier than we had expected.

Now over the next few months, Up may move in and out of profitability. But as we continue to see its balance sheet grow strongly, the trajectory is firmly towards consistent positive contribution. Over the past 7 years, we have built Australia's leading digital bank. It now serves well over 1.2 million customers, holds 6.5% market share in the 18- to 24-year-old demographic and continues to deliver strong year-on-year deposit and lending growth.

Just in the last couple of days, it ticked over $2 billion in residential loans on its book. So the trajectory for this business is strong and innovation with agile execution remains at the core of how Up goes about its business. Currently, the team are investigating broadening the lending products to include an investor residential loan product to capture a broader range of borrowers in the digital market.

Up reaching profitability is an important milestone, and it is tangible proof of our ability to make life easier for our customers with digital capabilities. I now want to talk about the power of the Bendigo brand and its role in supporting our strategy, which has been a frequent point of discussion, since our full year results announcement and how those insights have influenced our work on the Bendigo app.

Research shows that when choosing a bank, approximately 70% of customers are driven by rational factors, customer experience like ease of use and channel choice. The remaining 30% of customers are driven more by emotional factors, reliability, authenticity, trust, fairness.

At Bendigo, we score significantly higher on those emotional drivers in comparison to the major banks and also the mid-tier banks, and that's our core strength. This demonstrates that we forge a connection with our customers in a way that others often struggle to achieve. But we are also focused on improving our performance on those rational drivers through improved customer experience.

Fast digital sign-up, improved digital account management and speed of our lending platform are all tangible examples of the improvements we're making. So when we are asked why do customers bank with us, we know that the customers choose and stay with Bendigo Bank because they have a strong emotional connection with our brand. But our strength isn't just confined to emotional drivers. It's also reflected across other crucial performance metrics like our rep track scores, our overall brand consideration, our status as a trusted brand and our NPS versus market.

And we know that it's important that we can correlate that high NPS to deposit gathering strength. And Andrew is going to talk a little bit more about that later. If we take our strong customer connections, NPS and focus on growing lower-cost deposits, we know the Bendigo app plays a vital role in helping us to achieve that. And the app had fallen behind on a number of capabilities, which support those rational drivers.

So we use that research to directly inform the app's features and our focus with a clear goal of closing that gap when it comes to customer experience. In addition, we knew with our old online account opening capability, 3 out of 4 customers were dropping out before they'd get through that process. And we've also seen through our experience with the EasySaver product that when we've given our existing customers access to easy-to-use digital capabilities, they will take them up.

So Xavier Shay, our Chief Digital Officer; and our new Chief Technology Officer, Kieran O'Meara, they brought their teams together to focus on this challenge. And in doing so, they've been able to rebuild the in-app onboarding capability for Bendigo Bank in just 3 months. And this is a clear demonstration of how our investment in Ferocia, the team behind Up, is now bringing their execution capability and agility into the Bendigo business. And early results are really encouraging.

Since the launch of the refreshed app at the start of last month, we've attracted over 1,500 new-to-bank customers, most joining outside normal business hours. And the app is now scoring a rating of 4.8 in the App Store. The early indicators are positive that this channel will be a key driver for growing lower-cost deposits once we ramp up marketing and promotion activity.

Turning now to our announcement today of the RACQ Bank acquisition. This transaction represents a compelling opportunity for us to enhance shareholder value. The transaction will result in Ben acquiring approximately $2.7 billion in primarily residential mortgages and $2.5 billion in retail deposits as measured at June 2025.

And based on these June figures, we estimate that this book of business will generate approximately $50 million to $55 million in net interest income. We're going to commence integration activities early in the new calendar year, and we estimate post-tax integration costs of $25 million to $30 million.

We're targeting completion to be in the first half of financial year 2027 and will be funded by existing capital reserves. The acquisition is highly aligned with our strategic objectives. RACQ Bank, like Bendigo Bank, boasts a strong and loyal customer base and a low-risk lending book. It's going to increase our proportion of lower-cost deposits at a group level by around 20 basis points.

And we'll leverage Bendigo's existing infrastructure and capabilities on an ongoing basis. We'll migrate customers directly onto our core banking platform, allowing us to support these customers simply and efficiently, and those customers will be able to use our 75 Queensland branches and the ongoing run costs are going to be modest.

The acquisition also provides geographic diversity, expanding our presence in Queensland to around 18% of our consumer lending book. And the mortgage portfolio is sound with a low loan-to-value ratio of 58% and owner-occupied loans representing 79% of the book. Credit quality is excellent with minimal historic arrears.

Importantly, the financial benefits are going to be significant. Based again on those 30 June 2025 pro forma financials, we're estimating a 35 to 40 basis point uplift in ROE and about $0.04 to $0.05 of increased earnings per share. This path will support our -- sorry, this acquisition will support our path to enhance shareholder returns through both improved profitability and strategically aligned growth.

And today, as we announced this acquisition, we are a much simpler bank, 2 customer-facing brands, leading digital capability and one core system. As this slide illustrates, our ability to migrate the 90,000 customers onto one core system and the Bendigo brand will translate into shareholder value creation.

I'll now hand over to Andrew to talk through the momentum in the business.

Thanks very much, Richard, and good morning, everyone, and great to see so many people in the room joining us today. Today, I'm going to cover a few things. So first, I'll talk about business momentum and provide a little bit more color following our first quarter trading update, which was released on the 11th of November. And I'll talk about momentum with reference to our 3 near-term focus areas.

Then I'll talk about productivity and how we continue to think about managing our business as usual costs in line with our guidance of no higher than inflation through the cycle. So starting with our deposit franchise and picking up a thread from where Richard was going. You've heard us talk now about the power of rational and emotional drivers in customers' choice of banking. And you've seen that on emotional drivers, we score very strongly relative to the major banks and Tier 2 banks. And through the work that we're doing in digital, we're aiming to close the gap in rational drivers.

We believe that our customer-focused model drives that emotional connection and in turn, drives high customer satisfaction and strong Net Promoter Scores in both our Bendigo and Up brands. In our view, this advantage that we have is very difficult for others to replicate.

So how does that translate to value? Very simply, there is a strong correlation between Net Promoter Score and the ratio of deposits to loans. We would argue that it's part of the reason why we can gather lower cost deposits at the pace and the price point that we do. Continuing on the theme of deposits and now into business momentum.

As you know, building our muscle in digital deposit gathering is key to strengthening our already strong deposit franchise, where today, almost 2/3 of our deposits come from our physical network. As Richard mentioned earlier, about a month ago, we rolled out our refreshed Bendigo app, which now allows customers to join the bank digitally in as little as 5 minutes.

Early signs are positive with more than 50 new transaction accounts being opened every day. We're also seeing 1 in 4 customers take a savings account. And some of these new-to-bank customers have also taken out other products, including mortgages. Our growth in savings accounts continues to be strong, underpinned by a combination of Easy Saver through the Bendigo brand and Up savings accounts.

Year-to-date, Easy Saver is growing at over 13% annualized, whilst growth in Up Savings is very strong, up 35% year-on-year. With slower lending growth this year, we've been actively managing deposit and funding mix, and this has seen the mix of lower cost to total deposits improve.

Moving on to sustainable growth. You've previously heard us talk about the work we've done in the last few years to understand the marginal profitability of our various lending channels and using that as a basis to allocate our capital. For residential lending, in particular, what we do is look for growth opportunities, which also deliver the best combination of margin and return on equity.

That means that when our net interest margin and return on equity expectations are not being met, we will reallocate capital using price as our predominant lever. Through the course of this half, we've stayed patient in residential lending markets, being very selective about pricing decisions and trusting that we would see flow into our physical channels once the new lending platform came online. That patience is now being rewarded. For the month of November, applications per day, which are our key lead indicator are the highest that they've been all year and critically important, still within our funding appetite. We expect the book to start growing again in the second half and to be back at or near system annualized during the fourth quarter. This patient approach also means that our margin has been stable through the course of this year.

Moving to productivity and cost management. As you'll recall, we announced around 100 redundancies at our full year results. As of November, most but not all of those roles had come out of our FTE numbers and our cost base. In addition to that, we've completed further restructuring and other teams. And as of the end of November, our FTE are down 3.6% year-to-date, which is the lowest level that they've been, since January 2022.

What that means is that you will see lower headcount transmit into our cost base, partly in the second quarter and fully in the third quarter. We've seen that play out in our October numbers and our November numbers, which are tracking lower than first quarter average daily costs. We think that puts us on track for a second quarter expense result that is lower than first quarter.

In addition, we've been actively reducing contractor numbers down over 30% since the start of the year. This mostly benefits our investment spend and gives us confidence on our full year investment spend guidance. Moving on to productivity longer term. We've previously said that our longer-term business as usual expense guidance is to grow our costs no higher than inflation through the cycle. That guidance remains.

What I want to do now is give you a little bit more color on how we think about this long-term cost path. We know today that of our 9 cost pools in our organization, 2 of those will grow faster than inflation, and that is software license and cloud costs and also amortization. Neither of those 2 will be a surprise to you. 3 of our cost pools, we expect to grow around inflation, and that includes, for example, our customer-facing teams.

That leaves 4 cost pools where we're actively working to manage the growth in those cost pools to a rate below inflation. Overall, we believe that the benefit will allow us to maintain business as usual cost growth to no higher than inflation through the cycle. So how will we get after those 4 cost pools that I've just described? There are 4 key actions. The first is operational excellence. We established a program in 2022 and now have over 30 practitioners in our central team.

That team has been very focused on our operations and contact center teams and has yielded around a 35% reduction in that resource base over the last 3 years. We've also trained around 100 senior leaders in process excellence disciplines. The second is capability building through strategic partnerships. We've previously spoken about our current 60-plus partners that we use today in technology.

These partners perform both run and change activity for us. We're actively working through streamlining the number of partners which we use in future, and that number will likely be in the low single digits. We believe that this gives us both access to enhanced capabilities and a much more efficient cost signature in both technology run and change costs. We're also exploring partnerships around some of our other business processes.

Again, we see a lot of opportunity to access both new and improved capabilities and cost efficiency in running those processes. And we'll have more to say on this through the course of the next half. The third bucket is AI and automation. And as we said earlier, we recently signed a 5-year deal with Google that will provide enhanced capability around cloud and access to enterprise-wide AI tools.

We currently use AI in a number of areas of the bank, and we'll now look to accelerate use cases in other parts of our business. The fourth is refining external spend, including the cost of our corporate property footprint. Our work in this area in the last few years has been substantial and will continue.

As one example, in the last 3 years, we've reduced our corporate property footprint and rent expense by 30%, and we can see a path to a further 15% rent reduction in the next 3 years. On all of these items, we'll have more to say through the course of the next half as our plans continue to harden up. I'll now hand back to Richard.

Thanks, Andrew. I'd like now just to turn briefly to the announcement that we made last Tuesday and to provide a bit of context on that where I can. We identified suspicious activity in one of our branches and self-reported that to AUSTRAC and law enforcement authorities. We then commissioned Deloitte to undertake an independent review of the root cause of those issues.

That review, and we received the final report early last week, highlighted deficiencies in our approach to anti-money laundering processes and controls, and we've accepted those findings in full. We've now reengaged Deloitte to help scope the activities to help us to address the identified deficiencies. This work will then be aligned with the existing AML uplift program that was noted in our annual report.

The Board and executive of the bank are fully committed to funding this necessary program. And while the specific costs and time lines are not yet finalized, I can assure you this work is critically important to us. But I also understand this results in a level of uncertainty. I can assure you that we are moving with urgency and rigor to develop a comprehensive remediation program.

We're committed to achieving full compliance, and we'll update the market as soon as we have a finalized and actionable plan, including cost estimates. But at the same time, we must also continue to deliver on our 2030 strategy. Execution of our strategic initiatives will continue, and we'll make appropriate trade-offs to ensure we can balance both our AML uplift program and our strategic priorities within our funding plans.

So we'll now open it up for Q&A, and we'll be joined by Sarah, Kieran, Adam and Xavier as well to answer your questions. Sam, I'll hand over to you.

Thank you, Andrew. I look at the 2 in the front. All right. Jon Mott. Nathan is going to bring the microphone down.

Jon Mott from Barrenjoey. Just a question, a small acquisition, but a bolt-on acquisition today. Can you give us a bit more information? How much did you pay for it would be kind of useful. I hadn't seen those numbers. Was it above book value? Is there goodwill?

And also just -- I'll be brutally honest, a lot of the small banks and nonbanks around Australia are really struggling financially. And you heard in Matt [ comment ] talk that there's only 2 banks in Australia covering the cost of capital. With the technology, cyber, AML, risk, compliance costs, they're under a lot of financial stress.

Are there additional businesses that you'll be looking to acquire, either they're coming to you or you're going to them as additional bolt-on acquisitions that can grow the bank and provide scale over the coming years?

Yes. Jon, this is -- this acquisition is at book value. So there's no premium. And that was an important part of the consideration about whether to undertake this transaction. We've -- as you know, we've had a lot of experience with goodwill on our balance sheet. We're happy not to have any more. And -- but as well as the compelling financials of this transaction, we think strategically, it's a good fit for us as well. We're delighted to have some stronger presence in Queensland, one of the fastest-growing markets in the country and provides a good balance to the natural strength we've got in the Southern states.

As far as -- and look, I saw Matt's comments as well, and it is a challenging industry. We're not out there actively knocking on doors looking for more acquisitions. The reality is this was a conversation that started from the RACQ side of things. And if other opportunities come up, where we think there is a good fit strategically and economically, it's a really good outcome for our shareholders, then we'll consider it.

But it's not something we're looking to race around mopping up a lot of these smaller banks. We'll assess them if and when they may come and have a chat to us. But it's not a -- I mean, as we were talking about, I think, last time, our focus is primarily on organic growth.

And what customer losses you are receiving?

We've made -- look, we're not going to announce the actual assumptions we've made, but we've made some attrition assumptions in there. But importantly, there is an ongoing referral agreement in place, Jon. We're bringing across -- or we'll be making offers to their lending staff to bring them across as well.

So we're hoping we'll be able to keep those attrition levels to natural levels of attrition. And hopefully, with that ongoing referral agreement, which covers both lending and deposits with -- I think it's 1.7 million members, I think, RACQ has in Queensland, we would hope we'll be able to continue to attract a proportion of those to our bank.

Move to Andy.

Thank you. Andrew Lyons from Jefferies. Andrew, you speak to sub-inflation BAU expense growth over the cycle. Do you realistically think that you can do that in FY '26? You've done 7% expense growth in the first quarter on PCP. Now you have said today that you think you'll get second quarter costs down on the first quarter.

But it would appear to get to 3% full year expense growth, you're going to have to reduce cost by 6% to 7% for the remainder of the year versus that first quarter. Like is that realistic to sort of continue to maintain that sub-inflation cost growth in FY '26?

Just to clarify one thing, Andrew, no higher than inflation, not sub-inflation. So the trajectory is very strong, and our FTE is down 3.6% year-to-date. We've got other pieces of work in place at the moment. At this stage, we're still targeting to be around inflation, maybe a little bit higher than inflation. I note as well that inflation is continuing to tick up.

There are fewer days. Surely, you expected that. But look, people costs are 60% of our costs. And as I said earlier, our FTEs are as low as they've been in -- since January 2022. And with new leaders, some of whom are sitting to my right here, the work that's being done to restructure to bring capability into the organization to get cost out is as strong as I've seen.

So the indicators there are good. Now there are always going to be exogenous factors that might impact. But as we sit here today, the largest driver of our cost base, which is people costs, and that 60% of our cost is down -- is pretty well down year-to-date. And certainly, in the first couple of months of the second quarter, the trajectory is good.

So we'll go to Richard Wiles.

Richard Wiles, Morgan Stanley. Your capital level at the result was about 11%. Dividend takes off 40 bps. This acquisition takes off another 35%. So we're down to 10.25% and the target is above 10%. You're hoping to improve your loan growth, and I assume you're hoping to hold your dividend. So what makes you think you've got enough capital to do this acquisition, improve growth and keep the dividend where it is?

Yes. So our CET1 was 10.93% in September. That was [ active ], and it's climbed back up to about 11%. So if you do the math on the Board versus the Board target, we're sitting on around about $400 million of capital before we move into this transaction.

There's 2 parts to the capital impact of the transaction. 1 is transition costs that we'll incur between now and when the transaction completes, and then we'll step into the risk-weighted assets. That's first half '27 likely impact. Because of the very low marginal costs associated with the transaction, it generates organic capital immediately. So it's -- if you kind of back solve the costs that we've assumed, it's about a 25% cost-to-income ratio. So it's a very low cost to actually run the book. So as we sit here today, Richard, yes, we're comfortable with our capital levels.

And if you've taken into account the potential cost of the uplift program and the potential for your regulators to impose some sort of capital overlay?

Yes. I mean we don't know a bunch of things today, as you would expect. But as you would also expect, we regularly run capital testing and the like. And so as we sit here today, we're comfortable.

And can I ask separately, you've made some comments about your expectations for volume growth in the second half. And Andrew, as you've said before, you're very focused on margin management. Do you think you can grow revenue in 2026?

We'd like to. So the key, as we previously said, is it's a deposit-led approach to lending, and those deposits should be largely through lower cost deposits. Because of slow lending growth this year, we've been able to, for example, manage down more expensive forms of funding like wholesale funding, like term deposits.

Some of that might need to lift a little bit as we start to see growth pick up, in particular in the fourth quarter. But as we sit here today, our margin is in pretty good shape, and we'd like to see that balance growth translates into income growth.

Thanks Richard. We now move to Matt Dunger.

Matt Dunger from Bank of America. I wondered if I could ask about the anti-money laundering issues. I know it's too early for you to quantify today, but I'm sure you've looked at Bank of Queensland, who took a $60 million provision back in 2023.

Just wondering if you could talk to what sort of allowance you had already made for anti-money laundering and how you would compare Bank of Queensland's uplift program to yours, your own?

Yes. Thanks, Matt. So look, we'd already set aside a number nowhere near $60 million for the uplift program we're planning to undertake. It's a lot less than that. I must admit, I'm not across the scope of exactly the BOQ program of work.

And the reality is we don't know yet that the piece of work that we've asked Deloitte to do will help to inform that. And any number I try and pick out of the air now, I know it is going to be wrong. So the reality is I can't give you guidance on that. And -- but once we do have a reasonable guide for that, we will share it with the market. We're not going to try and be perfectly precise on that. But as soon as we know a number based on a reasonable set of assumptions and analysis, then we'll share it.

And should we be thinking about sub-inflation cost growth as being excluding a provision for this program of work?

The reality is we don't know. I'd love to be able to sit here and say this program will work, we'll be able to manage within our future view of our slate and BAU costs. But I just don't know. Again, as soon as we do know, we'll share it with the market.

Thanks, Matt. Tom Strong.

Tom Strong from Citi. Just wanted to go back to Richard's question around revenue growth. I mean coming back to system in the mortgage book really is contingent on these lower-cost deposits coming through. So can you just provide some color around the assumptions you've made to get to that 45% digital deposit target by the end of June '26? And where do you think you can get that to in time?

Yes, I might get Dave shortly to comment on Up in particular. But I'll just give you a couple of data points. So Easy Saver, as you know, and we've talked about Easy Saver for a couple of years now is one of our strongest growing products. It's a lower-cost product. It's a very simple product that our customers love. So that's growing at 13% annualized.

We've only just, in the last month, put the new join the bank capability in app and it's very early days, but we see that there's opportunity there. And Sarah might also -- I'm throwing to a few of my colleagues here. Sarah might also want to comment on some of the targeted marketing that we can do to then support the launch of that app. And this is my segue to [ Xavier ].

Up's growth continues to be very strong. And one of the things that Richard talked about earlier was the launch of Grow Flow. This is a different type of Saver product, which customers have responded very well to. And early days, very strong growth, and I can see a changed trajectory, since we launched that product. But [ Xavier ], do you want to talk about that?

Yes, 100%. And That, for me, was almost the missing piece for Up. We knew we weren't getting our share of customer deposits commensurate with the number of customers we had. We're now seeing that starting to come through. And so that's really positive. And I think also noting that our deposit growth in Up has been consistently outpacing our customer growth.

So even outside of growth flow, this was still true. And so -- and that's for a few different reasons, where our customers are aging and the average deposits goes up. We're starting to attract some slightly older customers that sort of shifts the balance up. And people are just getting more comfortable with Up as well. So that's working out really well.

On the 45% target, you mentioned that's I don't think -- so the assumptions that get us there are pretty much the things that we've just done. But there's no big other major things that I feel like we need to do in order to hit that. We just need to continue to push what we've done to get there. So I'm feeling pretty confident about that target at the moment.

Tom, one of the other things that's interesting with the new join the bank capability under Bendigo, as many of you are aware, we have -- on the Bendigo brand, we have a very strong demographic skew towards older Australians. The customer demographic that's coming through now is more clustered around the mid- to high 30s.

And so that's kind of exciting for us to see. Yes, it's early days, but through that capability, we're attracting a customer group that we weren't succeeding in attracting previously largely because we're asking them to come into a branch to open an account. And not many people in the 30s really feel that they want to come into a branch if they want to open a deposit account.

Thanks, Tom. We'll go to Andrew Triggs.

It's Andrew Triggs from JPMorgan. Perhaps one for Richard. Just on the AML issue, can you maybe take us into why it took the reporting of suspicious activity in one branch to do a proper third-party review of your AML preparedness? I mean this has been a topic for regulators and for the market since at least 2018. It strikes me that there wasn't -- this review hadn't already been completed by the group.

Yes. Look, that's a fair question. I think in hindsight, and hindsight is a wonderful thing that we arguably should have done this earlier. We weren't aware of the deficiencies that were identified. We've been working very closely with the regulator, AUSTRAC over many years. We've been continuing to uplift our AML capabilities over the years.

The reality was it took for the identification of a particular issue for us to go, hang on, let's go and do a root and branch independent root cause analysis here. We haven't seen to that point in time, evidence that there were deficiencies. And yes, look, a, that's probably all I can say on it. I'm not -- in hindsight, yes, it would have been nice to have identified these earlier before these issues arose, but the reality is we are where we are.

And for Andrew, just the 10% BAU cost growth in the first quarter, can you unpack that for us? I know some of it was redundancy remediation, but the bulk of it appeared not to be. And if 60% of your costs are fairly predictable being staff related. Could you sort of unpack that big number for us, please?

Yes. So there were some seasonal and some one-off factors, Andrew. So there was a higher days count than the second half average. There were some redundancy costs. There were some remediation costs. And we also do our pay review cycle in the first quarter. And that's -- as I think some of you reflected on in your notes when we published the trading update, this is the first time we've done a quarter 1 trading update.

So I think you're all getting used to our seasonal idiosyncrasies, and that is one of them. So the main drivers were those seasonal factors and hence, the reason why -- part of the reason why we're seeing now an appropriate drop in the second quarter. Some were the genuine one-offs, so things like redundancies and remediation.

I'll go to Brendan, please.

Just a question on your longer-term productivity. You did note that you got 60% of your cost is staff related. You've got a cost-to-income sort of over 60%. Now that you're on a single platform and you're developing a lot of these digital interactions with customers, particularly in deposits, what's the latent opportunity for staff reductions here? Like you've taken out 3.5% now. But in the longer term, what would be the ideal sort of target? And where would they be coming from?

Look, we think there are significant productivity opportunities across a range of areas within the organization. Now will they result in direct reduction in FTE like we've seen over the last 3 or 4 months? Maybe in some cases. But if we can get back on to a growth trajectory, some of those resources will be required to support growth.

I mean the acquisition we announced today, we've made some assumptions on some additional resources required to support those 90,000 customers. There will be changes, though, in our workforce over time. And that's the reality of all workforces at the moment as new capabilities, new technology and new demands occur.

I mean one area that I expect we're not going to be seeing reduction in headcount and probably going the other way is financial crime, not just based on the announcement of last week. So it's hard to give an absolute number. But one thing I will say is we're working really hard to drive productivity in the areas, where that's possible.

We're not going to be taking a foot off that pedal. There are other initiatives that are underway that have still got a way to go before completion. And once -- as Andrew, I think, mentioned in his update, in the second half, we'll be able to give you more insight into those. But we don't have a set number that we're targeting. We're looking to drive productivity as hard as we can right across the organization.

Just to build on, Richard, Brendan, FTEs is interesting. FTEs is important as a lead indicator. Ultimately, it comes to cost. And that's why we continue to talk about no higher than inflation, we think, is an appropriate target. And what I talked about in my slide, I can tell you one of those initiatives, particularly around partnering is a piece of work that we've done an extensive amount of work on already, and we'll be ready to talk about that in the second half.

And that really underpins that comfort we have around continuing to reiterate that guidance of no higher than inflation. And again, it's really about understanding that there are certain parts of our cost base that will grow above inflation, and you guys know that. So license cloud costs, every bank, a lot of companies across the market are seeing exactly the same thing. Amortization, you know as well because of our higher CapEx. So we've got to do work to stay in front of those costs and then manage the overall to no higher than inflation.

It might be useful to hear from Kieran to some of his observations, particularly around the technology range of platforms we use, et cetera, and how you think about that, Kieran, because to your point, as we simplify and get to one core banking system, that's providing opportunities.

Yes, it's a good point. So I think there's a few dimensions we're looking at. The work is underway. The first one is referenced in the slides before around the partners landscape. So in excess of 60 partners in the organization today. And it's true to say there's nothing particularly unique about any of them. So there's a scale opportunity there to rationalize and that started.

I think the second piece after that then is, to your point on one core is where do we take that one core next and what opportunity does that present? And the next immediate push for us will be into more decoupling of that so we can enable more of the front-end work that Xavier's team does that will accelerate the growth. But it will also accelerate the ability to rationalize the amount of technology we manage.

And so being relatively fresh to the organization, one of the first observations is there's a lot of discrete technology, and there is an opportunity to rationalize the number of things that we look after, which is the next big push. And my team have started on a point of view for that in the second half that we'd look to execute from FY '27 onwards. And that in itself is fairly significant in addition to looking at FTE numbers and so on.

I think third then is the -- for me is the mix of work and who does what work and where that happens and linked to the partnering strategy, we're exploring options there as well.

I got a second question on the AML. You talked about the process from here, getting Deloitte's to scope the changes that you need to make across the organization. How do the regulators get involved in this? Obviously, they would have concerns. Are they doing their own investigation? Or how does that integrate into what you're doing?

Yes. Look, we've kept the regulators fully informed on the process throughout. And from what I can see looking at the process that others have been through, and clearly, we're not the first to stumble into some issues in this area. We'd probably come out earlier. And we've done that out of an abundance of caution in making sure the market is as fully informed as we are around this issue.

So we're liaising, as you can imagine, very heavily with the regulators around this issue. They have access to that same report that led to the announcement last week. So they received that last week. I expect they'll be reviewing that before forming their opinion on how they want to work with us to make sure that we get our AML/CTF program to the necessary level of sophistication and maturity.

Thanks, Brendan. I'll work my way down to Ed, please, Nathan, and then BJ.

It's Ed Henning from CLSA. I just wanted to clarify something today, you've talked about committing to your 2030 targets, which is great. But -- and while I understand you don't know the cost of the AML and what's going on, can you just clarify for us, are you thinking about now just ring-fencing that and continuing to work with the growth initiatives to get to your 2030 targets?

Yes. I'd love to be able to ring-fence it perfectly and just say that's going to be over there. But the reality is this is -- we expect this is going to be a pretty significant program that is going to need a fair bit of focus. So the way one probably think about more is running in parallel rather than ring-fencing it. And I don't know whether these are the right analogies to be using.

But we will -- what is important, though, is we don't stop the business and say, right, let's all like moths to a flame, focus 100% of our attention over here. We need to absolutely commit the appropriate resources and attention to address the deficiencies that have been identified. But we need to make sure we continue as far as possible to drive the business forward towards that 2030 strategy.

Again, hopefully, by the time we're out with the half year results in February, we'll have greater clarity on exactly how that's going to play out. But I mean, there are going to be implications for our consumer bank, where the issue arose. There's going to be implications for our technology and digital areas, I expect.

There's clearly going to be implications for our risk management teams, both line 1 and line 2. So there are there's going to be a lot to work on here. But in the discussions we've been having internally, we want to make sure that those that need to be involved at this point of the process are giving the appropriate level of focus to this, but let's not swing the whole organization to be 100% focused on AML because we still got a business to run.

Okay. And then just the second question, just on the growth you've talked about today, getting back to growth in mortgages and still maintaining some margin management there. But also you mentioned price is part of it as well. Can you just talk about more in the medium term getting to that 2030, how you're thinking about growth? Do you think around system? Or do you think you need to grow above system to get to your targets?

Yes. Look, in the short term, probably the next 12 months or so, we'd like to be growing at around system. As we continue to build our capabilities and drive productivity importantly, so we can see more of the NII dropping to the bottom line, that's when we think we'll hopefully be in a position to start to take some market share again.

If you look back over the last 5 or 6 years, we have grown market share. Now there's been ups and downs on margin over that time. We want to try and get a much more steady approach to that margin management. And so over the course of the 4.5 years left of this strategy, we would like to see us grow market share once we make further progress on both the deposit capability and the productivity focus that we've got at the moment.

B.J., please.

Brian Johnson, MST. Richard, a few questions. And I appreciate the fact that there are things that you don't know about the AML. There are things that you do know, but you don't want to answer. And unfortunately, I think there were some questions that you should answer that you probably don't want to answer.

So if we ever look at the kind of trajectory of AML problems at banks, it strikes me that if you go back and look at it, CommBank got a pretty big fine. Westpac got a gigantic fine. The Westpac mine was demonstrably bigger because they hadn't kind of seen what had gone at CBA, NAB got a fine of 0 because they were very compliant.

So the first question, I'd like the subset of the questions on this, then I have another one on costs. Is that if we have a look at the AML issue, was this just a suspicious transaction identified in one branch? Or was there some money laundering? If there was only a suspicious transaction reported in one branch, but we've found a control deficiency, were there other breaches in other branches?

And then coming back on it is the real problem that you've got is that while have you gone, for example, and I apologize for this question, have you gone and had a look at the control environment, for example, in up to make sure that it hasn't got the same dynamic coming through. So can we get some detail on what the actual transactions were? Was there some money laundering involved? Why it only -- did this only happen in one branch?

Did it happen across multiple branches? And have you -- have we got the same control risk outside of the branches. And then over and above it, you've got 2 types of branches. You've got corporate branches and community branches. So could you unpack that for us, please?

That's a lot of questions.

How [indiscernible] we got. Look, the actual transactions, I can't comment on because they are still subject to law enforcement activity. So there is law enforcement related to those activities. And because of that, for legal reasons, I cannot comment on that. So that was the initial issues identified. We -- once we identified those and they were escalated, we then let the regulator know and law enforcement. Both of those parties were then involved on an ongoing basis.

In parallel, we asked Deloitte to do their review, which that review did not go beyond that branch, but it did identify there are deficiencies in the way we are monitoring and controlling AMLCTF more broadly. Now I'm trying to catch up with that question 5 or 6.

At this point in time, I'm not -- we have not done a full review of all branches and all transactions. But to this point in time, that is the only issues that have been identified. I'm not going to sit here and say, if -- once we've addressed those control issues, we may go back and then reassess other transactions there may be identified. I don't know. These are all hypotheticals at this point in time. We've got more work to do before we can give an answer to those questions.

From a look, the reality is that the transaction monitoring that goes on in our organization is the same, whether it be through Xavier's Up business, whether it would be through our branch network, through other channels. Those transaction monitoring activities that were being undertaken, we've identified deficiencies. So we need to understand what risk is involved more broadly with those deficiencies.

That's part of the work that's going on now and how we can then close the control gaps, whether we then need to go back and reassess historically, I don't know. Again, these are things that are very much in front of us to work through. And I'm sorry, I can't be more definitive than that on this matter. But it is very early days, and this is one of the challenges arguably in us coming out early with this because I know it's going to be frustrating for all of you and others in -- with lots of questions that we're just not in a position to be able to answer yet.

Okay. And historically, Richard, that's a great way to attempt to answer the question. But I look forward to finding out more about this over time. And I would encourage you just come out as you know, tell us.

The second question is, Richard, if we have a look at the housing market at the moment, housing lending in Australia, Macquarie is still out there pricing well below the peers and pricing up deposit rates. Of late, we can actually see Bendigo and Bank of Queensland for that matter, have basically repriced home loans up and then recently have cut them back down.

But if I have a look at the deposit product at 4.85% against an owner-occupied mortgage of 5.39% and I pay out the mortgage broker commissions more often than not, it doesn't seem to me like there's a lot of margin between the 2. What is the -- are you writing home loans at the moment below the cost of capital?

Short answer is no. I'll let Andrew and unpick some of this a little more in a second. Picking, for example, the highest possible rate through Up is not the weighted average interest rate that Up pays on its deposits. Its spread is well above 2% between its deposit rates and its lending rates. So we're very comfortable.

In fact, it's a strong ROE return through the mortgages we write there on the basis they're funded by Ups deposit. The changes we made recently were on the investor side of things. Again, the returns post those changes are above our cost of capital. We deliberately did not go in Owner Occ because that's where the returns are tightest at the moment.

So we've been tweaking some rates here and there to generate some -- help support some stronger flow, and we're seeing the benefits of that alongside some stronger flow in our resi -- sorry, in our retail business as we've rolled out the platform there. But Andrew, I don't know, if you want to add to that?

I think you've just answered the question beautifully.

So Owner Occ is below the cost of capital and investors above?

Owner Occ, if we were to cut pricing further in Owner Occ in broker, that would be below cost of capital. So that's deliberately why we've not moved pricing in there. Where we're growing the book is in digital, proprietary to an extent in our community banks and in broker, but investor.

And so when we do our calculations of marginal return on equity, we've got a hurdle rate that we want to meet, and we're comfortable meeting that hurdle rate. That's why we're only being very selective, Brian, about the way we price. We're not pricing -- we're not trying to grow volume by cutting pricing across all products. That doesn't work.

But just to clarify, am I right in concluding that Owner Occ is basically below the cost of capital. The front book through the broker channel. Is that...

At our current price point, where we're not writing a huge amount of volume right now, it's around about the cost of capital.

It does depend on the LVR at different point -- price points.

Carlos Cacho from Macquarie. On your -- your productivity agenda, we've recently seen one of your peers announce for the first time an offshoring of some more basic customer-focused roles. Do you have any plans to do similar, whether it's accessing more technology talent like peers have done or the lower-hanging fruit of customer service, like it seems like some easy ways to potentially reduce costs over the medium term.

Yes. I'll get Kieran to speak a little bit about the tech side of things in a moment. I think it would be an unusual action for our business and with our culture to put customer-facing activities offshore. Now I'm not saying that's an inappropriate thing to do. But culturally, that's not something that's on our agenda at this point in time. But we already use offshore-based skills in the tech space.

But Kieran, do you want to add what your thinking is there?

Yes. So again, we touched on this a little bit earlier. And so we've been quite transparent on this point with the partners. So for the 60 we referenced before, one thing that's interesting here is the majority of those partners' resourcing is here is actually resident in Australia.

And so that is an immediate opportunity. And so a feature of that rationalization down to the low single digits that Andrew talked about earlier will mean that more of that work that those partners do today will move overseas. We are in the process right now of looking at various options on what that might look like, and we'll look to execute on that in the second half.

And just around, I guess, back to the mortgage kind of margin discussion. Given -- as you noted, the mortgage growth and margins have had some ups and downs over the last few years. How can we be confident that getting back to system growth isn't going to come at material cost to margins?

I guess, can you share us what your learnings have been over the last few years and how you will do things differently? It's all well and good to say it will be deposit driven. But if the deposits aren't there, does that mean the mortgages aren't going to be there? How do you balance those 2 things? Because from the outside looking in, it has appeared at times like it's been a very difficult balance to get right.

Yes. I think -- thanks, Carlos. I think the lessons of the first half '25 have stuck with the organization. And we had a rollout of a platform, which was very successful, more successful, I suspect, than probably what we had anticipated, and that required a funding response. When we got to the point where we said we're growing too fast, we made then pricing changes in a couple of tranches, and then that slowed the volume down. That gave us a few key lessons.

1 was around the volatility in our margin, which was not what we wanted. The second was it gave us a clear sense as to where we needed to price the book to grow. And I've mentioned this before. So we've got a pretty clear sense as to the price point at which we need to set our mortgages to grow at a certain level.

And so the way we construct our plans, and I referenced this earlier, is we've got a number of applications per day that we target. And the way that we think about that number is we figure out what that means in a volume sense. And if we feel comfortable that we can then fund that as much as possible with lower cost deposits, then we say, okay, that's the number we go for. And so what we're doing is using price as a lever to control the flow, taking into account how much flow will move to a settlement, we'll move to then a loan on the balance sheet. That's why we do it.

Is that, I guess, a new initiative looking at that applications per day? Or is that...

No. No, I think they are connecting Up of funding and making sure that we support lending growth with as low-cost deposit funding as possible. And then some of the more recent digital work we've done to build our lower-cost deposits, so transaction accounts is helping to underpin that. But it was a critical part of the strategy that we -- that Richard took to the Board back in June of last year.

Next question. Christian?

Christian [ Mazer ], Jarden. Just back on deposits and with Up, you mentioned the strong growth that you've had and the new grow and flow offering that you have. How exactly does that interest rate structure work? And is -- are you attracting those new customers through price? Or is it more the offering that you have?

So I think it's the offering we have. Like if you want to get the highest interest rate in market for your deposits, that's not us. We're pretty competitive versus the majors, but we're not sort of total best in class. That's a deliberate pricing strategy for us. So I don't -- it's not 100% price driven.

I think previously -- so sorry, what is it? That will help. So we sort of have a 2-tiered interest system. If you don't withdraw, you can get the growth rate, which I think is about 4.6% at the moment. And if you do withdraw, you get a lower flow rate, which is 1.25. This matches up with how a lot of customers use save. A lot of saves are actually used in a more transactional sense and they're the sort of flow savers and then sort of nest eggs or emergency funds, that's sort of what tends to attract the grow rate.

Previously, we didn't have this sort of -- and you also need to be doing 5 qualifying transactions as well. Previously, we only had the qualifying transactions criteria, but our headline rate was sort of high 3s. And so what we're finding is sort of in this middle ground where for people who wanted a higher interest rate for their [ NestJS ], we didn't have a product for them.

And then for people who are really using it for sort of financial funds, we were probably overpaying. So sort of in this middle area. So now we split those 2 and that's provided a much more suitable product for a lot of people who were keeping a lot of their deposits elsewhere, but also just made the whole offering a bit more compelling for people.

So I will say we do have some customers, who don't like it, like it's not a slam dunk, and we knew that going in. We did a lot of research into this. But sort of on net, we -- more customers were interested in it than not, and that's come through in the numbers.

Second, Brian, just let Christian finish if that's okay.

Is it one product that flips between 2?

Yes.

So it's still an underlying just Up Saver product. And then depending on your activity for the month, it qualifies for the different rates.

Yes.

There's a really good explainer on the website. If you link through to growth flow, it's got a really good -- that sort of lays it out really nicely.

Next question [indiscernible].

So can I ask about your digital onboarding? So first, you talk about 50 transaction accounts per day. How do we benchmark against the current onboarding without the digital capability? And then secondly, you're talking about increasing marketing expense. What kind of magnitude are we thinking about? And what type of marketing campaign? And is the customer acquisition cost at a similar level at ARPU, which is you mentioned $50? Or is it significantly different?

So I'll just quickly answer the first bit and then -- so we were really just not seeing much at all previously through the prior onboarding that we did have. So it did technically exist, but like we were seeing a handful of day that. So it was basically nothing, and now we're seeing quite a lot more. So that's sort of the first part.

And then second part...

Yes. From a marketing perspective, we've been increasing our support for low-cost deposits in the run-up to digital onboarding. And now we'll start to build that. So the way that we work in marketing is we optimize the activity to where we're seeing performance. So you'll see our marketing of the digital onboarding product, or fast sign-up for customers build into the new year, and then we'll trial campaigns if we need to.

But I think previously, when we think about kind of we've talked previously about the demand we've driven, we've got a lot of latent demand there anywhere. So the brand connects with customers. It drives demand. And when they were coming to us, they couldn't sign up through the app to onboard. Customers can now. So we really need to get that balance right of what do we need to actually market versus optimize the demand that was already there. But yes, you will see it still build next year.

Maggie, one of the things that -- I mean, I'm a bit of a junky for the dashboards on these things. I probably hit refresh too often to watch how the numbers are flowing on a daily basis, but they have been growing since we launched quite nicely. And so I think Tuesday, we had 70 new accounts.

So it's -- on average, it's been about 50. But in the first few days, it was 30, 40, and it's continuing to grow. Look, first, I want to get to 100 a day. And that's probably going to be I mean, 30,000 customers we wouldn't otherwise have had. And then if we can really start to ramp up the digital marketing and from a marketing perspective, it's not like we're going to go and spend an extra $5 million if it were otherwise.

It's about -- Sarah doesn't get that much from me to play with. So she has to put it where we think we can get the best value. But I don't know, where the potential ceiling is on this. I mean we have a long time, I think, before we get to Xavier's 500 a day. Cost of acquisition actually is probably actually lower than Up because we're not paying referral dollars on this. So it will be a very low cost of acquisition at the moment.

James, do you have any media questions?

It's David Ross Australian. Richard, I had a question for you around AML. Can you tell us specifically which was the branch affected that you've referenced? I mean Bendigo has released a closures impact statement for every branch it's closed apart from the Pinewood community branch in Mount Waverley in Melbourne. Why was the Pinewood Community branch closed suddenly on 9 September and the franchise agreement terminated with no reason provided?

As I said before, with legal activity underway, there are certain things we can and can't disclose. And we're not, at the moment, in a position where we can identify the branch that was the source of those transactions.

I just also wanted to ask, obviously, Bendigo has had it community branch model for a while. In your view, I know everything is preliminary and the final Deloitte report is still yet to come. But has there been any indication if that model exposes you to more risks, particularly on AML?

So I think the community bank model is 28 years old now, and it's been a wonderful supporter of our ability to grow our business and also to grow our deposit base. The reality, as we do this review, we'll look at all aspects of our business. But over that 28 years, there has not been a particular skew that I'm aware of between community banks versus company-owned branches from a risk perspective.

They all have to meet the same policies and procedures, whether it be a community bank or a company-owned branch. And so I wouldn't expect there would be a particular skew there, but we haven't done that work yet.

Nicholas?

Nicholas Sobolev, UBS. Just regarding the RACQ book, are these loans predominantly owner-occupied? And once they're brought on to the balance sheet, how are they going to impact NIM for the group?

Yes. So 79% Owner Occ. The margin on their loans is comparable -- or sorry, the rate on their loans is very comparable to ours. So they'll be transitioning across to a Bendigo product at time of completion. There is only one deposit product, where there is any significant variation between any terms and conditions, and we'll work through how we might grandfather some of those terms and conditions for those customers.

But when it comes to the lending book, that will be a straight transition. They will continue to get the rate they have. And as rates move up and down, it will be from that rate. But there's no -- we're certainly looking through the book, we're very comfortable with the rates being offered on both sides of the balance sheet.

Okay. So for that 79% roughly would be written above cost of capital from your point of view or at like the rest of the...

Look, the reality is where those loans are coming on to our book with the only acquisition cost being the transition costs. So I mean, you could do a range of different ways of working out that cost of capital. But at the rate they are, we're certainly very comfortable that they'll be paying their way.

And as I said, more generally, the -- when you look at the acquisition, it's going to be strongly accretive from an ROE perspective and also generate up to $0.05 per share on an EPS basis.

Thanks, Nicholas. Time for 2 more questions. I can see Sally's hand up.

It's Sally Hong from Morgan Stanley. So you noted that Up Bank is becoming profitable today. Can you talk to me about how does Up Bank's like cost-to-income ratio compare with the broader group? And can you give us a sense on how Up Bank will contribute to taking Bendigo's ROE above 10% by 2030?

So maybe I'll start and then Andrew, if you want to comment on some of the longer term, how it fits in. So I mean, we've just hit profitability. So right now, the income is 100% right. But I think if you look -- if you sort of extrapolate out in terms of our -- the number of humans and technology costs we need to support the business, the marginal cost of adding growth, our expense profile is pretty flat.

And so the -- I expect that, that will continue to improve. And if you -- and long term or even medium term, we'll get under the sort of group CTI like relatively quickly. I'm not looking at -- like if I sort of look out in the next couple of years of growth, I don't need to drastically change my expense base to support that. So that's kind of how I'm thinking about that. And then do you maybe want to speak to the longer term, how...

Is the absolute key is that we are putting capital to work in that business. It's fully funded or more than fully funded from a deposit perspective today. The cost of that deposit stack is attractive. So hypothetically, Dave could grow his book by double and the marginal costs are pretty small because of the efficient platform that he's built.

And so the way that we think about that business is we'll continue to allocate capital to it whilst it's delivering such attractive returns while it continues to gather customers at the pace that it does. So that's how it contributes. It's a very low additional marginal cost as we bring more assets on the balance sheet.

Thanks, Sally. We'll finish with Richard.

You've talked about some of your productivity initiatives, your headcount reduction, your outsourcing initiatives and rent are good examples. Can you quantify the cost savings that you expect to get from these initiatives? And if you can't do that today, do you have any plans to quantify the cost savings perhaps at the first half result?

Yes. So again, what we think is most important here is what it actually means from an overall cost perspective because I could give you a number. But if I don't give you a reference with that number, then you might say, okay, well, what's happening with the rest of your cost base? And so the way that we've described it, Richard, is to say that those costs and the savings in those 4 cost pools that I referenced earlier will help us to manage our overall cost growth, our business as usual cost growth to now higher than inflation.

Inside that, yes, we know what the number is. We'll take it on notice as to whether we quantify that or not. But what you will see over time is as we execute on those 4 key initiatives, it will translate then into the cost base, whether that's through FTEs, lower rent, whatever it might be.

Andrew, there's an alternative way to look at that. We could say if you do nothing, your costs are going to grow 5%, 6%. We know your amortization is going up. So we want to know what cost savings you expect to deliver to get to that BAU within inflation.

So I think it would be helpful if you disclose some expected cost savings. You have done it in the past. Other banks do it. So I think it would be helpful if you disclose that at the first half result or when you're ready.

Sure. We'll take it on notice.

Thanks, Richard. Thanks, everyone. I'll hand back to Richard for final comments.

Thanks, everyone, for the questions and some really good questions there. Based on what we know today, we do remain committed to our target of achieving an ROE above 10% by 2030. This is a goal that drives our business priorities and decisions, and we will keep you informed with our progress on that as we continue to drive our strategy forward.

So thank you for coming along today. We appreciate the time you've taken and look forward to joining you for some refreshments, if you got time now that we finished the formal part of the day. Thank you.

Good morning, everyone. Thanks for joining us for the Bendigo and Adelaide's 2025 Full Year Results Briefing. Let me begin today by acknowledging the traditional owners of the land on which we meet today, the Gadigal People of the Eora Nation, and I pay my respects to their elders, past and present and emerging. I also extend my respects to the Aboriginal and Torres Strait Islander people who are present on the call today.

Today, our CEO, Richard Fennell; and CFO, Andrew Morgan, will present our FY '25 full year results, followed by a Q&A session.

I'll now hand over to Richard.

Thanks, Sam, and good morning, everyone, and I appreciate you taking the time to join us here today. Our full year result demonstrates the resilience of our organization and our ability to adapt to changing circumstances with a more balanced approach to lending growth and margin management in the second half of the year. This followed a first half that saw significant demand for our residential lending products exceed our capacity to fund through lower cost deposits.

The second half, we've focused on returning to a more moderate level of growth and have delivered a stable margin outcome. The key lessons learned during the first half of '25 have helped shape our strategic priorities for FY '26 and beyond. Our key investments, including the Bendigo Lending Platform have resulted in increased investment spend in the last few years. And as we look forward, these investments will continue to generate value through improved customer experience and greater productivity.

In the most recent half year, the Bendigo Lending Platform and our direct channels drove 71% of total residential lending settlements, while digital contributed a further 16%. In FY '25, we have continued to leverage our unique strengths. Our customer numbers are up 11%, supported by a Net Promoter Score that is 36 points above the industry average. Our digital bank app continues to deliver with the strongest customer growth since its inception, and it now has 1.2 million customers. Our balance sheet remains strong. Our common equity Tier 1 capital is unquestionably strong and well above our Board-approved target and our household deposit-to-loan ratio is 73%, significantly above the average of the major banks.

Turning now to our financial performance. Cash earnings of $514.6 million for the full year was down 8.4% year-on-year. Income was down slightly, mostly related to non-interest income and to a lesser extent, higher funding costs impacting margin in the first half. Through a focus on margin management and selective repricing activity in the second half, we've delivered a flat margin in a falling cash rate environment. Last week, we announced the impact of a goodwill impairment, driven most significantly by change in discount rates. Andrew will cover this in more detail shortly.

Additionally, we increased our restructure costs resulting from the first phase of our recently established productivity program. We restructured a number of support functions and also recently announced the closure of 10 corporate branches, and we're in the process of retiring our agency model. This first phase will be followed by additional actions as part of a more comprehensive productivity program during the 2026 and '27 financial years. Our operating expenses increased by 7.7% year-on-year, reflecting the planned investment spend we outlined during the year and inflationary pressures within staff and technology costs.

Pleasingly, in the second half, operating expenses were up just 2.1%, including investment spend or just 0.3%, excluding those continued investments. In relation to credit expenses, we saw a full year write-back of $14.7 million due to releases in our collective provisions, primarily in the first half. We don't expect this to be repeated in FY '26.

Turning now to our divisional performance. The results from our Consumer division reflects the contrasting performance of the halves. Strong mortgage growth was achieved over the full year, up 8% with flat cash earnings. Our digital EasySaver product launched in February last year helped to drive EasySaver balance growth of 23%, providing strong momentum for ongoing low-cost deposit growth in FY '26.

Our Business and Agri division's cash earnings decreased by 10%, primarily due to reduced net interest income. This was driven by a range of factors, including liability pricing adjustments and strong competitive pressures in business lending markets. However, we achieved second half growth in both business and agri following the successful implementation of new lending and CRM system changes and the migration of 24,000 rural bank customers to the Bendigo core banking system. This unified platform consolidates our business and agri customers onto a single system, brand and website, establishing a strong foundation for future growth.

Up's positive momentum continued over the year with almost 1.2 million customers, a tripling of the mortgage book to $1.7 billion and deposit growth of 34% to $2.8 billion. Its strong brand and mission to simplify money continues to resonate with customers, reflected in a 6-point NPS increase to plus 55, low cost of customer acquisition and a weighted average interest rate spread exceeding 200 basis points.

As Up's customer base matures, we anticipate significant growth in home lending with 110,000 customers projected to enter this stage within the next 2 years. We've been deliberately patient with Up. By prioritizing customer experience and building a scalable offering, we've created a strong brand and Up is on a clear pathway to stand-alone profitability.

Our digital deposits continue to grow while lending growth has moderated. Digital deposits both in Up and Bendigo have grown significantly over the half year. Bendigo Bank-branded deposits through EasySaver and online term deposits are up 58% over the year and deposits at Up have increased 34%. The strong growth in our EasySaver product, driven by a smoother customer experience has improved our overall funding mix as we look to support lending growth with a greater proportion of lower cost deposits.

For residential mortgages, digital origination remains an important channel for Bendigo Bank. The proportion of digital settlements was down 3% over the half, largely a result of price changes to support volume and margin management, noting that the channel economics remain strong. Over the next 6 months, we'll look to further optimize our digital lending channels and price our products in ways that support sustainable growth.

Sustainability remains a key focus area for our organization. This year, we've continued to deliver on our purpose to feed into the prosperity of our customers and communities. Our approach to supporting financial inclusion has seen us successfully deliver on the final year of our financial inclusion action plan and build partnerships and initiatives designed to support our customers when they need us most.

In the last 20 years, our unique Community Bank model has enabled investment of more than $416 million into local communities in the form of community sponsorships and grants. This year alone, in excess of $50 million was invested into local communities, a fantastic milestone. This reinvestment significantly increased from last year, demonstrating our aligned values with communities and shareholders. This year, we've also made advances to better support our Community Bank partners to measure impactful initiatives in their local communities.

With 78% of the network onboarded to our community impact hub, we can now more easily quantify the scale of community investments with Community Banks supporting outcomes in the social impact themes of resilience, inclusion, health and well-being and prosperity. Our fraud and scams team blocked $47 million of potential fraud and scam payments this year. These activities resulted in a 36% year-on-year reduction in customer losses from scam activity. This year, we've also worked to evolve our climate approach. BEN 1.5 degrees is a set of aligned science-based targets, which underpin our plans to help our agriculture, residential mortgage and commercial real estate sectors to decarbonize over time. More detail of our refreshed approach to climate can be found in our climate disclosure.

I will now hand over to Andrew to talk through the financial results in more detail.

Thanks very much, Richard, and good morning, everyone. This result reflects a continuation of the discipline that we showed in our third quarter trading update. We've slowed residential lending growth to help stabilize margin. We've also seen an improved funding mix with stability in transaction accounts and continued strong growth in savings accounts. We've also carefully managed pricing decisions, which has enabled us to deliver a slightly stronger net interest margin in the final quarter despite the lower cash rate.

And we've tightly managed business as usual costs to well below inflation, mostly due to weakness in other income and higher investment spend, our operating performance was down 2.9% on the prior half. As a result of a smaller write-back in credit expenses this half, cash earnings of $249.4 million were down 6% on the prior half. Our balance sheet is in a strong position going into financial year '26, reflected in strong capital, funding and liquidity.

On this slide, we show you the usual reconciliation of cash to statutory earnings. As announced last week, we have booked an impairment of goodwill and also a material redundancy provision related to some of our corporate divisions and branch closures. The decision on goodwill reflects our view that we're moving into an increasingly uncertain environment globally. To reflect this risk, we made some changes, the most significant of which was to increase the discount rate, which we used to value our cash-generating units. This led to an impairment of some of the goodwill allocated to our Consumer division.

Turning to other items. A recovery in house prices in Sydney and Melbourne boosted Homesafe unrealized income. Restructure costs, excluding those announced last week, fell half-on-half as flagged in February. Going into next year, we have one final business consolidation to complete, which is the Adelaide Bank core consolidation. At this stage, the estimated costs for the consolidation are between $14 million and $20 million after tax. In addition, we will begin Phase 2 of our productivity program in the second quarter of financial year '26. It's too early to provide any estimates on this, and we will provide more detail at our planned Investor Day in November.

Turning now to total income for the half. Income of $974.2 million was up 0.2% on the prior half. Net interest income increased just over 1.1%, reflecting growth in average interest-earning assets and a stable margin. Adjusting for fewer days in the second half, NII growth would have been around 3%. This was mostly offset by weaker other income, which was down 5.5%. Other income, excluding Homesafe was down 6%, reflecting lower fee income, the impact of our part divestment of our wealth business and a nonrecurrence of some income received in the first half.

Homesafe income was down 2.5%, reflecting a lower volume of completed contracts in the third quarter, but a recovery in the final quarter. In respect of key considerations, as previously flagged, income from the Homesafe portfolio will reduce over time, subject to the rate and profit on contract completions. This half saw the number of open contracts reduced by around 3%, whilst the average life of contracts completed through the half was around 8 years.

Turning now to net interest margin. Compared to the prior half, our NIM was flat at 188 basis points. Asset pricing negatively impacted 1 basis point, which was mostly due to ongoing retention pricing pressure in business and agri. In residential lending, pleasingly, the gap between front and back book pricing has now closed. Deposit and funding pricing was down 1 basis point with some improvement in wholesale pricing, offset by the impact of the cash rate reduction on some low rate-sensitive savings accounts. Our replicating portfolios provided a benefit of 1 basis point, all of which came from deposits and revenue share benefited from slightly lower deposit margins.

Following a flat NIM in the second and third quarters, our fourth quarter NIM benefited from some repricing decisions, up 1 basis point to 188 basis points. Our exit NIM was slightly higher than the fourth quarter average. On key considerations for 1 half '26, we expect cash rates to continue their downward trend. We expect some benefit from the various repricing changes that we've made late in the second half.

We also continue to see customers rolling off fixed rates and mostly favoring variable rate mortgages. Second half maturities were around $3 billion, and we expect around $2 billion of further maturities into 1 half '26. And lower cash rates will see replicating portfolio contribution turn to flat to slightly negative. The unknown factor, as always, is the degree of price competition on both sides of the balance sheet.

Turning now to residential lending. We continue to prioritize the deployment of capital into channels where both the economics are compelling and growth opportunities exist, being self-serve digital mortgages and intermediated digital mortgages through our new lending platform. This half, 49% of our new settlements were in these 2 lower-cost channels with the new lending platform comprising 33% and digital direct mortgages comprising 16% of settlement volumes. This half, we also saw the strongest contribution from our proprietary channels in a number of halves, with the proprietary network and Community Banking partners comprising 38% of settlements.

There are a number of positive trends in our mortgage book right now. First, just over 40% of new loans are below 60 LVR and almost 90% of new loans are below 80 LVR. Second, the average credit risk weight on mortgages has continued to improve. And third, critically, the ratio of NIM to credit risk-weighted assets on new business as a proxy for risk-adjusted returns increased again through this half. So whilst momentum has slowed, the quality of returns we're generating continues to improve.

In respect of near-term growth, we are targeting growth around system through the course of financial year '26. Our deposit gathering franchise remains an ongoing strength and underpins our growth ambitions. Across both our proprietary network and Community Bank partners, we delivered growth of just under 3% on the prior half. We continue to see good momentum in digital deposits. In our Up business, digital deposits increased 9% over the half, whilst Bendigo digital deposits grew 19%. Whilst deposit growth slowed in the second half to just over 1%, deposit mix improved.

Pleasingly, we continue to see strong growth in EasySaver accounts, which were up almost 10% on the prior half and overall savings accounts up 5%. Following a dip in third quarter, transaction account balances had a strong fourth quarter, finishing marginally lower than the first half. Partly as a result of slowed momentum in residential lending, we saw offset accounts shrink 2% over the half. We also saw a slowing in term deposits, down almost 1% on the first half.

What's most pleasing through the half is that our pricing actions have improved the mix towards lower-cost deposits, which accounted for just over 52% of total deposits. Critically, our household deposit-to-loan ratio remained strong at 73%, which is 7 percentage points higher than industry average.

Turning now to operating expenses. Total costs increased just over 2% for the half, which was almost entirely due to a ramp-up in investment spend as previously flagged. Excluding investment spend, business as usual expenses grew just 0.3% on the prior half, which is well below inflation. Inflation and software license fees impacted our BAU costs, contributing 1.4% to overall cost growth, whilst amortization was flat.

Average FTE was slightly lower in the half, reflecting some restructuring activity late in the half. Importantly, through the course of the half, we continued to invest in our digital teams. We're also delivering on productivity and cost management, which contributed $3.2 million or a 0.5% reduction in our cost growth through the half. In respect of future considerations on costs, we are targeting to keep BAU cost growth contained to no higher than inflation through the cycle as we've done over the last 5 years. In any given half, sometimes we'll be above, but most of the time, like this half, we are aiming to be below inflation.

In 2025, investment spend totaled $231 million on a cash basis. In 2026, we expect to spend around the same level and about 50% of that spend to be expensed. We also expect investment spend to be fairly evenly phased over the 2 halves. With just the Adelaide core banking migration to be completed, we expect a substantial reduction in non-cash investment spend on financial year '25 levels. At the same time, our work on productivity and cost management will continue. As mentioned earlier, we will have more to say on Phase 2 of our productivity program and any consequential restructure costs and benefits later this half.

Moving to credit quality and credit expenses. Our key credit metrics remain sound, and we continue to carefully watch trends in the industry and within our book. Through the half, we booked a net write-back of $4.2 million, mostly reflecting a recovery of a long-standing agri credit. Gross impaired loans have remained relatively stable at 15 basis points of gross loans. Arrears across the book remain low, but are increasing. 90-plus days arrears in residential lending have increased in the high single-digit basis points in the last 6 months to 82 basis points.

In agribusiness, arrears have increased in the last 2 months, mostly due to a combination of expired loans and some complexities following the rural core banking migration in March. We expect to see the arrears rate normalize through the course of the half. Whilst asset quality remains sound and arrears are at relatively low levels, we do expect bad debts to trend up over time. Our funding and liquidity metrics remain strong and well diversified. Liquidity levels have reduced through the half in absolute terms, and our average liquidity coverage ratio for the fourth quarter was strong at 132%.

Over 80% of our total funding needs for the half were met from customer deposits and the balance from net wholesale funding. The proportion of customer deposits to total funding improved on the prior half to just under 77%. And our coverage of household deposits to loans at 73% is well above the industry average. Our Community Bank partnerships importantly provide us with a net $14 billion of funding, which provides further diversification and a relatively cheaper funding source than wholesale funding.

And turning now to capital and dividends. Our CET1 ratio reduced 17 basis points to 11% over the half and capital consumption overall reduced compared to the first half, reflecting a slowdown in lending growth through the fourth quarter. Capitalized investment spend continued, albeit at a slightly slower pace than first half. Our capital remains well above the Board target of above 10%, and directors have determined to pay a final dividend of $0.33 per share, which will be fully franked. This represents a 74.8% payout ratio for the half and on a cents per share basis is flat on the prior comparative period. Given our strong capital position, we intend again to neutralize the DRP for a sixth straight half. So in summary, we're in a strong capital position going into the new year.

I'll now hand back to Richard.

Many thanks, Andrew. Today, I want to spend some time on our refresh strategy that we have recently finalized and released internally to our people. This strategy does not propose radical change, but does reflect change of emphasis and new priorities. Our refreshed strategy builds on 4 key strengths that are fundamental to our long-term growth.

First, trust and reputation. Our market-leading customer we need to succeed strong with our CET1 ratio on a stand-alone basis over 200 basis points higher than the average of the major banks. Second, agility. Our innovative culture provides us with an agile and adaptable skill set, essential for supporting sustainable growth in an ever increasingly digital operating environment and anchors our people across all areas of the bank. We recognize scale is fundamental to delivering long-term shareholder value. We'll focus on building that scale through innovation, as we've done in recent years with solutions such as Up and the Bendigo Lending Platform.

Our customers will continue to be at the center of everything we do. In the past, we have been many things to many people, which has generated complexity in our products, our structures and ultimately resulted in increased costs. Looking forward, we will be more disciplined in our target markets, building products and customer experiences that focus on the needs of specific segments.

Our new strategy has 5 pillars. Make life easy with digital through a significant upgrade to our digital customer experience, leveraging existing skills and expertise across the whole bank; operate simply and efficiently by streamlining operations and leveraging strategic partnerships and AI-driven automation; deepen customer relationships, expanding our share of wallet across both Bendigo and Up using the strength of our brands; set the benchmark for trust and societal impact, reinforcing our leadership through community support and environmental sustainability initiatives and reinvent banking for a new generation with Up, maintaining Up's momentum by expanding its product and service offerings to drive profitability and customer growth.

These pillars will be supported by 3 key enablers. Uplifting our risk management capabilities, streamlining our technology foundations and strengthening our performance culture through a more modern operating model that supports our objectives. One of the key structural changes we have made is the establishment of a strategic execution office. The CEO -- the SEO will coordinate our approach, track our progress and ensure disciplined execution of our strategic initiatives with heightened accountability.

We will share more detail on these pillars, including our early progress at a planned Investor Day in November. Over the next 2 years, we'll focus on 3 areas that will be critical to reaching our ROE target. These are optimizing our deposit franchise, enhancing productivity and delivering sustainable growth. Each area will have measurable progress reported at future half and full year results.

Turning to the first of these, optimizing our deposit franchise. We are taking a deposit-led approach to growth, utilizing lower-cost deposits as the primary source of funding for our lending activity. The investments we will make, including -- include our refreshed Up style in-app digital account opening capability for Bendigo new-to-bank customers, launching in October and building out our Bendigo app functionality to deliver improved digital experiences for all of our customers.

We see significant opportunity to grow our savings accounts at system, helping to strengthen our deposit mix and support our lending growth. Our digital initiatives will be instrumental in driving growth, supported by our traditional physical channels. In 2024, we launched our EasySaver product to existing Bendigo customers through our online channels. Over the half, digital deposits grew by 19%, confirming our belief that demand is strong. This growth was achieved without digital onboarding capability for new-to-bank Bendigo customers.

The opportunity lies in delivering enhanced digital capability to capture this demand. And this is where Up's execution strength and sharp focus on delivering quality customer experiences is an advantage that we will leverage. Additionally, we'll strengthen the focus of our frontline teams on deepening relationships with our 1.7 million existing Bendigo Bank customers, targeting, for example, term deposit and lending customers who don't currently have a Bendigo transaction account.

Over the last 6 years, the bank has worked hard to deliver the important technology foundations that will set the bank up for future success. At the end of this calendar year, we will achieve our target state of one core banking system, delivering simplicity and creating more opportunities to be agile. We continue to work towards delivering a more efficient cost base through strategic partnerships and the use of AI. These partnerships will further enhance efficiencies, offsetting increased amortization costs over the coming years and providing access to market-leading technology.

We'll also reshape our operating model with the first phase of restructuring for our support functions to be completed by October. We've also begun working with strategic partners who can help us leverage innovative technologies to deliver structural cost savings and even better customer experiences. AI will be a key component of our productivity strategy. We've been using various forms of AI for the past few years, including machine learning and predictive AI in credit risk, fraud detection and customer churn prediction. More recently, generative AI in software development, where our engineers use coding assistance in their development pipelines.

We are also an early adopter of new generative technologies in AML, which is yielding improvements in fraud detection. In the last financial year, we've rolled out our first personal AI productivity tool known as BenAssist, which staff can use to build productivity agents. Looking ahead, we will expand this strategy by partnering with a major AI technology provider to improve our capabilities. For example, in our contact center, we've begun to deploy agents to deliver an improved experience and faster resolutions. As Andrew mentioned, we'll provide an update on Phase 2 of our productivity program in November.

We will prioritize lending growth in our higher-returning channels, focusing on customer segments and opportunities that exceed our cost of capital. As Andrew mentioned, we've already started to see the benefits of our capital-efficient lending with the growth of our digital mortgages and the Bendigo Lending Platform, our NIM to credit risk-weighted asset ratio has significantly improved over the last 3 halves.

In Business and Agri, the implementation of the new CRM and origination system will also support capital-efficient growth. These initiatives are important to growing our balance sheet return profile. And finally, to our targets. As part of the 2030 strategic plan, we have refreshed our targets. Our flag on the hill is an ROE above 10% by 2030. This target will guide our strategy, decision-making and execution. Our ROE target hinges on the 3 key areas I've just outlined. Productivity improvements and optimizing our funding mix will deliver the biggest impact, supported by disciplined capital allocation and targeted growth in our core consumer and business and agri lending markets.

The work we've completed in the strategy process will only be realized through disciplined execution. To embed this discipline, our recently established strategic execution office reports directly to me, ensuring we remain on track across key projects that will deliver on our target. Measures of our success will include BAU expenses remaining no higher than inflation through the cycle, which excludes amortization from past investments, productivity outcomes to offset known cost headwinds, B&A growth to improve in FY '26 and savings account growth above system.

The success drivers are interconnected and fundamental components to achieve our ROE targets. The programs of work we've established will provide a clear path towards our 10% ROE objective. The key will be disciplined and consistent execution.

I'll now hand back to Sam to moderate the Q&A. Thank you.

[Operator Instructions]

Our first question today comes from Sally Hong from Morgan Stanley.

I just had a couple of questions. The first one is on margins. So you delivered a stable margin over the past 3 quarters, and you flagged a couple of tailwinds for the first half '26. Would it be reasonable to assume that you're expecting the margin to stay flat over the next half?

I'll let you go, Andrew.

Well, Sally, we'd certainly like to see more stability in our margin. And just to reiterate what we've previously said about sensitivity, we have previously said, if you go back and measure the path of our NIM relative to path of our cash rate when cash rates were low. So from trough cash rate to peak cash rate, we expanded our NIM by 2 basis points for every 25 basis points of cash rate cut. And we previously said, I think, the last couple of reporting seasons that, that math broadly holds true on the way down, that includes unhedged deposits in our replicating portfolio. Look, we have clearly eaten that cash rate impact through both the quarter and the half, and that's really been through very disciplined and selected pricing activity.

And we've done that both sides of the balance sheet. We've, for example, moved almost every month for the last 6 months in term deposits. We've moved out of cycle in our key savings product, and we've also moved a little bit in our lending product as well. So Sally, hard to pick though where competition goes. That's always the really difficult factor. But certainly, we'd like to see more stability. For completeness, we've called out headwinds and tailwinds today. Clearly, a falling cash rate, absent any of those sort of pricing interactions is a headwind. But as we've shown through the last quarter and the last half, we've been able to manage that.

That's really helpful. On the second question, can you please tell us more about the building blocks of the 10% ROE? Like in terms of like optimizing the deposit franchise, are you guys expecting margins to go up over the next 2 years? Or like for productivity, are you aiming to keep costs flat? Or are you targeting to keep expense growth in line with inflation?

Yes. Sally, the deposit opportunity for us, we think, is pretty significant. And so we are really hoping that as we roll out new digital functionality, particularly digital onboarding for our Bendigo customers, we'll see pretty significant growth in the lower cost deposits being transaction and savings accounts. That, if we are successful with that, really will provide a solid base of funding to continue to grow the lending side of the business. Now that growth, if we can hold our margin flat, should then provide some solid NII growth. So that's an important element of the building blocking relation to the deposit side of things.

In relation to productivity, as we mentioned in the presentation, we're looking to hold BAU costs at no higher than inflation through the cycle. We did a good job of that this last half. There will be some ups and downs along the way. Importantly, though, we are targeting to offset the future amortization increases that we know are coming given the investments we've made over the last few years to offset that cost headwind with productivity improvements. So they're probably the -- all I could say at this point in time as to how those 2 key building blocks are going to contribute to that improved ROE.

Our next question is from Tom Strong from Citi.

If I can just follow on the last answer with regards to the strategy with, I guess, the approach for the next 12 months. I mean you've had to slow your balance sheet considerably in the second half to get, I guess, more balanced growth. But in '26, you want to return mortgages back to system. And I presume you want to keep that momentum going in business and agri. So what's the biggest step change on the funding side over the next 12 months to sort of support that asset ambition?

Yes. Thanks, Tom. You're right. We do have that ambition to continue to grow in business and agri, and we are hoping to get back towards system growth on the resi lending side, which has slowed significantly, particularly in the last quarter. The key, as you point out, is deposit growth. We've seen actually really quite good deposit growth over the last few months rolling into the end of last quarter and a pretty solid start to this half as well despite the challenges our customers face in having to come in to a Bendigo Bank branch if they want to open a new deposit account or become a new customer, I should say, and then open a deposit account.

From October, we're going to make that a hell of a lot easier for them with the ability to do that online. And we are confident that, that will see an uptick in deposit customers joining our bank. We know there's plenty of demand out there. The NPS results that we continue to generate show that there is an interest in continuing to bank with us. And the other aspect that we are doing a better job of now is cross-selling deposit products to customers who have other products with us, in particular, lending. So I think there are a number of levers that we're pretty confident will, over the course of this financial year, give us the ability to fund economically the growth we're hoping to achieve in both B&A and resi lending.

That's very clear. And just a second question, I guess, more big picture, given we're talking 2030 targets. But we've seen APRA talk to intent to improve the proportionality of regulation and a lower regulatory burden overall for smaller and midsized banks. I mean what sort of change do you anticipate over the next 5 years that could actually be supportive of a better playing field for Bendigo?

Yes. That's a really excellent question. Look, we were really heartened to see the recommendations of the Council of Financial Regulators and ACCC review. What we're really genuinely interested to see is how that manifests itself by the sounds of it, you are. And really, it's a bit early to get a handle on that. The reality, as we look at the regulatory grid, we know there is still a lot of regulation coming down the pipeline from all regulators, including APRA and ASIC. We would hope that with the new proportionality of regulation and potentially a third tier of banking regulation between the very large banks and the very small banks, we'll see, I guess, a better balance on the regulatory burden for banks such as ourselves who sit somewhere in the middle there. But I must admit, I don't have a strong view on how that will manifest itself, but I'm hopeful it will reduce some of that burden and allow us to continue to spend more of our investment dollars on customer-facing capabilities rather than meeting the regulatory burden.

Our next question comes from Andrew Lyons from Jefferies.

Just 2 questions. I might start with the ROE target. And Richard, you've spoken to the building blocks for the ROE target. But can you perhaps talk a little bit more about how that translates to the trajectory of ROE between now and FY '30? Do you think we'll see a linear increase? Or is this going to be more of a step change that's going to be back-end loaded?

Yes. Look, I think realistically, we know that over '26 and '27, we've got a fair bit of heavy lifting to do still in relation to some of the investments we're making and also the productivity requirements to deliver the ROE improvement. So it's not going to be linear. I won't go into all the detail of how we've modeled it over that period because the one thing I know is it won't play out exactly that way. But the reality is we've got a fair bit of heavy lifting to do over the next couple of years before I'd expect to see an acceleration in the increase in ROE.

Andrew, I don't know if there's anything you want to add to that?

Yes, I think that's right. And to use maybe a little bit of a car analogy here, Andrew, what we don't want to do here is try to slam the foot down on the accelerator in a sense. We've got to ease our foot off the brake and then grow into the ambition to hit those targets. And the 2 most critical things, as Richard talked about, first of all, getting our lower-cost deposit gathering in order.

And in particular, this half, that join the bank capability will be really important to that, strengthening our digital deposit gathering capability in business and agri will be important to that. That will then feed the volume of lending growth that we want to go after. It should give us stability, we hope, of margin and therefore, lead to income growth. And then dealing with some of the structural cost issues that we have is the other component. So the next couple of years, as Richard said, is a lot of heavy lifting to get the business in place. So look forward to talking more with you about that towards the back end of this year.

Yes, that's really helpful. Appreciate that color. And then just a second question on capital. While your reported CET1 ratio of 11% is well above your greater than 10% target, your capital was down 17 bps half-over-half despite the fact that you did note you did slow growth, particularly in mortgages, and you want to see that back towards back towards system going forward for FY '26. Despite that, you've increased the dividend half-over-half and you'll neutralize the DRP via an on-market buyback.

So I just want to maybe a question for Richard. What gives the Board comfort that the business can continue to generate organic capital in the face of a payout ratio that's currently above or was above 70% in the second half?

Yes. Look, clearly, there's a couple of factors here. One is we do want to improve that profitability from that second half result going forward. We've -- as part of the modeling we've done, we've built a runway where we see a more gradual -- as Andrew said, we're not going to slam the foot down on the accelerator, but more gradually grow into that balance sheet opportunity. There's still quite a bit of headroom in that capital position versus the Board minimum that we have in place. And we would hope by the time we're getting down towards that amount, we're seeing significantly improved organic capital generation that can continue to fund that growth on a go-forward basis.

Sorry, Andrew, just to add one other thing to what Richard said. So one of the items that will help and take on board your point around the drop in CET1 is the amount of non-cash investment spend is dropping substantially. And so with the heavy lifting almost done on our various core consolidations, it's really only the Adelaide core consolidation to go, which will be completed this half. That will certainly help the capital position.

Our next question is from John Storey from UBS.

Richard, Andrew, I've just got 2 questions for you. I guess the first one for me, obviously, heard a lot this morning about digital and deposits. And I guess within that construct, I mean, Up is obviously a very important component to the overall Bendigo investment case. Just wanted to get a little bit of a better understanding of how you think about monetizing the Up client base and also the 110,000 clients that you called out this morning that are likely to take out a mortgage, how do you direct them into your proprietary channels? That's my first question.

Yes. It's a great question, John, because Up as -- it's been a really exciting journey for us over the last half a dozen years as we've built that out. But it continues to be a source of investment rather than a positive contribution to the bottom line. We see that reversing by FY '27. And that is naturally going to happen as the balance sheet continues to grow. In relation, the key -- one of the key drivers of that growth in the balance sheet, as you point out, is the growth in lending with Up Home. And what we're seeing is many customers, existing Up customers are choosing Up to also be the source of their home loans. Now one of the ways we're looking to grow that is also looking to broaden the product offering from a home lending perspective in Up.

Right now, it is only owner-occupied that is offered to Up customers. I was just chatting to Xavier last week about the potential and what's required to expand that offering to also include investors. And what we do know is a lot of young people in getting into the market actually choose an investor or investment property as the best way for them to get in rather than owner-occupied. But there are a range of factors that we're working through.

And with that, I mean, unrivaled customer Net Promoter Score of plus 55, we find that a lot of customers are very happy just to go straight to Up, a brand they trust and love to also provide them with their home loan once they get to that stage in their personal journey.

Great. And then just very quickly, just on the Business and Agri division, just something that stood out is definitely the margin compression, NIM compression that you saw just half-on-half. And obviously, you had very strong growth within certain segments of the division. Just maybe to get a better understanding of how much BEN is having to invest in price to drive the type of growth that you're seeing there?

Thanks, John. Yes, I think as we called out in our NIM chart, there is some ongoing price pressure to retain clients. It is a very competitive market right now. I think that's a pretty known factor. I think one of the key factors, though, behind the compression both across the year and across the half is actually deposits.

And in particular, we've seen a shift without that digital capability that I mentioned earlier. Without that capability, we have seen a shift of some of our higher-margin deposits out. And we have seen some pressure in term deposits as well. So we haven't -- given our funding position through the half, we haven't pursued term deposits in particular. And so there's been some pressure in deposit margins overall, partly again due to mix and partly due to some price compression in term deposits.

Where we go forward from here? Look, it's a big focus for the team. Our ambitions remain where they are to see that business getting to system through '26. The work that we've done around understanding marginal costs, understanding returns through channel, we need to put to good use to make sure that we're putting our capital into places where we can achieve cost of capital and see that franchise expand.

Our next question is from Ed Henning from CLSA.

I just wanted to circle back on something you initially were talking about is in -- for your ROE target and your margin kind of basically being broadly stable, but with that really being driven by the deposit side. You talked earlier also about the continued cash rate deductions, and you've been changing your pricing on your TDs and savings products coming through. I just wanted to clarify, even with that and potential more cash rates coming, you guys are comfortable that you are going to grow your deposits enough to hopefully hold your margin broadly stable-ish to FY '30?

Ed, that's certainly the plan. Like I mean, your choice of the term comfortable. If I was completely comfortable with this plan, I think the Board would have probably wanted us to push harder. Look, this is such a competitive dynamic environment. I don't think any of us in these roles necessarily sit back and say I'm completely comfortable with all the dynamics that feed into margin. But certainly, that is our plan.

Just to add to that, we are coming from a ways back in respect to digital deposit gathering. As Richard mentioned earlier, our join the bank capability is not there. Despite that, we continue to grow in lower cost deposits, more so, of course, in savings accounts and transaction accounts. But part of the work that we're doing around digital and digital deposit gathering is to anchor that shift of funding towards -- more so towards lower cost deposits than what it is today. So we are coming from a way back. We're putting our investment to work to make sure we close that gap.

Just on though, if you turn it on in October and hopefully you get some good uptake in that, should see more near-term margin benefits or it's just because the cash rates coming through potentially being cut kind of offset in the near-term and then it just grows steadily beyond that? Is that kind of how you're seeing it?

Look, I think it's a truism to say that there's probably a couple more cash rate cuts to come. This is a mix driver for us. So what we're looking to see is that both the proportion of our funding in respect of customer deposits through wholesale increases and then the proportion of customer deposits towards lower cost deposits increases.

And what we've seen and what the industry has seen over a number of years now is compression in transaction account balances. We've seen less compression this half, and that's without that join the bank capability, Ed. So what we're looking to see is an improved mix skewed towards lower cost deposits, again, supported by investment and supported by the amazing branch network that we have and the amazing community bank partners that we have.

And then just a second one also on the goal of above 10%. Your credit growth, you're talking about getting back to near system on residential improved in Business and Agri next year. I imagine you want to grow above Business and Agri in your plans through to FY '30 and kind of around system, do you anticipate -- while system is probably growing above this at the moment, but for your system growth rates, are you assuming kind of 4% to 5% through to FY '30 or is it higher than that?

Yes. No, mid-single-digits is our assumption on system growth over the next 5 years. I can't remember exactly the numbers year-by-year, but that's -- we're not assuming high-single-digits.

Our next question is from Matt Dunger from Bank of America.

You've talked today about upgrading digital for account openings, in particular, on the savings accounts. We've heard from the team, you're accelerating the rollout of mobile lenders. So you announced last week a reduction of 10 branches. You've still got 121 corporate branches today. Is 10 branch closures enough? Do we need to see a change in the branch footprint?

Matt, we -- those 10 branches that we're closing, those 10 corporate branches, was the outcome of a complete review of the network. We think we've now got the right-sized network from our corporate branch perspective to set us up going forward.

Now I'm not going to sit here and say that there may not be the odd branch here or there from time to time that we end up rationalizing or indeed moving as sometimes is the case as well. But we think that's -- we deliberately did it as an end-to-end review and then in one hit, so we can then stabilize from that point.

One of the elements of our strategy that was a really interesting point of discussion as we went through the development process was the value of our branch network. And clearly, community banks are the majority of our branch network, and we all know how critical and important that -- those relationships and that network is for the bank as a whole. So I don't expect there to be a material change in that amount. And as I said, we've really now done a full review of our corporate branch network and think we've got the right number.

We see the opportunity to leverage that branch network to continue to drive the strong deposit growth alongside that enhanced digital capability we've spoken about. So don't expect any more significant announcements, certainly not in the near future anyway.

Great. Got it. And just if I could follow-up on the non-interest income, in the half, you called out the lower FX and transaction account fees. I'm just wondering what impact the mix is having on non-interest income as you move more towards digital given the shift in the business? And are you seeing more price-conscious consumers? Are we going to see ongoing lower growth in non-interest income?

Yes, I might take that one. So Matt, there are a few factors driving other income. I'll put Homesafe to the side for the moment because we talk about Homesafe quite a bit. So there were some one-off or non-recurring income streams that occurred in the first half, not in the second half. That accounts for about half of the dollar delta.

There were 3 other factors, all of which were about the same dollar value. One was you might remember that we effected the sale of Bendigo Super in October of last year. And so the income on that FUM has come out. And so the second half income for that business is more reflective of go forward.

The second factor was cards income, and this is an interesting dynamic that we're seeing. So we've seen a shift in customer behavior through the half, a little bit away from credit cards and more towards FPOS and direct debit. And so that's -- it's a less profitable part of our cards business. And so that has had a bit of an impact as well. And then as you called out, there's a little bit of FX.

Our next question comes from Carlos from Macquarie.

I wanted to dig into the savings accounts a little bit. I know you kind of noted you've made some additional changes there beyond the IVA, I think about 15 or 20 bps of additional cuts since January. You've also recently changed your deposit products, which I mean you probably have a better idea than me, but from what I've seen online seems to have seen a bit of a negative reaction from customers. So I was just wondering if you can give us any color of any changes of flow or sentiment from your customers on those savings rate changes and product changes, some of which occurred after the end of the half?

Yes, Carlos, I'll take them one by one there. So on the Bendigo side with the Home -- sorry, EasySaver product, our key savings product, we continue to see strong flows there. Yes, we have reduced the rate on that a little more than the cash rate reductions over the last 3 changes. Fortunately, it still resonates well with customers. The simplicity of that product, the fact there's no requirement to undertake certain transactions or the like to get a bonus rate. It really does seem to resonate well in paying a competitive rate of interest, but with simplicity.

In relation to the grow flow change, it's probably too early to tell there. The change we've made there provides the opportunity for a higher interest rate on savings accounts, but it changes the way we structure those. So those accounts, to get that higher rate of interest, you can't be using those for transactions.

Now whenever we make a change in any of our products, there are certain groups of customers who don't like that change. That's the reality of it. And yes, we've heard a fair bit of feedback from those people who don't like this change. I'm not expecting to see a material movement in customer numbers on the back of this. I actually am hopeful we'll see, if anything, stronger attraction with the ability for those -- for customers who arrange their financial affairs to actually save more with the offering as it is going to be between transaction and savings accounts going forward for up.

And secondly, I was wondering, if you could give us any kind of anything in your thinking for investment spending beyond FY '26? You've noted that it's going to be flat this year. But then if you start moving forward, given that ROE target, given probably the need to get more productivity, invest in AI, etc., do you have any -- how are you thinking about investment spend in '27 and beyond?

Yes. Thanks, Carlos. So clearly, we've done some pretty detailed modeling to build up the return on equity. I think the -- what's really changing now in our investment spend is not so much the dollars. So as we flagged today, the cash spend will be broadly the same as '25 levels.

What is changing is the mix. And the mix is changing because a lot of the foundational spending that we've been doing in particular areas has come to an end. And so we're deliberately now weighting the portfolio behind those couple of very key strategic initiatives that we've called out a number of times today, so digital and digital deposit gathering in particular, and our productivity efforts.

Look, it's -- we have set targets based on what we know today. I would just ask you to note that a lot of that big foundational work is coming to an end through the course of this half. And as far as we can see forward at the moment or as much as we're prepared to give you guidance, we've given that to '26 at this point.

Our next question is from Jon Mott from Barrenjoey.

Just there's been a lot talked about already on the 10% ROE target by 2030. So I just want to step back because sometimes these things look great on a spreadsheet. But when you stop and think about the implications of it in a broader market environment, it throws up a few things.

So firstly, you need to increase your NPAT by about 50% over the next 5 years with a normalizing credit costs, which I think you're assuming. And it would also imply that your return on tangible equity would be higher than every other bank in Australia outside Commonwealth Bank of Australia. So to get this, you're going to have to have some pretty big changes, but it's also assuming that the other banks which has got ANZ plus [ Macquarie ] continuing to invest, [ Comm Bank ] continuing to go as is NAB either don't follow you and compete or that the industry economics dramatically changed to a much more favorable environment. Can you give us a bit of thoughts around that in a wider context of the competitive dynamics across the industry?

Yes, Jon, I'm glad you've highlighted the fact that this target we've set is a challenging target, and it should be. The -- and the -- it's, give or take, a 25% improvement in our current ROE. We are very aware of that. One of the positives of being a smaller bank is that from a competitive perspective, there is more opportunities. We sit here today with 2.2% market share. We don't need to take a huge amount of share from other competitors to get the sort of growth that we're looking for.

We believe we have got the ability to do that whilst maintaining margin through the interest rate cycle. Now the interest rate cycle, yes, we're in an easing cycle at the moment. But at some point, that will probably swing around the other way. There are challenges there. We do know as well as the revenue side, though, Jon, we've got some heavy lifting to do on the productivity side, and that's going to be a critical element for getting our efficiency and productivity to a level that sees more of that revenue flow through to the bottom line.

So look, it's a challenging target, but it's one that we're committed to trying to achieve. We've made some significant changes in the organization in how we are planning to manage our business going forward, including that new strategic execution office to try and hold us to account as we work through the changes we need to make that we've identified that will help us get to that 10% ROE.

Our next question comes from Andrew Triggs from JPMorgan.

My first question is just a follow-up again on deposits, digital deposits. To what extent is the main benefit likely to come from Up Banking? And just in that context, penetration already looks fairly high with 1.2 million customers. Could you give us an idea, please, of what you think the addressable market is there, given it tends to be mainly younger customers?

Yes. Look, actually, the digital deposit growth, we actually see the biggest short to medium-term opportunity under the Bendigo brand. But you raised a really good point around the Up deposit customer base. Most Up customers join us when they're in their late teens to early 20s. Most people at that stage do not have a lot of savings. So the amount they actually have on deposit with us is relatively small.

And if I think back to my time, which is a long time ago when I was that age, you kind of live paycheck to paycheck. And so there's not a lot on deposit. As that customer base continues to age, though, and we see this dynamic playing out, even without significant customer growth, but I will highlight the actual customer growth in the last 12 months was the strongest customer growth ever in Up's history in customer numbers.

Those customers start to save more. They start to put money away towards hopefully a home or save for other reasons, a car or holidays, those sorts of things, and we start to see increase in deposits. And not for a moment suggesting this will be the case, but even if we didn't see any net increase in customer numbers, I would expect to still see some reasonably solid deposit growth through Up. But again, just circling back to where I started, Andrew, the real opportunity for us in the short term is to attract more customers from a digital channel perspective through to the Bendigo brand.

And the second question just relates around the cost side. Slide 34 shows the year-on-year walk for costs. And while you're targeting BAU costs below inflation over the long term, I can't recall the last time seeing such a big disconnect from BAU cost driver and productivity offset in the bank. So there's quite a wide divergence there. Just what gives you the confidence that you can really get on top of the BAU cost growth and lift productivity?

We're debating who's going to answer. I'll start and then Andrew might add. Look, Andrew, this is why we have initiated a more significant productivity program within the bank. We would love to see a world where technology inflation dissipated, but we're not counting on that.

We will expect wage inflation to ease as inflation across the -- or in Australia has reduced and back within the target range of 2% to 3%. But key for us is actually then offsetting volume-related costs, which did contribute significantly in the last 12 months through productivity, but then stand-alone productivity initiatives. And again, I don't want to preempt what we'll talk about in November, but we'll be able to give you a bit more detail there about some of the early areas beyond that, that we have already done in some of the support areas in the last month or so when we have that Investor Day.

Andrew, do you want...

I'm just going to add to that we are coming from a long way back. And I think all of you have, over time, called us on our cost number and on our cost-to-income ratio. What we hope you start to see, and we'll talk about this more in November that it's different. And just to give you a couple of data points in the 6 months that we've just seen, we did reduce our FTE by 1%. Just in the last couple of months, we reduced our FTE by 2%.

We're swinging the mix of our roles towards frontline digital tech. We've done some work. We've booked a restructure provision last week. And we are going through the organization and looking at, as we talked about, AI automation, where today, we're not huge users. It's not that we're not doing anything in AI. It's not that we're not doing anything in automation. But relative to other organizations, I think we are coming from a way back. So the opportunity is for us to get after that.

Sorry, Andrew, I think you mentioned earlier that you expect software amortization headwind to be offset by productivity. Was that -- I'm reading that right?

Yes, that's right. So BAU costs.

As in fairly level. Those 2 elements fairly level?

We weren't that specific, Andrew. What we're really saying was we recognize that amortization is going to increase over the next few years with the impact of the various investments that we've made. Our cost target is BAU cost are no higher than inflation through the cycle. The productivity programs will help to offset that amortization and other headwinds.

Our next question is from Brian Johnson from MST.

My first question, if you have a look at Bendigo over the very long term, the secret sauce has been that you've got a much lower cost of funding than your peers, which is deposits. But when we have a look at where your deposits are right now, Up has got a base rate of 0, a bonus of 3.85%. The EasySaver has got a 0 base rate, an ongoing rate of 2.8%. RewardSaver is 0.1%, including the bonus is 4.05%. But when I have a look at this compared to the rates across the major banks in Macquarie, these deposit rates look really, really low. I just want to understand why customers will join Bendigo in a digital sense when the rates just don't look that competitive compared to what I can find elsewhere? Like why have you got pricing power in the deposit market to actually grow deposits?

It's -- you're right, Brian, it is our secret sauce. And I wish I could sit here and give you the secret algorithm that explains it all, but it is a sum of the parts. The sort of customers that we tend to attract, although they do 95% plus of their activity digitally, they like to know that there are branches available if they want to go and speak to someone face-to-face.

They like the things we do in the community. They like the fact that AUD 50 million has gone back in the last 12 months to support community activities. There are a whole range of factors that contribute to our Promoter Score that's 36 points above the average of the industry. And in Up's case, a Net Promoter Score of plus 55.

Those factors, I can't, as I said, explain exactly the algorithm and how that works, but history tells us when we put digital capability in front of those customers, then they are happy to take advantage of that easier way of joining us and doing business with us as we've seen with the EasySaver product.

As you rightly pointed out, it's not the sharpest rate out there, but it is attractive to those customers who want to bank with us and like the way we provide support to them as our customers and also to the communities in which they live and work.

Good luck on that one, Richard, because I would have thought they're new customers, so who knows? Just coming back to the ROE slide, and I apologize, Richard, because I can't really let this one slide, but I've known you a long time and we've often spoke about the goodwill from the Adelaide Bank acquisition didn't make a lot of sense. So well done for writing it off. But given that that's AUD 0.5 billion of ROE enhancement we've just got by reducing the value of the equity base, what I'd like to understand was why the greater than 10% -- is the greater -- is the ROE above 10% now? Is that a greater number than it was historically because the equity base is reduced?

And then also, in the old days, it was premised on a 10 to 12 basis point loan loss charge versus now it's 5 to 8 basis points. I want to get a feel, are we still talking about the same ROE above the cost of capital or is it materially higher than the previous plan? And why did that previous plan not work?

Well, I won't comment on why, as you put it, the previous plan won't work. What I will focus on is the plan that we have developed over the last 6 to 9 months. And it is fair to say that the target number as the E has dropped with that goodwill adjustment, which was a decision the Board only made last week, has changed.

So that ROE requirement of getting above 10% was not something we built with a premise of, okay, we're going to write off a bunch of goodwill to get there. So we're not

So that means by definition it's higher than it was, Richard, correct?

That is a fair deduction to make from those comments.

And Richard, just coming back on that. It's not just the equity, it's the long-run loan loss on which it was greater than 10% was also based on 10 to 12 basis points. You're now saying 5 to 8, I mean that's massive leverage. Does that mean it's even higher than that again?

Well, that -- I'm not sure. I've only been in this chair 12 months now, but I'm not sure I've used 10 to 12 in any discussions with the market. That might go back a few years. We've gone back and done the analysis to look...

Richard, It was at the third quarter trading update I specifically asked the question as I did at the first half result in the transcript.

All right. We'll go back and look at that. Anyway, what I will say about that is we've gone back and modeled the last 10 years and the average loss rate during that period is 7 basis points. So we think 5 to 8 given the risk we currently carry in our balance sheet and plan to take in our balance sheet going forward is appropriate. As I said, I'm not going to -- we built this target up over the last -- the work over the last 6 months or so and that was with that 5 to 8 basis point change. I won't comment on the previous plan.

Our last question today is from Matt Wilson from Jarden.

Firstly, on home loan offset accounts, they declined 2.5% half-on-half, which is good because these things are negative spread. Are you doing anything there from a fee or pricing perspective to drive that behavior?

Do you want to...

Yes, Matt, is the short answer. So partly, the tail off in offsets was due to slower growth in resi, but also, we introduced some new pricing for resi loans that had an offset. We did that back in April. So that has, we think, had a little bit of impact as well.

Okay. And then secondly, just with regard to your ROE targets, Homesafe is obviously a drag. It takes up about 150 basis points of Core Equity Tier 1. If you're able to exit that pre-runoff or excluding runoff and sell it to someone, that probably lift your ROE again by another 50 to 70 basis points. What's the likelihood that you can offload Homesafe rather than run it off?

Yes. What it would do, if we were to do that, would increase our equity position from a regulatory equity perspective if we were to sell it at our book value. And then if we could put that to work, it would improve our ROE.

Or buy it back, yes?

Or buy it, yes, there's a number of options there. I think it's fair to say that if there was an easy transaction to be done out there at book value, it probably would have been done by now. It is interesting. As much as we know from the history of this product over 15 years or more now, I think, how well it performs and someone has got their head around that for continuing to offer that product on a go-forward basis. Finding someone to invest in the back book has proved to be challenging in a way that would, we think, be providing an appropriate return to our shareholders for a significant sale versus the benefit of letting it run off and harvesting the capital over time.

Okay. I guess if I could push my luck given I came last. Tiimely, we used to -- when it was called TikTok, it was very close to being IPO-ed. Could you give us a strategic update on where Tiimely is now? Because obviously, that was -- got a reasonable stake in that business. It seems to be doing okay. If it did our IPO, there's a nice windfall there as well.

Yes. Look, I must admit, Matt, I don't have an update on that. Look, we continue to work closely with Tiimely. They're a really important partner for us and have been critical for us being one of the first to market with digital mortgages and continue to support us with our Up Home, BENExpress products and also the Qantas and NRMA offerings alongside their own Tiimely offering.

We have one of our executives who is our representative on their Board, but I must admit I haven't got any particular insight on what they may or may not want to do around any potential float or sale of the business.

That's all our Q&A. I'll hand over to Richard to wrap up.

Thanks, Sam, and thanks everyone for your questions today. Today, we've outlined our refreshed strategy and our key focus areas over the next 2 years. These results today reflect the ongoing hard work and dedication of our people. I want to thank you for your unwavering commitment to our customers and to our bank. And I'm confident that our new strategy and investment program will deliver tangible improvements in our ROE and shared value for our customers and shareholders. Thanks, everyone, and we look forward to discussions over the next few days.