ANZ Group Holdings Limited (ANZ) Earnings Call Transcript

Good morning, everyone. I'm Kylie Bundrock, ANZ's Group General Manager, Investor Relations and M&A. Thank you for joining us for the presentation of our full year 2026 financial results being presented from ANZ's offices in Melbourne, which stand on the lands of the Wurundjeri people. On behalf of the ANZ team, I pay my respects to elders, past and present and extend my respects to any Aboriginal and Torres Strait Islander people joining us for today's presentation. Our results materials were lodged this morning with the ASX and are also available on the ANZ website in the shareholder center. A replay of today's presentation, including Q&A, will be available on our website shortly after the session concludes. The results materials and today's presentation contain forward-looking statements. And in that regard, I draw your attention to the disclaimer at the front of the results slide pack. Our CEO, Nuno Matos; and CFO, Farhan Faruqui, will present for around 45 minutes, after which I'll explain the procedure for Q&A before we move to questions. [Operator Instructions] Over to you, Nuno.

Thanks, Kylie. Good morning, everyone. Thank you for joining us. We have completed the first full year of our ANZ 2030 strategy. In October '25, we laid out a clear plan focused on 5 immediate priorities and 4 strategic pillars delivered in 2 phases. We committed to a set of financial targets and transparently reporting on our progress with consistent disclosures. The results we are announcing today demonstrates the significant progress we have made through the execution of ANZ 2030. We are on track to deliver all 5 media priorities on time. In parallel, we are also investing in strategic growth initiatives and our business execution is improving quarter-on-quarter. In short, our transformation is happening, and we have momentum. Since announcing ANZ 2030, the external environment has become even more volatile. [indiscernible] tensions, energy price shocks and rapid technological change are affecting the markets in which we operate. These factors have impacted capital flows, trade and infrastructure development across the region in the past year. At the same time, the rapid evolution over the digital intelligence is transforming our societies, companies and individuals operate. Competition for capital to fund AI, defense energy transition projects and government deficits has intensified. This expenditure super cycle, combined with inflationary supply-side shocks continues to drive interest rates higher globally. In Australia, the cash rate is at its highest levels in 2008, while U.S. bond yields are the highest since 2002. Against this backdrop, the economies across our geographic footprint remain relatively resilient. Asia continues to be the fastest-growing region in the world, while New Zealand and Australia show modest growth. At ANZ, we have the right strategy for this complex environment. The work we have done to strengthen execution, simplify ANZ and build resilience has created a stronger bank. Our mix of business is reflected in our high-quality portfolio, which is mostly comprised of investment-grade or highly secured exposures. Our capital levels remain strong and we are a highly rated bank, benefiting from diverse sources of funding from both depositors and debt investors. This strength allows us to focus on helping customers leverage opportunities and navigate risk joining our deep product capabilities, the strength and scale of our 2 home markets and our international network across 29 markets. For large corporate customers, this includes participation in the technology-led export boom in Asia and the energy transition. We also help small and medium-sized businesses as they weathered a more challenging environment improve efficiency and build their businesses. In Australia and New Zealand, our retail customers are largely resilient with the majority ahead of their scheduled repayments. However, we acknowledge that some customers are experiencing financial pressures, which has been more evident in the second half. We work closely with those customers who require assistance to identify appropriate and sustainable support. Now turning to our financial performance. And I note, I will compare numbers excluding the impact of last year's significant items. Our disciplined management of margins capital, costs and business volumes underpinned a 10% increase in our cash profit over the period -- the prior year and delivered higher shareholder returns. Our return on tangible equity was 11 56%, an improvement of 19 basis points over the prior year. Our balance sheet and capital position remains strong with common equity Tier 1 broadly stable at 11.99%. Our liquidity and funding ratios are all well above regulatory minimums. We declared a final dividend of $0.83 per share at a franking rate of 80%, increased from 75% in the first half. This translates to an additional $0.18 of franking credits per share for eligible Australian shareholders. The full year dividend is $1.66 per share. Now turning to the first phase of our ANZ 2030 strategy, focused on 5 immediate priorities which are all on track. Our first is embedding the new leadership team and resetting our culture. Both are critical to establishing a winning culture and executing ANZ 2030. Most recently, Ben Kelleher joined the Executive Committee as a group executive and CEO New Zealand, following the retirement of Antonio Watson. I would like to take this opportunity to thank Antonio for her significant contribution during 17 years with the bank. We have also transformed the broader leadership team, including bringing new talents with the experience needed to execute our strategy. This year, we embedded our new values and updated our code of conduct to give our people clarity on the behaviors, decisions and pace expected of them. Together, these are crucial guardrails that support execution of the strategy to ensure our people put customers' interest first, deliver quality work at pace are more accountable, action-oriented and decisive and balanced results with risks. Our second immediate priority is accelerating the integration of Suncorp Bank. By the end of September '26, in line with our commitment, we delivered 60% of this program. We now target 85% by March '27, and we are on track for full customer migration by June '27. Our third priority is delivering a modern digital single customer front end to 7.7 million retail customers and more than 600,000 small business customers by the end of September '27. At the end of September, we delivered 45% of the program, again, on track, and our plan is to get to 80% by March '27. Completing this priority and the integration of Suncorp will allow us to show up to customers through 1 ANZ experience under 1 ANZ brand while allowing investment with confidence and efficiency. This will unlock significant potential for the future and we will mark the beginning of our second phase of ANZ 2030. Through the year, we have made significant and sustained progress in materially simplifying the organization. We realized a positive benefit of $902 million, exceeding the $875 million of gross cost savings with for shadow at the first half results. This productivity benefit, combined with a significant step change in cost management and some favorable FX translation has allowed us to deliver a 7% reduction in our cost base. Our cost-to-income ratio of 49.3% improved by more than 4 percentage points in FY '26, demonstrating progress towards our mid-40s target by FY '28. We also continue to make progress on our known financial risk management uplift and remain on track to deliver our root cost remediation plan through our PACT program. PACT is anchored in the bank's strategy and is part of our broader transformation, focused on delivering better outcome for customers. Today, we have released the second and third report from Promontory, our independent reviewer. The latest report acknowledged our progress while recognizing the challenge of executing a complex program such as this. Now I will shift from our immediate priorities to our strategic foundations with a focus on the customer first pillar. Our strategy is focused on improved customer service, superior propositions, strengthen property origination and becoming the transactional bank of choice for our customers. When we launched ANZ 2030 a year ago, I was clear, we had 2 divisions which performed consistently well in Institutional and New Zealand, while Australia Retail and Business & Private Bank had underperformed. Since then, both Auto Retail and Business & Private Bank have progressed their transformation and started to gain momentum. For Auto Retail, there was a material improvement in financial performance. we delivered a 5% increase in revenue while resetting our cost base down 16%, highlighting the deep structural transformation and simplification taking place. We restored growth in home lending and customer deposits to be in line with system in the second half, while maintaining disciplined margin management. And as a result, ROTE of this division is now accretive to group returns. NPS is starting to head in the right direction, while MFI clearly has more to be done. In FY '26, we start laying the foundations for our defined propositions, focusing on the affluent and migrant segments, launching simple and secure digital international money transfers. We also launched our digital app in New Zealand, India and Singapore, make it easier for people to bank with us even prior to arriving to Australia. We also started investing in proprietary channels but we acknowledge we are at the beginning of this journey. In FY '27, alongside delivering the single customer front end, we will advance our affluent and market propositions reshape our credit card propositions and transform our contact center experience. In Business & Private Bank, we are also delivering a strong financial outcome, increasing revenues by 6% and while reducing costs by 3% and driving an increase in RoTE of more than 100 basis points. Profit increased 14% year-on-year as we grew both sides of the balance sheet. Deposits grew in line with the market for full year '26 and lending reached system level growth in the second half. While MFI has increased, strategic NPS has not followed Reversing this trend is a clear priority. We are making progress delivering ANZ 2030 with a focus on more bankers who are better trained with better tools as well as the improved patterns for our customers and a strong private bank. Our commitment to increase bankers' numbers by around 50% by 2030 is on track with 50 frontline banks added in the fourth quarter. Our Banking Academy run in partnership with Melbourne Business School. It's now live, helping lift the capability of our existing bankers while creating a pipeline of talent. The first graduates are already in the market serving customers. We continue to evolve our AI-enabled CRM tool for our frontline bankers supporting more informed and personalized customer conversations. For our mid-market business, customers we delivered the first iteration of our improved and simplified experience using Transactive Global, our market-leading institutional payments platform. This platform, together with the single customer front end for small business, means over time, we'll go from 10 different customer-facing platforms for our business customers to just 2 primary platforms. Private Bank remained strong, with deposits up 10% and investment funds under management up 11% and lending up 17%. The business continues to demonstrate momentum with ongoing investment in frontline capacity while work progress on modernizing our wealth proposition. For Suncorp Bank, we are in the final stages, premigration and fully focused on ensuring this is a safe and secure event for our customers. As we prepare, we are taking all the actions we would expect ahead of a migration of this scale. This includes, for example, discontinuing certain products and no longer accepting new lending applications. we are redirecting those customers with new lending needs to ANZ. In the meantime, Suncorp continues to provide great service to customers, and we are supporting them through the migration. Institutional continues to deepen customer relationships while ensuring efficient capital allocation, and I'll refer to the members on an FX-adjusted basis. Revenue was down by 1% and reflecting lower average lending balances throughout the year and highlighting our focus on returns. Increased efficiencies reduced costs by 2%. Our market-leading payments and cash management business drove operational ethical deposit growth of $12 billion or 10% over the year, while total institutional customer deposits grew 24%. We exit the year with positive momentum in Corporate Finance with lending growth of 7%, weighted toward the second half where lending spreads and terms became slightly more favorable. Trade lending balances grew strongly as we help customers transact across the region. Markets revenue increased 1% through the year despite challenging conditions in the second half. Our Capital Markets business delivered its stronger ever half as we supported our clients in ensuring a record level of funding. We also made tangible progress on the growth initiatives under our ANZ 2030 strategy. We onboarded more than 30 significant new-to-bank FIG and multinational customers who are sector leaders and represent a material opportunity across the region. We continue to invest in our payments and cash management platforms including enhancements to the transactive global experience, delivering self-service term deposits and expanding confirmation of pay functionality. We also expanded our use of capital efficiency tools delivering approximately $2 billion of RWA efficiency to recycle into additional customer growth. Looking to FY '27, we'll continue to upgrade platform capabilities and sales capacity and enhance our customers' payment solutions. Now in New Zealand, we are shifting gears and we are determined to match our ambition with our market-leading position. In FY '26, revenues were up 2%, while costs were up 3%, excluding the impact of the New Zealand class action. Net lending and deposits had solid growth at 5% and 4%, respectively, with the SME business lending a highlight. In a highly competitive market, we grew our New Zealand customer base to more than 2.7 million. Our personal MFI share increased by 1.5 percentage points to 33.6%, while personal NPS rose to its strongest level since 2022. Carrying this year's momentum forward, we are continuing to replatform the business for the future, having launched a faster digital term deposit journey as well as ANZ apply, which now provides customers with an indicative home loan decision in around 5 minutes. We are refreshing our propositions for priority customer segments, including strengthening our wealth proposition through partnerships with major global institutions, while working to better serve the evolving needs of affluent customers. And in business banking, we are putting more bankers into the market supported by better data insights and lending capabilities, particularly in the segments and locations where we see opportunities to grow. Today, I also want to update you on our approach to AI, given the growing importance of the technology. At ANZ, the AI journey is not new and it is not a stand-alone strategy. To be clear, we view it as a critical enabler of our ANZ 2030 strategy. Our approach is deliberately targeted. We have organized our AIM framework to serve our strategic pillars in 3 key ways: first, by delivering more relevant personalized experience to our customers, and bed tools for our bankers. Second, by simplifying work and increasing organizational productivity and capacity; and third, by strengthening how we manage risk. Rather than pursuing AI everywhere, we are prioritizing opportunities which unquestionably deliver value and accelerate our strategic initiatives with rightsized investment spend. Our AI use cases require clear business outcome where the technology can be embedded into the way work gets done and where it can be scaled across the bank. That work is supported by robust governance, which is already in place and controls that we are continuing to strengthen. We are introducing a clear architecture and platform strategy, common technology and data. With the land on customer first, in FY '26, we deliberately concentrated our investment on high-value use cases supporting the strategy. This included the evolved AI-enabled CRM tool for business bankers and bad customer service to the transformation of our contact center experience. These are not stand-alone AI tools. They are embedded into end-to-end workflows. We are also embedding AI into how we deliver technology. For example, AI-assisted software engineer has doubled our capacity to deliver coding for the single customer front end. As we have seen recently, this technology carries risks, which demands a very tight control framework. Therefore, trust is central to our approach. We have existing controls in place, including multiple AI gateways and a governance council. We are building on this by implementing an enterprise AI control plane which will provide visibility, governance and technical control across users, models, agents, tools, costs and platforms as well as traceability of decisions. As we increase the use agents, humans must remain in control. Our enterprise control panel will set the fine limits on what agents can and do and stop activity where it operates outside those limits. To scale this work safely, we are also simplifying our architecture around common platforms, strengthening our rate of foundations and governance and building AI skills and literacy across the organization. This includes establishing an AI Academy to improve foundational AI literacy and role-based proficiency as we scale adoption across ANZ. Our aim is to build a sustainable pipeline over skills and talent through immersive learning and practical labs. We are confident this approach will support the delivery of ANZ 2030. Finally, we acknowledge the need to ensure the right balance between people and technology and to consider the impact of AI on society more broadly as we embrace its adoption at ANZ. Now to conclude, '27 will be pivotal for ANZ. We'll deliver 2 major transformation projects, the integration of Suncorp Bank and the SI customer front end, as well as a significant uplift in customer outcomes through our NFR program and continued investment in those initiatives. With this, once we have successfully completed the first phase we'll be in a much stronger competitive position to deliver the second phase of our strategy focused on growth and outperformance. Today, I would like to leave you with 3 final key messages. Our transformation is moving at pace, and shareholders are being rewarded. We continue to invest for growth in line with ANZ 2030, and the business is gaining momentum. With that, I will hand over to Farhan.

Thank you, Nuno, and good morning, everyone. I'm going to build on Nuno's comments. Our full year '26 results demonstrated that we are delivering value for our shareholders while transforming the bank to be fit for growth. We have structurally reset our cost base while delivering on our immediate priorities and building momentum, including in our Australian businesses. The result is a stronger financial performance create capacity to invest in strategic growth initiatives and increased reward for shareholders. Our progress is evident across key financial measures. Statutory profit was up 23%, and on a cash profit basis, excluding the significant items in FY '25, profit was up 10%. Return on tangible equity increased 109 basis points to 11.56%. Our cost-to-income ratio improved 416 basis points to 49.6%. And revenue to risk-weighted assets increased 8 basis points to 4.83%. We're generating better returns from both our cost base and the capital that we deploy. Momentum strengthened across our balance sheet in the second half. Higher rates supported margins and replicating portfolio returns. However, they also increased customer preference for high-yielding deposits and contributed to tougher trading conditions with softened markets income, particularly in the fourth quarter. Pronounced currency movements were largely offset by lower translated expenses and earnings hedges, limiting the net impact. Our capital position was supported by stronger organic capital generation which created capacity for approximately $30 billion in lending growth and to maintain a stable dividend. Credit quality remained resilient, reflected in low individual provision loss rates. Our total shareholder return was 20.7% for the year, and our earnings of $2.53 per share is up 30% year-on-year. We have declared a final dividend of $0.83 per share. The DRP will be neutralized. Franking on the final dividend increased to 80% from 70% a year ago. We entered FY '27, the stronger business momentum a structurally lower cost base and the balance sheet capacity to support our next phase of growth. For the full year, the group delivered a cash profit of $7.6 billion, up 10%, excluding the significant items in FY '25. As I highlighted at the first half, FX movements were pronounced this year. We had a large portion of our non-Australian dollar earnings to reduce volatility. We were able to offset $94 million of translation headwind in revenue with a $302 million translation benefit in expenses. We further reduced the net FX impact through $234 million of realized FX earnings-related hedge gains. As a result, the net impact on profit before provisions was approximately $50 million. For the remainder of the presentation, unless I state otherwise, I will speak to performance on a constant currency basis and exclude FY '25 significant items to better reflect our business performance. FY '26 revenue increased 3%. Revenue excluding markets, also growing 3%, supported by year-on-year growth of 3% in net interest income and 6% in noninterest income. Markets delivered $2.1 billion of revenue for the year, growing 1% year-on-year. Net interest income growth was supported by balance sheet momentum, which accelerated through the year and margins benefited from a higher interest rate environment. Noninterest income growth reflected the ANZ Worldline joint venture acquisition, higher fees within some of our businesses and the non-repeat of prior period items. Growing capital-light revenue is a key priority under ANZ 2030. And consistent with this, we are now reporting net fee and commission income more prominently across our results announcements, statutory reporting and divisional disclosures. This provides greater transparency and a clearer basis for assessing progress against this priority. In the second half, our revenue increased 2%, supported by ex markets income growth of 3%. Net interest income, excluding markets increased 4% compared with the first half. As I mentioned, our Australian Retail and Business and Private Bank divisions have improved momentum together delivering 7% revenue growth half-on-half. Overall, the second half demonstrates improving momentum in our core businesses and gives us a stronger revenue position heading into FY '27. Turning to margin. NIM excluding markets, increased 2 basis points to 2.3% in the second half, while group NIM was stable. I will now talk to the key drivers of group name movement over the half. The replicating portfolio contributed 5 basis points as lower rate hedges continue to roll on to higher rates. Disciplined deposit pricing contributed a further 2 basis points. Wholesale funding also contributed 1 basis point in the half as we took advantage of favorable funding markets. These benefits were partly offset by deposit mix as customers continue to favor higher-yielding products together with ongoing competitive pressure on asset margins, particularly in Australian and New Zealand home lending. In the fourth quarter, NIM, excluding markets reduced 4 basis points quarter-on-quarter to 2.28%. Around half of that reduction reflected higher group center liquids with the balance largely driven by asset and funding mix. Looking ahead, the replicating portfolio remains supportive and we expect 4 basis points NIM benefit over the next 12 months, which is 2 basis points higher than we had previously indicated. Also, we do not expect the group center liquids impact experienced in the fourth quarter to persist through the first half of 2027. However, competition and funding mix pressures are expected to continue. On balance, noting that margin outcomes may vary from quarter-to-quarter, we expect first half 27 NIM ex markets to remain broadly stable half-on-half. Moving to the balance sheet. Customer deposit growth, excluding markets were strong and broad-based, increasing 8% or $51 billion year-on-year. Payments and Cash Management was a particular highlight, with operational at-call deposits up 10% in the year with around 1/4 of that growth from new customers. This reflects the strength of our relationship model, international network and transactive global platform. Australia retail deposit momentum improved with household deposits growing around system as we exited the year. Business in Private Bank grew deposits in the seasonally softer second half for the first time in 3 years, while New Zealand grew at a round system and maintained its market-leading deposit share at approximately 30%. Consistent with the broader industry, customer preference for term deposits became more pronounced in the second half and we saw this trend across all divisions. Turning to lending. We saw strong momentum in lending across our businesses. Loans grew 6% over the year, accelerating in the second half, up 4% half-on-half. Institutional lending grew by $19 billion or 12% this year across regions and products. The depth and scale of our international trade capabilities contributed to strong year-on-year growth as our clients added resilience to their supply chains. Corporate finance lending growth gained momentum towards the end of the year, providing an exit rate benefit while maintaining stable front book margins and portfolio credit quality. In Australia retail, home lending returned to system growth in the second half supported by improved service levels and participation in the government's first homebuyers guarantee scheme. We also delivered disciplined lending growth in business in Private Bank with ad system growth in the second half weighted towards larger customers in our middle market segment. In New Zealand, we maintained share in business in agri lending and balanced volume and margin in a highly competitive home lending market. Markets, as I mentioned earlier, delivered $2.1 billion of income this year, up 1%. Our markets income was lower in the second half, particularly impacted by the final quarter as customers shortened hedging tenors against the backdrop of an uncertain global economic environment. This contributed to lower FX and rates income, while commodities was impacted by weaker precious metals demand as we highlighted at the third quarter. On the other hand, Capital Markets delivered a record half as we supported our customers through an elevated funding cycle. Now turning to expenses. On a constant currency basis, expenses reduced by 4%. On a reported basis, excluding significant items recognized in 2025, expenses reduced by 7% ahead of our initial market guidance of 3%. While FX movements provided a benefit the cost outperformance was also underpinned by stronger productivity. We delivered $902 million of in-year gross cost savings, $100 million more than our initial guidance. A significant part of this came from simplifying our operating model, including the program announced last September to reduce approximately 3,500 roles and a further 1,000 managed service contractors. That program is now complete. We also reduced our reliance on consultants and contractors, lowered third-party spend through vendor retractionization and strengthened cost management across the group. Collectively, all our actions delivered more than $1 billion in benefits on an annualized basis. Suncorp Bank synergies contributed a further $82 million of productivity primarily through the removal of duplicative project spend. Investment spend was approximately $1.5 billion for the year. We are focused on prioritization and driving more value for every dollar spent. Our capitalized software balance remains below peers, reflecting our continued approach of expensing a higher proportion of investment upfront. Overall, the performance demonstrates the structural cost reset we have achieved and strengthened cost accountability across the group. Taking into account our expected full year cost of the ANZ Worldwide ownership, our pro forma 26 cost base would be $11.26 billion. Looking ahead, we will continue to deliver productivity to both offset inflationary pressures and support the growth phase of our strategy. Therefore, we expect FY '27 total expenses to remain flat to the pro forma FY '26 cost base of $11.6 billion. Moving to portfolio quality. With an overall FY '26 loss rate of 4 basis points, the credit quality of our book remains robust. This charge remains below our long-run loss rate of 11 basis points and reflects the quality and the diversification of the book across our business lines. For the second half, the individual provision charge was $212 million, which included $79 million of wholesale provisions and $133 million of retail provisions. This resulted in a second half annualized loss rate of 5 basis points. While slightly up on prior periods, the book remains resilient to macroeconomic conditions. Nonperforming exposures were flat year-on-year at 0.57% of total committed exposure. I note that there was a 2 basis point increase in the second half, primarily driven by our Australian mortgage portfolio, reflecting higher cost of living and interest rate pressures on our customers. Our 90-day plus delinquencies increased by 12 basis points to 95 basis points over the last 6 months with a small increase in hardship assistance. Despite the increase in delinquencies, Australian mortgage individual provision losses remained low, at $8 million for the half, supported by strong collateral coverage with the portfolio dynamic LVR of 40%. Overall portfolio quality remains strong, with 87% of customers ahead on repayments and 75% maintaining savings buffers of at least 3 months. We continue to stress test our mortgage portfolio against a range of economic factors, including unemployment, interest rates and house prices, and we remain confident in its resilience as a result. Our institutional portfolio remains a high-quality book with 92% of total exposure is investment grade. The portfolio continues to be heavily weighted towards low-risk segments with 60% of exposure to sovereigns and financial institutions, while higher risk, watch and control list exposures reduced over the half. In Business & Private Bank, our portfolio continued to perform well with our small business portfolio, 90-plus day delinquencies remaining steady for the half at 2.2%, and our wholesale portfolio credit quality remaining broadly stable. We note some emerging stress in the agriculture and transport and logistics portfolios, reflecting the higher cost operating environment. Overall, the business and private bank portfolio remains well collateralized with 83% of exposure fully secured with a loss rate of 8 basis points for the half and 7 basis points for the year, which is down 2 basis points on FY '25. Our New Zealand portfolio also remains resilient the agriculture sector has strengthened, early delinquency and hardship indicators have improved, while 90-plus day delinquencies for mortgages were modestly up 3 basis points in the half. Now moving to collective provisions. You would recall that we increased our provision balance in the first half, having considered risks to our portfolio from the geopolitical environment, particularly in the Middle East. We have maintained this prudent approach in the second half, continuing to recognize the evolving economic and geopolitical environment, including the impact of elevated inflation and interest rates, which are reflected in our base economic forecast. For the second half, we have further increased our collective provision balance with a charge of $96 million, driven largely by portfolio growth, credit quality movements and a minor change to our scenario rate settings and overlay adjustments. Our collective provision balance has increased to $4.53 billion, with coverage increasing 2 basis points over the prior corresponding period to 1.2% of credit risk-weighted assets. This is now approximately $2.1 billion above our base case scenario, providing coverage across a wide range of economic outcomes. This approach has taken into account the following: one, around 53% of our scenario-based settings are weighted towards downside outcomes, reflecting the geopolitical environment. Two, our Australian mortgage collective provision settings have increased balances by $65 million for the half and $327 million over the past 18 months; three, our onshore and offshore portfolio continue to be both resilient and of high quality as supported by consistently low individual provision loss rates; and four, that group collective provision balances cover 13 times the individual provision losses taken in FY '26, remaining steady and well above peers. Overall, our settings continue to provide appropriate coverage and as always, we continue to actively review this position as conditions evolve. Now turning to capital. The CET1 ratio ended the year at 11.99% including the 8 basis point impact of the ANZ Worldline Australia acquisition. This outcome is underpinned by stronger financial performance, which delivered 80 basis points of organic capital generation in the second half, up from 71 basis points in the prior corresponding period. The interim dividend and risk-weighted asset growth from customer lending was fully funded from this capital generation. The CET1 outcome absorbed 9 basis points from previously disclosed data methodology changes that are expected to at least partially unwind in the 2017 financial year and 22 basis points net of the capital floor from higher IRRBB risk-weighted assets in the second half. On IRRBB, given the interest rate environment, we took the opportunity to prehedge a portion of our replicating portfolio prior to existing hedges rolling off to support net interest income. The associated 8 basis point capital impact of that will roll off in the first half of financial year '27. Higher interest rates, particularly through September, also impacted the market value of replicating portfolio hedges consistent with the broader sector. rates have subsequently moved off those recent peaks. We also remain focused on capital efficiency and higher returning growth. 2 external RMBS transactions delivered 5 basis points of capital benefit this year. with further initiatives underway to support capital optimization. The declared final dividend is $0.83 per share and with significantly improved earnings, the dividend payout ratio is 66% aligned closely with our target range of 60% to 65%. Shareholder returns are supported by increasing the franking level to 80%, up from 70% a year ago and reflective of improving performance in the Australian geography. On funding, our average surplus liquidity coverage ratio and net stable funding ratio are stable year-on-year and well above regulatory minimums. We executed our 26 funding program as planned. and additionally brought forward $3.5 billion of 27 funding given attractive market levels. Looking ahead in the '27 financial year, we expect to issue around $25 billion to $30 billion. In closing, we entered FY '27 from a stronger position with a clear focus on sustaining revenue momentum, maintaining cost discipline and allocating funding and capital to opportunities that generate returns in line with our ANR 2030 strategy. Thank you, and I will now hand back to Kylie for Q&A.

Thank you, Nuno, and thank you Farhan. [Operator Instructions] I will now hand to the operator for questions. Thank you, Ash.

[Operator Instructions] Your first question today comes from Andrew Triggs with JPMorgan.

My question is just around the Institutional Bank, which saw the strongest loan growth that I can recall in quite some time. Could you provide a bit more color on that and the sustainability that you referenced to pick up in corporate finance momentum late in the second half, please? And it's been done with a little bit of margin decline, but still decent, it looks like underlying top line growth and pre-provision profit growth.

Thanks, Andrew. We -- in institutional, clearly, we operated in the first half of '26. We operated in what I would call a challenging environment, certainly onshore, but also offshore. And what I mean challenging, I mean, we thought that the pricing levels were not completely rational. And in this segment, as we know we actually don't target lending as a goal. We target returns, and we target relationship or transactional banking. So in the first half, we consciously prefer to be more selective in applying capital in lending capital to the market. In the second half, the conditions normalized a little bit, and we thought that they were more in line with what we expect. So second half, we grew, I would say, at pace on the asset side. We believe those conditions will continue to be there in 2027. But again, Don't expect us to be a lender, expect us to be a transactional bank. What we want to keep a very clear priority on returns while we support customers in a 360 manner. So that's what happened in 2026 and what I think it will happen in '27.

And to what extent has momentum sort of not yet been reflected in net interest income. Could you give us a sense of how the loan growth proceeded through the third and fourth quarters?

Yes, it's a very good question. I would say that a significant part of the loan growth happened in Q4.

Okay. And just if you combine the capital impacts of the data and methodology and pre-hedging on replicating portfolio behind what would be the combined impact on capital that will unwind over FY '27.

If -- sorry, if you -- sorry, could you repeat the question again, Andrew?

So just that you talked about the impacts of data and also the pre-hedging on replicating portfolio, it sounds like replicating portfolio impact will come back in the first half and some of those data methodology impacts will come through over the full year. Could you combine those 2?

Sure. So on the pre-hedging, Andrew, we about 8 basis points impact, which would unwind in the course of the first half. And on data methodology, it's hard to give you a number. But as you note, we took about a 9 basis point impact on capital. In the third quarter, we expect some of that to unwind in the first half. Hard to give you an exact number for that. Having said that also, as you would have noted, peak rates have also come off from the peak of September to now. Substantially, particularly in Australian dollar term rates as well as U.S. dollar term rate. So that's going to be helpful towards -- as we head towards December and March. So we expect a fair amount of this to unwind as we get through the first half.

Your next question comes from Matt Dunger with Bank of America.

I wondered if I could ask about investment spend on Slide 58. You've shown us that it's fallen with growth spend dropping away. How sustainable is this growth spend dropping away? And with Suncorp Bank migration on track, how much investment spend is this free up? And will this be reinvested in growth or lower costs?

So thanks, Matt. Look, I think the investment spend, we had guided, as you will recall, last year that we expect our investment spend to be roughly around $1.5 billion as we get through the ANZ 2030 strategy. Now that may shift as we get to the latter years. But at this point, we are holding to our guidance of $1.5 billion investment spend every year. Now the expense rate, as you may have noticed, has slightly reduced, but that's largely because of the fact that we have moved more technology CapEx heavy items into the slate and moved some of the more BAU OpEx heavy items into BAU overall, our software capitalization has not shifted. It's just a shift of where we are highlighting change versus run. And I think that's sort of become a cleaner representation now. But we certainly expect at this point for our investment spend to remain at about $1.5 billion, and that also accommodates for the work that is happening on Suncorp Bank integration as well as on the single customer front end. So this is not -- we are not changing our guidance for '27.

Yes. And I must say the following also, Matt, I know that dollars are the only measure that we can use publicly to compare or to an ounce. But the dollar efficiency on our investment spend has increased materially, meaning the outcomes, we can squeeze out of each dollar invest in technology have improved significantly, and it will continue to improve significantly. And this is beyond the single the simple AI impact is beyond that, it's how we organize technology to deliver and business to deliver together. That has changed dramatically, and it will continue to change dramatically. The investment in Suncorp, which is material, which will end by June '27. All that spends will be then redirected into growth into additional avenues of growth. So we believe 1.5% is the right level. Obviously, it will fluctuate with the inflation going forward, obviously, but it's a great level, and we are getting better on extracting value for each dollar every year. Thanks, Matt.

Your next question comes from Jonathan Mott with Barrenjoey.

Question for Nuno. When we go back to the 2030 Strategy Day just over a year ago, and you announced you're looking for 12% roughly by 2028 and 13% by 2030. The revenue and economic environment, both in Australia and around the world have deteriorated substantially. Australia has had 5 rate hikes since that time. The governor is saying it's going to potentially feel like a recession for a lot of people. If the revenue environment maintains a soft environment, competition remains intense. Is there more flexibility that you've got on costs over the next few years to hit these targets? Or are the targets going to be much more difficult to hit?

Yes. It's certainly an important reflection and doubtedly the economic environment we are facing in '26 and '27. It's less positive than the 1 we had a year ago. Having said that, it's also fair to say that we are closer at this point in time from our '28 goals then eventually the market would expect at this point in time. So if you see our ROTEs, 11.56 in '26, our cost to income is on the 49s, which is approaching the mid-40s. So my first message is we're not changing in any way or form our guidance, absolutely not. Second, management of margins, management of capital, management of business momentum is what distinguished companies at the end of the day. And we feel that from a management perspective, we will continue to excel and we will continue to excel in the short term while we are building the long term of the company to make the company -- to make sure the company is in a much stronger competitive position soon enough. So even though I would certainly prefer to have a more benign environment, I don't have any doubts in renewing our commitments to the guidance. In terms of the costs, we certainly will continue to maximize our productivity. And at the same time, we also are conscious that if revenues are not there, additional costs will have to be evaluated. So it's again management. We don't spend just because we spend because there is a revenue to be captured if the revenue is not there, we will not spend. So I guess what I'm telling you is, Jon, is that we will apply management to these numbers. and to our outlook, but we remain fully committed with our guidance, and we see a clear path to get there.

Your next question comes from Victor German with Macquarie.

And I was hoping to follow up on expenses. I appreciate all the hard work that you've done on expenses so far. But I'm really trying to kind of get a sense for how our ambition is the near-term cost flat cost target. The 2 have -- in 2026, there was a, I think, $100 million that you disclosed in the third quarter relating to a fine. And 2027 should benefit from some integration synergy benefits. So adjusting for both, what is the underlying cost growth that your guidance currently imply? And do you feel that incorporates the sufficient cost discipline that you were trying to achieve. And if I can also push my life -- sorry, Kylie, on the related topic, but also just following up from Nuno's comments on investment spend. I appreciate that you are -- you feel that you invest more efficiently than peers. And here comparisons are not perfect. But if we look at CBA and Westpac, there appear to be have rebased their investments on to around $1.8 billion to $2 billion in the P&L versus P&L and the investment spend of $1.3 billion. So I'll just be came to hear your thoughts on the relativities with peers. And if you feel like your investment spend is actually sufficient based on everything that you're seeing that your peers are doing?

Sure. Listen, on the cost side, we ended the year at roughly $11.07 billion of costs, okay? With all the considerations that Farhan already mentioned, which effectively tells you that we accelerated -- accelerating our productivity journey. If you now include a full year of or line, as you know, we acquired Worldline roughly 2 months before the end of the year. If we include 100% of the cost base of Worldline, the underlying cost for '27 would be around $11.25 billion, $11.26 billion, okay? What we are guiding is no more than that. So it's basically we are guiding flat costs okay? So -- and what it means flat costs? It means the following. It means that we will absorb 100% of inflation, which, as you know, lately is being running a little bit high. And we also will absorb the whole investment in our growth initiatives, and that's about increasing the number of bankers, and we are increasing a significant number of bankers in business banking in '27. We are also increasing the number of proprietary lenders on the home loan business. And again, we are also improving our platforms and remediating continue to remediate our NFR shortcomings of the past. So we are absorbing all of this in '27 and still arrive with a cost flood approach. As you saw in '26, our house, ANZ will always try to do is best, okay? And the cost management, this is an important message. '26 was not about just cutting some headcount, '26 was about establishing a culture of not spending a cent more than what is needed to drive this business. And that means people. That means contractors. That means consultants. That means vendors. That means traveling. It means that we only spend what is connected with the revenue or obviously, with complying with the regulation. That culture and that methodology, which has a governance as a way of doing things in the company is embedded. So you should count on us to continue to try to beat whatever we commit. Second, on your specific question versus peers. I have the sense that whatever goes to P&L from investments since each bank has a different definition of investments, to be clear, it's not comparable. But what I can tell you is that our $1.5 billion of investment in growth is the number we feel the company needs and the company can digest in a year of effective transformation. Thanks, Victor.

And just if I can confirm because you talked about the investment in additional bankers, and that makes a lot of sense. That's -- I'm assuming that sits outside of the investment spend because the investment spend number is not changing year-on-year. but it sounds like you were investing more. Any chance you can give us a bit more color in terms of how that sort of additional investments kind of investment in the business outside of investment spend. How much is that increasing next year?

I can give you a sense of the concepts we are doing and some level of dimension. Yes, the investment spend is basically technological investment. But there is a massive investment in people. And that means, on 1 hand, continuing to change and refresh our leadership team in the company, which has been a significant part of our culture transformation in the last 18 months. But for example, in Business Banking, we announced that we would increase 50% the number of our bankers up to 2030, okay? You can basically make it linear and have a sense of how much people we have to increase net in 2027. And I can give you even a more easy to do math. In Q4, we did 50 just in Q4. So that gives you a sense of how much people how much frontline and capacity to interact with the customers we are putting in. And the same will happen for home loans in terms of proprietary lending. So there is a significant increase on strengthening our property origination, which is in doubt as we said several times in our pre-presentation. We said that our origination machine digital and people, platforms and people or people and platforms had to be strengthened. And those 2 elements are a significant part of what we are doing, okay? Thank you, Victor.

Your next question comes from Andrew Lyons with Jefferies.

Just a question on your capital. At the FY '25 result, you delivered the 12.03 CET1 and chose to issue equity through the DRP and you flagged the potential to do the same in the interim you ended up not doing that. 12 months on CET 1 is lower at 11.99 and said you'll neutralize the DRP. Now I can see you do have some reversals to come through on the capital base. But what's changed in your assessment of the capital position between 12.03 within underwritten DRP and 11.99 with a neutralized one.

Sorry, thanks for that, Andrew. Look, I think we I think it's fair to say, Andrew, that we sit here in a very different place relative to where we were a year ago. I think the first and most important thing is that we are now 1 year into our ANZ 2030 strategy. We have greater confidence in terms of our ability to generate organic capital. And as you've seen, we have done so already by increasing our organic capital generation to 80 basis points versus 71 basis points if you look at prior corresponding period from the year-end. So the impact of our strategy is starting to show through from an organic capital perspective, which gives us more confidence in terms of being able to continue to generate earnings to support our growth and our dividend. The second, as you mentioned, is that there is going to be a fair amount of unwinds that are going to come through and those unwinds are substantial, some of which I just mentioned to the question that was asked earlier. The third is that we have been a lot more focused, and we have -- we are building a very clear DNA or almost I would argue a machine to try and create better quality capital optimization and far more discipline around capital allocation. So a lot of the activities that we're going to be undertaking and have undertaken already, which included as I mentioned, some of the RMBS transactions that we've done in this half. We've talked about some of the -- and I mentioned this, I think, earlier in the third quarter. We've done some transactions, which we'll continue to do. So there's a fair amount that we are doing as well as some of the data methodology changes that will come through in the second -- in the first half and into the year in FY '27, all of which are going to add capacity in our capital position. So that worries us a little bit less. The fourth thing is that last year, we had much less confidence and visibility to what was going to happen with the New Zealand business capital requirements and now that has become much clearer. So we know where we stand in so far as New Zealand is concerned. We were -- we now have less capital to generate and to -- sorry, get less capital ratios to work towards in New Zealand versus what we had originally expected. So we have some capacity there potentially as well. So I think when we take all of this together and look at where we are in terms of our capital, the activities that we are taking to create more capacity and the unwind that is going to come. I think we are in a much better place compared to a similar number 12 months ago.

Can I just add just what the benefit from the changes to the New Zealand capital requirements were for the ANZ Group?