Australia and New Zealand Banking Group (OTCPK:ANZBY) Q4 2022 Earnings Conference Call October 26, 2022 7:00 PM ET
Company Participants
Jill Campbell – Head, IR
Shayne Elliott – CEO
Farhan Faruqui – CFO
Conference Call Participants
Andrew Lyons – Goldman Sachs
Richard Wiles – Morgan Stanley
Jonathan Mott – Barrenjoey
Victor German – Macquarie
Brian Johnson – Jefferies
Brendan Sproules – Citi
Andrew Triggs – JPMorgan
Ed Henning – CLSA
Nathan Lead – Morgans
Jill Campbell
Thanks. Good morning, everybody. Thanks for joining us for the presentation of our Full Year 2022 Results being presented from the ANZ offices in Melbourne. On the banks of the Bureaurung [ph] in Docklands, which is Wurundjeri country. I’m Jill Campbell. I’m ANZ’ Head of Investor Relations. I pay my respects to all this past and present and also extend my respects to any aboriginal and Torres Strait Islander peoples joining us for today’s presentation.
Our result materials were lodged earlier this morning with the ASX, and they’re also available on the ANZ website in the shareholder center. A replay of this session, including the Q&A will be available later this afternoon around mid-afternoon. The presentation materials and the presentation itself being broadcast today may contain forward-looking statements or opinions. And in that regard, I draw your attention to the disclaimer that’s on Page 1 of the slide deck. I’ll talk more about Q&A procedure when we get to that section of today’s session, but ahead of that, and as most of you would already know, if you do want to ask a question, you’re going to need to do that by the phone.
Our CEO, Shayne Elliott; and CFO, for Farhan Faruqui, will present for around 35 minutes, after which I’ll go over the procedure, as I said. And with that, I’ll hand to you, Shayne.
Shayne Elliott
Thank you, Jill, and good morning, everybody. I’m also joining you today from the lands of the Wurundjeri people of the Kulin nation, and I’d like to pay my respects to them as the traditional custodians of this land, and I pay my respects to their elders past and present. And I also pass that respect on to any aboriginal and Torres Strait Islander people that are joining us today.
Now before we start into the result, it’s troubling that we have needed to start recent years’ results by acknowledging those impacted by natural disaster, whether it’s flood, fire, tornado, drought. And this time, our thoughts with those who have been impacted by the floods, particularly those in regional Victoria and New South Wales who are still cleaning up from the worst flooding in decades. And it’s yet another tough time, but I can assure everybody listening that we are doing all that we can to support our customers in need and will continue to do so.
Now turning to the results. It’s really pleasing to report statutory profit up 16%. Cash profit increased 5% year-on-year and 9% in the second half. Our balance sheet is strong with a common equity Tier 1 of 12.3%, while return on equity was up 47 basis points to 10.4%. Now this is one of the best set of results we’ve delivered. Underlying profit before provisions was up 20% in the second half, the highest half-on-half increase in over a decade.
Yes, the recent environment is supportive, but the result reflects many years of reshaping, derisking and repositioning ANZ. Each division made a positive contribution, with good volume growth across the group. Margins recovering in all businesses and importantly, risk-adjusted margins improving across the board, demonstrating the benefits of a simpler, well-balanced portfolio.
Now we start the new financial year with strong momentum in all businesses, a solid balance sheet, financially healthy customers and a highly engaged team. Now reflecting that strength, the Board announced a dividend of $0.74 per share, an increase of $0.02 despite the higher share count arising from the capital raising earlier in the year.
Now looking back on the year, we had five clear priorities, restoring momentum in home loans, launching ANZ Plus, disciplined growth in institutional and commercial, completing major regulatory programs and continuing the hard work on simplification. And we’ve done what we said we would do. Growth has been restored in Australian home loans. Approval times are back in line with peers, and we’ve grown the business with an eye firmly on risk-adjusted margins.
We built processing capacity and improved operational flexibility so we can respond better when volume surge. And we’re confident we can maintain growth in home lending, but our focus will remain on utilizing the capacity wisely.
Now the repositioning of the Australian retail bank on to ANZ Plus continues apace, and the early signs are terrific. We’re really pleased with how it’s performing, both technically and in terms of customer engagement.
Deposits are growing at a rate faster than any bank ever launched in Australia. Deposits reached $1.25 billion yesterday and currently around a third of customers joining Plus are new to ANZ. Now while some of the deposit growth reflects customers moving from their existing ANZ accounts, total ANZ retail deposits on either platform continue to grow.
Net Promoter Scores for the joining experience are approaching 50, already materially higher than our peers and still improving. But ANZ is more than just a new app. It’s a new bank, an entirely new stack of technology built by our ANZ X team sitting on a simplified existing core. It’s also a new business model built around improving the financial well-being of our customers, and that’s great for customers, but also good for ANZ, driving greater lifetime value per customer.
Now the research shows that the best way to improve financial well-being is to establish a good savings habit. And that’s why we launched Plus with a savings proposition at its heart, and the ability to set multiple savings goals without the need to open new accounts. And this is really taking off with 45% of active customers setting themselves a goal and a significant number setting more than one goal.
Now to put this into a better perspective, only around 5% of customers set goals on our traditional platform. So we’re confident that financial well-being benefits of Plus are resonating with customers. Now it’s also worth reflecting on the value of knowing what our customers are saving for a deposit on a home perhaps. So we can offer them the appropriate products and services at the right time.
Now it’s too early to share granular detail on performance, but you can see here the type of metrics we monitor in real time to check the resilience, the effectiveness, engagement and financial performance of Plus, and we will be sharing many of these with you from early next year as we reach scale.
Now in addition, we have a series of automated control bots that run real-time health checks on our most critical controls, and we’re adding new bots regularly. Now that level of monitoring and control just is not available on our legacy systems, and it allows us to grow Plus safely at pace.
Now we’re confident ANZ Plus is more attractive to customers. It’s more engaging, more efficient to run, more secure and resilient with more attractive economics for shareholders. Now today, we’ve been focused on testing the proposition and acquiring new customers. But the task shortly will be the migration of existing ANZ customers. And at the same time, we’ll continue to enrich the savings experience and launch true end-to-end digital home loans.
Now digital home loans will be piloted with staff in a matter of weeks before launching in market next year. This will not be a digital front-end and analog back end, but a fully digital end-to-end experience from application all the way through to settlement.
However, look, we know that buying a home is the biggest financial transaction most people do in their lifetime. So we will continue to offer coaching and support at any stage in the process for those that need it.
Now in the half, we separated out our small business segment, creating a stand-alone Australian commercial division. With Institutional and New Zealand executing well, ANZ Plus and market and retail back to growth, the time was right to focus our attention on the next biggest opportunity. Our banking small businesses has always been attracted and ANZ has a particular customer mix positioned perfectly for the current cycle.
We bank over 650,000 small businesses across a wide array of segments, but with a heavy focus on deposit and transaction-heavy trading businesses. So in aggregate in this segment, for every dollar we take in deposits, we lend about $0.50 of which 80% is secured.
Now in addition, our commercial customers are also great home loan customers and a significant number of them utilize institutional services like foreign exchange or trade finance. So at a total customer revenue level, they contribute around a quarter of all group revenue and generating the highest overall returns of any customer segment.
But servicing these customers more about data and digital tools than boots on the ground. And while we have increased our banker cohort, our primary investment has been and will continue to be in technology and providing better tools for customers and our bankers.
We’ve also focused this business back to basic, the basics that customers value, exiting noncore, high-risk propositions like margin lending and financial planning and broker-originated asset finance. Now look at the same time, we’ve entered the partnership with Worldline to provide the world’s best point of sale and online payment technology at lower cost and reduced risk. This is a globally competitive technology race and taking a domestic-only approach in terms of product development just is not credible.
Now it’s not surprising that in this point of the cycle, the commercial division is growing very strongly with revenue up 20% in the second half. Operating costs well managed, delivering a cash profit up 15%. Both deposit beta and operating leverage are very favorable in this segment.
Turning to institutional. Institutional is a strong customer franchise with our multiyear transformation driving better outcomes. This is just not the same business that you were analyzing years ago. Loan quality has improved dramatically with the investment-grade loan book increasing 50% since I became CEO.
The transition from a lending driven business to a provider of banking infrastructure and services has been dramatic. Today, our largest customer segment within institutional is high-quality, globally diversified financial institutions and we’re the largest provider of banking infrastructure in both Australia and New Zealand. Underlying payment and foreign exchange transaction volumes are growing strongly, driving core balances and favorable deposit beta.
Now our customer franchise and markets, which typically contributes around two thirds of the global markets revenue had a solid year, although trading conditions were tough, leading to a lower overall markets outcome than we would have liked.
Sustainable finance and adjacencies are a global mega trend with ANZ Institutional already a significant player. And as institutional repositions further around transaction services and sustainability it will deliver quality growth with better, more stable returns to shareholders.
Now turning to New Zealand. We’ve maintained industry-leading positions across key segments and improved risk-adjusted margins. The business is well diversified, high quality and extremely well managed. It’s also worth reminding shareholders that ANZ is also New Zealand’s largest private sector fund manager providing further diversification overseeing $34 billion in funds under management.
And we see good growth opportunities as the funds and KiwiSaver industry expands, where we currently hold around 20% market share.
Finally, in New Zealand, it was pleasing to reach the very final stages of the BS11 implementation. This has been an enormously complex task and it’s better to have this behind us than ahead. So we’re well positioned in New Zealand to focus on the future and further build the franchise.
Critically, at the group level, we continued the systematic derisking of the bank with the final step in the formal separation of our wealth business to Zurich and Insignia completed just a few weeks ago. Now you’ll remember that we signed the sale agreement in 2017 and we’ve been working hard ever since to transfer $36 billion of funds under management across 48 products for 762,000 members and 2.2 million policies, along with 2,000 group plans with over 500,000 members, both safety to their new owners. Not to forget the almost 2,000 people who’ve moved across in 15 separate transitions. And we did all of that on time without incident and below budget.
We remain the only major bank to have fully exited these businesses and removed this risk. We’ve also essentially completed the wealth remediation program, sold the margin lending book, exited financial planning and launched the partnership with Worldline to manage our merchant acquiring business. So as a result, we’re a much safer bank. We’re better able to grow in a focused and targeted way.
Now looking ahead, we all know that the world has entered a period of significant uncertainty. Central banks are battling to control inflation. While geopolitical uncertainty, most notably the war in Ukraine continues to weigh heavily.
Closer to home, there are many factors at play. And while some indicators are weakening, many support the strong underlying health of the economy. There is particular stress with regard to cost of living and the resulting rise in inflation expectations and the drag on consumer confidence. And I can’t overemphasize the impact that cost of living pressures are having in the community. It’s clearly an issue not only at the supermarket and petrol station, but also with household utilities and now the cost of housing itself with a rent or mortgage repayments.
Energy is a major challenge given the cost of transition and the impacts on energy security. And as a major institutional bank in particular, we have an important role to play funding the transition and supporting security of supply.
Now all of these factors are certainly having an impact on our retail and small business customers. However, our data shows that they are entering this period of stress in strong shape. Households in Australia and New Zealand are wealthier, more liquid and more employed than ever.
Now I realize we’re talking in averages and that the risk lies in the tails, but nonetheless, the data is instructive. Aggregate Australian household debt, net of liquid assets is around zero, the lowest it’s been in 15 years, and that excludes superannuation and property assets. The number of customers behind on debt repayments continues to fall, although that’s likely to turn soon.
Home loan balances for our Australian customers are up about 10% on average from pre-COVID, but more expensive personal loan and credit card balances are down around 5% and 12%, respectively. Home loan offsets are up about 50% on average and deposits overall up 27% per customer.
And Australian small business customers are equally robust. Average loan size for our small business customers has increased by about a third, reflecting the need for working capital in a nominally growing economy, but that growth is highly secured and at the same time, those small businesses have grown their deposit base by 23%.
Now if we look at the cohort of Australian home loan customers who’ve been with ANZ over the past year, where we can track salaries, the average customer has experienced a 5.5% increase in income. And the New Zealand experience is the same with an increase of 6.6%. So in both cases, that’s about the same level as inflation and so customers can maintain their lifestyle and for many, increased savings or pay down debt.
But of course, our focus is on those customers most exposed to stress. For example, those first-time homeowners who bought at the peak of the market borrowed above 80% loan-to-value with high debt-to-income levels and who are already experiencing a fall in the value of their house. And or and those that are living in areas experienced higher than average unemployment or exaggerated house price declines.
But fortunately, these stress spots are few and far between. And one of the great lessons of COVID was the value of data and the ability to analyze at a granular level and proactively intervene where required. And we invested heavily to build that capability, and we are now able to leverage that as we enter another period of volatility.
So for example, we can quickly identify home loans located in a post code experiencing falling house values for those who are already in or approaching negative equity and actively monitor them and help as needed. Now it’s worth noting that 13% of Australian post codes have already experienced average house price falls of more than 10%.
Our total exposure in those post codes to those currently in negative equity is around 0.4% of our book or $780 million. And that exposure would rise to around 1% of the book should values fall a further 10%.Look, now while that will be stressful for some customers, and we stand ready to help and we are well prepared financially.
Now the equity in one’s home is important, but it’s not what drives customers’ willingness or their ability to repay. Stable, predictable income is the ultimate protection for homeowners and for banks. And with unemployment at historic lows, and average hourly earnings rising faster than before, there is significant buffer remaining in the system.
But for those few that will experience stress, we’ve kept in place the additional hardship resources we invested in during COVID. So while the future is uncertain, both the bank and our customers are well positioned for what may come.
Now with much of the work to simplify and strengthen the bank completed, we agreed on the acquisition of Suncorp Bank in July. It’s the fastest-growing state in Australia with a young population and a diversifying economy, why wouldn’t we take action to improve our presence in Queensland. This is a good bank, and we’re excited about the opportunities.
Now we’re still in the process of obtaining regulatory and government approvals, and I want to stress it will be up to them to test the merits of the acquisition, but we believe a stronger ANZ will be able to compete more effectively in Queensland, offering better outcomes for customers. We have a team in place already planning for integration and growth should the deal be approved.
And to help us better compete in the future, we are introducing a new corporate structure that will be a subject of a shareholder vote in December. Now this is not about us becoming a fintech or a vinch [ph] capital firm. We are proposing this structure, which is very common for financial institutions around the world to make our core bank stronger and unlock shareholder value.
To better serve customers, we need to invest in capabilities outside but adjacent to banking, like the Worldline partnership. And while we can operate those types of capabilities within a bank, the current legal structure makes it much slower and harder to operate at the pace required. Now we’re on track to a tight deadline. And with shareholder support, we hope to have the structure up and running early in the New Year.
So look, to finish, I just wanted to reiterate a few key points. This was an outstanding result with key financial metrics heading in the right direction and all businesses contributing to growth and return. We’ve done what we said we would do. We improved momentum in Australian home loans, ANZ Plus is in market growing strongly and on track to launch digital home loans later next year. We delivered disciplined growth in institutional and commercial. BS11 is largely behind us, the wealth business fully separated, and we took further actions to simplify the bank.
Now looking ahead, we’ll maintain our focus on strategy and disciplined execution. We’re already preparing well for the Suncorp approval and the ultimate integration. We’ll get the NOK structure in place to strengthen the core bank. We’ll continue to invest in ANZ Plus with a focus on migrating existing ANZ customers and launching a digital home loan. We’ll continue to grow commercial and institutional, particularly around sustainability and payments infrastructure. And our work on productivity will continue.
Now look, to be clear, there are economic risks ahead, but we’re entering 2023 in great shape with positive momentum and well prepared for whatever challenges lie ahead. I take comfort from the ongoing support of our people. They believe in our purpose and industry-leading employee engagement is no accident. It’s something we are passionate about, and we will continue to invest in.
So with that, I’ll hand over to Farhan to talk through the results in more detail.
Farhan Faruqui
Thank you, Shayne, and good morning, everyone. As you’ve just heard from Shayne, we have delivered on our key priorities and produced a strong set of results for the year despite what has been a highly volatile and uncertain operating environment.
Pleasingly, we have seen the momentum continue to build during the second half across all our businesses. This financial outcome has been underpinned by several years of effort in simplifying our business, derisking our portfolio and managing capital and funding prudently. We have held ourselves to account for managing down our run-the-bank cost in order for us to invest in important growth initiatives and to satisfy our heightened regulatory obligations.
But in addition to financial performance, we made solid progress in the half towards our most important strategic goals. The launch and a strong start to ANZ Plus, agreement to acquire Suncorp, a successful $3.5 billion capital raised to partially fund the Suncorp acquisition, which was structured to provide fairness to all our shareholders and finalizing the multiyear BS11 regulatory program. We exit FY ’22 well positioned to take advantage of the opportunities ahead of us, while staying prudent on our risk settings.
We delivered a strong result for the year and for the half. Cash profit before provisions expanded 7% for the year, and 16% for the half. This performance has allowed us to increase our dividend to $0.74 per share despite the increase in the share count as a result of the capital raise in the fourth quarter. I should also mention that since the capital raise, we have delivered a TSR of 20%, demonstrating value for our shareholders.
The second half cash profit outcome has been delivered through a combination of volume and margin uplifts across all our businesses, disciplined cost management actions to offset the inflationary headwinds in the second half, while continuing to invest in the future for better customer experience and outcomes.
Profit before provision ex L&I expanded 20% in the half, as Shayne mentioned, representing the highest half-on-half growth for over a decade. We’ve also been prudent considering the uncertain environment by maintaining an adequate level of collective provisions balance despite continued improvement in credit quality.
You’re already up to speed on our first half and third quarter performance, and we pre-released our large notable items template last week. I would note that for ANZ, L&I is incorporated above the line, and it is purely called out to make it easier for you to assess the underlying performance.
Moving forward from here, my commentary will focus primarily on half-on-half, excluding L&I. I’d like to start with revenue where we delivered our first double-digit revenue growth for a half since 2009, with all four of our divisions performing strongly.
Importantly, the revenue growth was driven 50% by volume or transaction-related uplifts and the balance 50% by margin benefits. The highlights for the half for me were lending, deposit and transaction volume growth for the group with a focus on risk-adjusted margins. We restored momentum in Australia home loans as per our guidance at the start of the year.
In institutional, we delivered one of the highest half-on-half revenue growth outcomes in recent years, up 10%, driven by a strong corporate finance result, as well as the outperformance of the Payments and Cash Management business which was buoyed by growth in transaction volumes and rising rates. And importantly, risk-adjusted lending margins remained stable.
In commercial, as Shayne said in his comments, we have delivered renewed growth, while managing margins tightly in a highly competitive environment. Revenue grew 20% this half, the highest of all divisions, a result that I attribute to the gentleman on my right, who is currently the acting head of that business. In New Zealand, we balanced volume growth with a strong margin outcome and continue to effectively reshape our portfolio from a risk standpoint.
I will now talk in more detail to NIM, other operating income and markets outcomes for the half. So turning to NIM first, which is a key feature of our result. Margin trends were strong in the half, with underlying margins up 13 basis points. Our exit rate of 180 basis points for the September 22 months reflects strong momentum built in the second half. This outcome is a result of disciplined lending origination balancing volume margin trade-offs in a highly competitive market and actively managing the pricing of our deposits and funding costs in a rapidly changing interest rate environment.
Let me provide more detail in respect of our deposit and capital portfolios, which were positively impacted by rising rates. At call accounts and term deposits contributed 17 basis points to the NIM expansion in the half. This margin expansion was across our retail and business customers and geographically spread across Australia, New Zealand and our international franchise.
It’s important to note, however, that almost 50% of this margin expansion occurred outside of Australia, and this reflects the value of the diversification of our portfolio of businesses, as well as our geographic footprint, a unique advantage relative to our domestic peers.
Our capital and replicated deposit portfolio contributed 7 basis points to margins in the half, and we expect this expansion will continue as maturing tranches are reinvested at higher prevailing rates, along with further expected cash rate tightening.
Now the size of this portfolio remained broadly flat half-on-half, but a possible reduction could occur going forward should switching to rate-sensitive deposit products accelerate. There is more detail on capital and replicated deposit NIM impact on Page 54 of the investor pack.
As we look ahead, it’s important to recognize that the size and frequency of change in rates in the second half has been unprecedented in recent times. Consider that in the last decade, the RBA the RBNZ and the Fed together carried out 60 cash rate moves, but almost a third of those have occurred in the last 12 months and were relatively larger in magnitude.
From here, we see a range of possible headwinds and tailwinds and of these we expect that deposit and lending competition, shifts in customer behavior in terms of deposit mix, as well as the impact of capital and replicated deposit earnings will be the most significant.
So given this mix of headwinds and tailwinds, extrapolating with accuracy is difficult. However, we expect that the environment will continue to be supportive for margins in the first half. Although any change from the exit margin is likely to be relatively more modest.
Moving on to other operating income. This half delivered the strongest OOI ex markets result of the past four halves, driven by our core underlying franchises, particularly in Australia retail and the Institutional business. The uplift in Australia retail was largely seasonality driven. It is important to note that given both halves were impacted by the phasing out of the break-free product we expect further upside from new product offerings in FY ’23.
In Institutional, there was growth in Corporate Finance fee income in the half, driven by higher corporate M&A activity and increased trade flows, as the world opened post-COVID and supply chains were restored.
And now to our markets business. While total market revenues declined off the back of some pronounced external shocks, importantly, our markets customer franchise remained resilient and grew 8% year-on-year.
The ANZ markets business is not a proprietary trading business. We are there to support our customers and at times of pronounced disruption, customers, particularly in rates and credit markets tend to step back as the directional trends become uncertain. So if we exclude four months where extreme events, which are mentioned on the slides, drove market dislocation, the average monthly markets revenue remained around $160 million.
Looking at the key drivers of markets outcome, you can see on the chart, the standout performer was our foreign exchange business, which benefited from customer volume uplift, owing to increased volatility. Conversely, extreme periods of rate movement reduced customer activity in the rates business. And in credit and capital markets, wider credit spreads and general risk off sentiment resulted in lower primary bond market issuance and impacted secondary markets.
I’d like to now move to expenses. Over the past 6 years, we have consistently demonstrated expense management discipline. On a constant currency basis and excluding the cash towards acquisition, run the bank costs were flat for the year and for the half, which was in line with the guidance we provided at the first half results and then again at the trading update.
This is a good outcome given the cost environment changed significantly over the last 12 months, with rising inflationary pressures, particularly labor costs and vendor costs. We have worked to mitigate these pressures through sustainable productivity initiatives which delivered another $260 million over the course of this year.
These included increased adoption of customer self-service from investment in digitizing and automating processes, further rationalization of our corporate property footprint and consolidating our offshore service centers from three to two campuses.
Now moving to investment spend. We have invested across our businesses over a number of years, and we are seeing the clear benefits of that emerge. Our efforts to build a simpler, better bank have positioned us to take advantage of opportunities in a rapidly changing banking landscape.
To support this, we increased investment spend to almost $2.2 billion this year with a larger proportion of that spend focused on growth and simplification. We expect this proportion to increase further as we move past the peak in regulatory and compliance spend with BS11 now substantially behind us.
ANZ Plus has been a priority investment for us, as Shayne mentioned, and was required to replace our legacy technology and build additional capabilities. This investment has been approximately 15% and of our investment slate over the past 2 years. As Shayne said, we have made good progress to date on our Save and Transact proposition, and we have accelerated investment on the digital home loan proposition. We will report progress on the financial metrics that reflect the value proposition of ANZ Plus, as we build scale and roll out further products and features.
We also increased investment in our sustainability business, real-time payments and the cash management platform in institutional and also through technology, including Gobs [ph] in commercial. And finally, we have continued with our simplification agenda. For example, we now have over 30% of our applications on cloud versus our goal of transitioning 70% of our applications over the coming years.
This migration is resulting in improved resilience, more efficient software spend and better capacity management. 87% of our investment spend in total was expensed this year, an increase on the prior year, which contributed to about $150 million of the year-on-year expense uplift. This reflects ANZ’s disciplined capitalization policy, which has a $20 million threshold. As a result, we have capitalized significantly less than our peers, and our capitalized software balance again reduced, as we continue to expense a greater proportion of spend.
Now we will continue to ensure executive accountability for what is being delivered and expect that our OpEx rate will continue to increase in FY ’23 as more of our investment spend is directed to areas that are not capitalized such as towards Software as a Service and towards building capabilities, for example, in ANZ Plus.
Now overall, we delivered a flat run-the-bank cost for the year, which has enabled us to continue investing in the initiatives which I’ve just covered. But looking ahead, expense trends will be impacted by headwinds arising from wage and vendor cost inflation, together with other uplifts, including the annualized impact of the cash towards acquisition and stranded costs post the formal separation of the Wealth business. We will, nevertheless, maintain our relentless focus on productivity to help offset some of this impact.
It is likely, however, that our total expenses, excluding L&I of $9.17 billion will increase by circa 5% in FY ’23. However, all else being equal, we expect revenue growth to be higher than cost growth in full year ’23.
Now moving to risk. The quality of our book, together with the operating environment is reflected in lower new and increased individual provision charges, which were fully offset by write-backs and recoveries resulting in an individual provision release for the half.
While the total collective provision balance increased by approximately $100 million half-on-half, the composition of the balance has evolved over the period to ensure it remains appropriate for a volatile environment.
Let me take you through that compositional change. Firstly, our customers are in a strong position, and our portfolio has continued to shift towards lower risk exposures. Also, as COVID-19 risks receded, the overlay set aside for COVID was no longer required. When you combine those releases, together with movements in the portfolio through mix, volume and credit quality, that means the real starting position is $2.86 billion.
We have then built the provision balance back up again by about another $1 billion to allow for the significant uncertainty attributable to the increased risks associated with rising inflation and interest rates and the increased geopolitical tensions.
Our collective provision balance of $3.85 billion is $2.1 billion above our base case modeled outcome. Even more importantly, our balance is over $600 million above the conservative downside scenario, which in the case of our portfolio, for example, is stressed for scenarios such as a fall in residential property prices from the peak which was at the end of the third quarter of approximately 30%, an unemployment peak of 6% in FY ’24 and a contraction in GDP to negative 0.5% in ’23.
So an outcome that is $2.1 million above the base case and $600 million above the downside scenario reflects the fact that while all portfolios are in good shape, the economic outlook presents some real uncertainty for our customers.
Now before we move on from credit quality, I just wanted to provide briefly some overview points on the good work done to derisk our book over the past 5 years. Firstly, within institutional and commercial, where you can see the credit risk-weight intensity has improved steadily over the last 7 years.
Our internal expected loss has almost halved and sits at a historic low 19 basis points, which is the output of asset sales, together with the reshaping of the institutional business, including, as Shayne mentioned, a 50% increase in investment-grade exposures. The Australia Commercial division is a high-quality book, 80% of the $59 billion portfolio is fully secured, and the division has almost doubled the amount of deposits to loans.
Turning to retail. The mortgage portfolios in both Australia and New Zealand are robust, and there’s quite a bit of background information on both within the results back. You can see on this slide, however, that the Australian portfolio is conservatively positioned with low dynamic LVRs and 70% of customers are ahead on repayments and offset balances are continuing to increase.
On the right of the chart, you can see our fixed rate loan roll-offs where ANZ has passed the peak, but this does remain elevated over the next 18 months. It’s also important to note that repayment capacity for fixed rate loans is assessed using a 300 basis points buffer over the prevailing customer variable rate.
In New Zealand, reflecting a focus by the regulator to reduce higher LVR lending, 92% of ANZ’s loans have an LVR lower than 80%, with the average dynamic LVR at 37%. The book has historically been dominated by fixed rate loans, which is currently approximately 90% of the book.
Now moving to capital. We have a robust capital, liquidity and funding position. Strong organic capital generation from good profitability in the quarter, more limited risk-weighted asset growth and the non-repeat of the IRRBB increases seen in prior quarters, in addition to the equity raising helped drive our end-of-period CET1 ratio outcome of 12.3%.
CET1 on a pro forma basis is 11.1% and accounting for the impact of the announced Suncorp Bank acquisition, which is expected to complete in the second half of calendar ’23. The associated capital raising for the acquisition of $3.5 billion was the largest equity raise in the world for an M&A transaction this calendar year-to-date and was well supported by our shareholders despite the volatile market conditions and the Patrio [ph] structure provided a fair and equitable outcome for all our shareholders.
The capital reforms taking effect in January 23 are expected to be broadly neutral for the system. And for ANZ, the changes are expected to be positive for institutional, but largely neutral for the group and positive on a Level 1 basis.
Now noting ANZ’s manageable DFF refinancing requirement, we expect our term funding in the wholesale markets in FY ’23 to return to broadly pre-COVID levels of approximately $25 billion to $30 billion.
So in closing, we’ve delivered on the five priorities we laid out for FY ’22. As we look forward, we are resolute in our efforts to navigate the uncertain environment, and we are nimble enough to benefit from the tailwinds and build the resiliency against the inevitable external headwinds.
We are confident in and will continue our efforts to strengthen our balance sheet, focus on our strong customer franchise and manage our exposures and risk settings conservatively. At the same time, we remain disciplined on cost and focused in continuing to redirect our investments towards building and growing a better bank and a more resilient franchise.
Thank you very much for your time, and I’m handing it back to Jill.
Question-and-Answer Session
Jill Campbell
Thanks, Farhan. Thanks, Shayne. Just before we move to Q&A, I know you’ve all done this a lot. [Operator Instructions] So with that, I’m going to hand back to the operator and to Andrew Lyons from Goldman Sachs for the first question.
Andrew Lyons
Thanks and good morning. Shayne, you’ve provided great disclosures around your NIM today, which has clearly shown strong leverage to higher rates, both absolutely and relative to your peers. However, I’d be kind to get your thoughts on how you think about your NIM leverage going forward.
Slide 26 shows that your business at core deposits, where the majority sit offshore were a key driver of your second half NIM performance. However, I guess, with all the rates now more closely matching offshore rate moves. Do you expect the benefits from rate rises from here to be more biased to your Australian exposures where perhaps ANZ is relatively underweight?
Shayne Elliott
I’ll actually get Farhan to answer that if that’s okay, Andrew.
Farhan Faruqui
Yes. Thanks for that question, Andrew. Look, I think there are – so there’s multiple aspects to the book. So if you look at our capital and replicating deposit portfolio, that’s obviously more leveraged to Australian dollar rates because that’s a large part of our book as you know. In so far as customer deposits are concerned for both for business at call [ph] as well as for retail at call. Yeah, it’s actually a reasonably balanced book between international and Aussie dollars.
I think we’ll continue to benefit from the rate hikes that are coming through in the U.S. dollar rates as well as in New Zealand dollar rates. I don’t think that is going to be particularly overly biased towards Australia. I expect that there will be a bigger shift in Australian dollar rates benefit to us because of the fact that Australia was lagging the offshore rates. But I think that the benefits are going to be reasonably well proportioned between the two currencies.
Andrew Lyons
Okay. That’s great. Thanks, Farhan. And then just a second question just on expenses. You’ve mentioned you expect the expense growth of about 5% in FY ’23. Can you perhaps just talk a little more about the drivers of that growth, particularly around the inflationary pressures on your run the bank expenses, I guess, how expensed investment will trend into ’23, particularly given you have highlighted the share of risk and compliance is likely to continue to fall in FY ’23? And then finally, to the extent to which you expect to deliver further productivity versus the $261 million from FY ’22?
Shayne Elliott
Yeah., I’ll start and then hand over to Farhan. It’s a really great question. So I think the important thing to note, and again, I know your question was mostly on investment side. But as you think about the BIU, that inflation is already in the building, yah. And because if you think about 70-ish percent or two thirds of our cost base essentially salary and wages, okay, about half of the people work in Australia, half somewhere else. Those – and with our cycle of increases, those increases hit us on October 1st. So we have an annual sight. So there’s sort of – over the last, I don’t know, 5, 6 years, putting the little period in COVID aside, the annual rate of increase in selling wages would be somewhere around the 2-ish sort of number. This year, it’s clearly going to be double that.
And so that’s already with us. And then, of course, but that’s not salary and wages, to some extent, Andrew, as somebody else is salary and wages. When we say vendor costs, that’s not all of it, but a lot of it is just paying somebody else’s salary and wages. So a lot of that stuff is with us and while – and so we’re not going to – we don’t renegotiate salaries every week. And so even if inflation reported CPI starts to increase from here, that won’t necessarily reflect us in real time et cetera.
So I think that’s an important point to know. So that’s why we’re confident about giving you some guidance around the cost number but so it’s essentially here. But do you want to talk to you a little bit more on that and the productivity and the investment slate question, which is again, even the investment slate, a lot of it is essentially salary and wages, right?
Farhan Faruqui
That’s exactly right. I mean – so I think the – if you think about – if you look at our Page Slide 30 of the investor pack. And you look at the impact that we’ve had this year on – through inflationary pressures on salary and wages, et cetera, that’s $164 million.
Given where we are in terms of the inflation headwinds right now, that number could easily be double or more just in the case in FY ’23. And that, as Shayne mentioned, comes right upfront. It starts on October 1. So we are already facing that inflationary headwind.
Similarly, we’ll have the investment spend being equally impacted by the same inflationary pressure. So it is – those are obviously pressures that are already in the system in addition to the vendor costs that Shayne talked about.
But in addition to that, as we called out, we do have the standard cost that remains from the exit of our Wealth business. And that’s not unsubstantial. We also have the full impact of cash rewards acquisitions, plus some of the work that we’ve done around cloud and ANZ Plus starts to build additional cost as we run two platforms at the same time. So these are all costs that are coming through. As a result of the investment we’re making with the benefits that are going to come through over the course of the couple of the next few years.
Now on the productivity side, though, we’re not starting – we don’t start every year with a zero balance on productivity. Our productivity is a continuing exercise, and we have some tailwinds on productivity even going into FY ’23 because of the work that we’ve done and we get the – in ’22, and we get the full year benefit of that in FY ’23.
So that productivity focus will continue. And of course, we’ll have to find ways to offset some of these inflationary pressures. But what we’re really saying is that we sort of land roughly around a 5% increase in total cost through a combination of the pressures and offset partially by the productivity.
But I don’t want to walk away from the important point that we’ve had also that given sort of our current expected view on inflation and the cost uplift and productivity, we still expect revenue growth to be higher than cost growth in the course of the full year ’23.
Andrew Lyons
That’s great. Thank you very much.
Operator
The next question comes from Richard Wiles with Morgan Stanley. Please go ahead.
Richard Wiles
Good morning, everyone. I’ve got a couple of questions. First is on deposits. And the second is on costs. Shayne, maybe I’ll start with the one on deposits. For most of the half, your TD rates, particularly in the 3-month bucket, were quite a lot lower than market and certainly lower than some of your major bank peers. And then in October, you increase those term deposit rates more than the cash rate. So a little bit of catch-up. So I’d sort of like to understand what changed in October, why suddenly the larger increase in TD rates?
Shayne Elliott
Yes, fair enough. I guess you’re not going to totally be satisfied with my answer, Richard, but a moving target rate. I mean, look, first of all, we’ve got a very diversified deposit base much more than our peers, but just because of the nature of institutional and commercial, et cetera. So we have more sort of options available.
We’ve also been less reliant on things like the TFS and other bits and pieces. So our mix is just different. Now we have to always balance the fact we need to be competitive. We need to be out in the market. We need to have decent rates. But on the other hand, we have to balance our funding need and look at alternatives.
So I don’t know that there’s much to read into what happened in October. Other than that, it’s just constantly under review. It’s managed really dynamically. We have a process working with treasury and now we assess what’s going on in terms of our needs, what the alternatives are. And then obviously, in this particular case through Mile [ph] in their business, they will then assess what’s happening in their book and what they think they need to do from a competitive point of view.
But I think – my point is I don’t think there’s any – there’s nothing happened in particular in October. We are entering a period though, and it’s been interesting to watch in New Zealand as well, which is further ahead, obviously, in the cycle of 7 months, they started raising at 7 months here. Customer behavior is changing, right? And so it’s only recently despite we’ve had quite a few rate rises, only recently that the rates are of sufficient attractiveness that people are starting that move from at core to term deposits.
And so from our book anyway, that has been a relatively recent phenomenon. It’s still pretty small, but I think we’re going to have to – I think there’s going to be much more competition in that TD market. And then the only other thing I would say, we have been also very focused on the ANZ Plus offering, which is a call offering with no conditions and that’s obviously a very – it’s not the highest rate available in the market. But at 3.25, we’ve been focused on that being – wanting to be our sort of – I don’t want to – our sort of hero [ph] product, if you will, because for obvious reasons, we try to attract new to bank customers into that product.
Richard Wiles
Thank you. And if I can ask you about costs. This time last year, you were targeting $8 billion of costs. I know it was an exit rate number rather than a full year number. But the target was $8 billion. Now your guidance is suggesting $9.6 billion for full year ’23.
I know inflation has gone up a lot. I mean, maybe inflation for just a 5% adjustment to the cost target or the cost outlook, so maybe 8.5%, the 20% increase in between what you were saying this time last year and what you’re saying now is much, much more than inflation.
So I’d like to understand sort of what’s happened with the $8 billion never realistic? Or has there been a decision from ANZ to massively change the timing and the amount of investment spend?
Shayne Elliott
No. So let’s go back to what we said. Actually, the $8 billion target was some years ago, and then we refined that and much before last year to say, actually, what we’re really talking about here is making sure we have our BAU run the bank, whatever word you want to use, that we didn’t want to get to $8 billion by under investing in the franchise. It was really about the running the bank cost, and we said, hey, it’s important was that target was 7%.
And I remember having these conversations with all of you around the breakdown of that. And we’re really focused on getting to the 7%. That the investment piece has to stand on its own to feed, and we shouldn’t under invest just ahead a number, but there needs to be greater accountability about the investment side.
So two things happened. One, we got the run the bank down to 7.3-ish, yes, didn’t quite get to the 7%. And was when we said, hey, based on where we were, based on what we were seeing in terms of pressures in the business, we no longer felt that having that cost target was appropriate. That was number one.
Number two, there’s been a significant shift in terms of the OpEx rate within the investment slate. So I can’t remember where we started. I mean, Farhan show, we’re now expensing 87% or whatever it is of the slate that was significantly lower. So that alone has increased the cost rate by a couple of hundred million dollars. Now obviously, the benefit of that is we’ve got a lower capitalized software balance on our balance sheet.
So I think it’s important to split that out. So I don’t think that’s a fair analysis, Richard, to say something we’ve got a 20% increase in cost. But do you – I mean, we still focus very hard on productivity on the run the bank costs and Farhan laid that out in the – we delivered that was hard, flat essentially for the year again, more or less. We’re pointing out that, that’s going to be much harder to do in an inflation world where salaries and wages, our number one cost are rising call it, 4% to 5%, somewhere in that range. So we’re calling that out. And then I think Farhan talked about some of the stranded cost in your run costs, and you can probably add to that, Farhan terms of costs?
Farhan Faruqui
Yes. No. So as I mentioned, Richard, as – and I think Shayne has sort of broadly answered the question already. But I think it’s – the impacts have come in different shapes and forms, right? So it’s not just been, hey, we started with X and we now should be into 1.05 because of the fact that it has had impact through, as Shayne said, on expense rate.
We’ve had dual platforms operating as we transition to our new technology. We’ve had exit of our businesses in wealth, which are called adding to stranded costs. And of course, we’ve made acquisitions, which obviously have an impact on our total cost as well.
So it’s not just a pure inflation rate translation. At $7.3 billion roughly of run-the-bank costs, we’re actually not far away from what our original target was, as Shayne said, of the $7 billion on run the bank.
Now the way to manage that is to say, well, you know what, let’s just cut back on investment spending and manage to a smaller expense outcome. But we actually think that this environment is actually very supportive for us to make sure that we accelerate those investments and get those new customer propositions out to the market sooner rather than later.
So I think it’s a very deliberate strategy. Of course, you could get to a smaller number by just shutting down investment, but that’s not necessarily a good idea from a business perspective in terms of the future.
Richard Wiles
Does the $9.6 billion have a split between run the bank and change the bank like it has in previous years?
Farhan Faruqui
Well, I think what we’re trying to say at this point, Richard, is that the entire portfolio is going to be impacted by inflation and by some of the shifts that are occurring and some of the standard costs issued depending on how you report them.
So we’re basically trying to pivot to a – let’s look at the total cost target because, frankly, we’ve got to continue to manage internally and make sure we have enough transparency with our team in terms of how we’re delivering those productivity saves and where they’re coming. But I think we’ve come to a point now where it’s probably best to look at it from a total cost perspective.
Shayne Elliott
I mean I think the pressure is though, Richard, to – because again, we don’t – we’ve sort of moved away from that split is all else being equal, you’d say the inflation pressures are going to be a little bit more on the BAU and a little bit less on the slate because I just have the nature of the cost because the BAU is essentially a seller on wages bill, and there’s slightly – so that will be a little bit higher than the average, probably and the slate will be a little bit less.
And of course, the other problem for you, anyway, and I accept this is that the slate moves around not just because of inflation, but because of the things that we decide to do or that we are asked to do by regulators sort of – or the things that we decide to do or that we are asked to do by regulators, so there’s a sort of a move in the volume, if you will, of that. It’s a bit hard to know. What we’ve learned over time is – there’s new requirements imposed on us from various bodies, and it’s a little bit hard to predict on that one. And that’s why we sort of moved to the 5% overall, and we’re very confident about that.
Richard Wiles
Thank you.
Shayne Elliott
Thanks, Richard.
Operator
Your next question comes from Jon Stewart [ph] with UBS. Please go ahead.
Q – Unidentified Analyst
Thanks very much. Thanks, Shayne. Thanks, Farhan for giving us the chance to ask a few questions. Just on the first one, trying to just get some sense around the interest rate sensitivity. So Andrew, obviously looked at the sustainability of the deposit side. I just want to quickly touch on the interest rate hedges that you have. It looks like at the half year, you had 66% of the Australian capital replicating portfolio hedged that’s increased to 74% to the bank overall now in terms of your Slide 54 and bringing that back to Slide 104. It looks like it’s more exposed to the longer end rates than it is on the short-end rates. Just wanted to get a sense of what we should read into this about your views on the path of interest rates? And also if you could just comment on the interest rate sensitivity around that. That’s my first question.
Shayne Elliott
Yeah. So John, really quickly, you’re right. Our hedged position has increased on our replicated deposit on our ITO [ph] portfolio. It’s probably closer to about 80% hedged now and 20% unhedged. This is really not so much about a view on rates, but this is really to provide stability in terms of earnings and ensuring that we are managing our book appropriately from that standpoint.
And if you look at Slide 54 of the investor deck, John, it sort of gives you the mathematical outcome for where we are heading in terms of the overall portfolio. I’m sure you’ve looked at it already, John, but just to summarize it for others.
There is a – there’s obviously a significant positive tailwind, if you like, in terms of the rate rises on that portfolio. At this point, the overall balance has remained stable, as I mentioned. And of course, that could change as mix changes and – and as volume changes over the course of the next few years. But purely mathematically speaking, I said it’s over the 3-year period, it’s about a 35 basis point positive – 34 basis point positive tailwind and we just continue to manage that as best as we can in terms of providing stability of earnings rather than having a high level of volatility on our capital and replicated portfolio.
Q – Unidentified Analyst
Okay. And fine, just to summarize there, obviously, would that assume or could we assume banks definitely going to be or will be a lot less rate sensitive arguably into the first 6 months of the year than what you’ve seen over the last 6 months?
Shayne Elliott
You mean deposits would be less rate sensitive. Is that what you’re saying?
Q – Unidentified Analyst
No, not the deposit, the actual hedges that you have now, so your net free funds, right? You won’t be as exposed to the rate increases that you have been over the last 6 months on a look-forward basis?
Shayne Elliott
Yes. So I mean, look, I think that’s true. But – so there’s going to be two aspects to this, right? One is just the fact that we have – the short-term unhedged piece, which, of course, will continue to benefit has upside as rate increases. On the other hand, we’ll have rollover – we’ll have tranches maturing on the longer-term hedge positions, which are going to be reinvested at higher rates. So yes, I mean, I think there will be pros and cons. But overall, I think there is still a net benefit of rising rates to the overall portfolio.
Q – Unidentified Analyst
Thanks so much.
Operator
The next question comes from Jonathan Mott with Barrenjoey. Please go ahead.
Jonathan Mott
Thank you. I’ve got a question on Slide 10, which is on the commercial business. A great disclosure there and really good leverage coming through with the risk adjusted margins at close to it was 140 basis points in the half. I wanted just to ask a question about that 25% of group revenue coming through from these customers.
So a huge return on equity coming through from this customer group wouldn’t that imply that the rest of the customers we generate the other 75% of group revenue, we’ll be generating well below their cost of capital. And as the commercial bank customers, which are really subsidizing the rest of the group?
Shayne Elliott
Yes, so not quite, but your point is valid. And I think we’ve talked about this to having this comes a long time ago, not with you. But you’re right that when you look at the average ROE, you say, hey, on average, the group’s 10.5, you know, this business is well above that. So clearly, some are well blot. So that’s absolutely the case.
Now when we break down like when we talk about that uplift at sort of the 1.5 uplift there, the $1.5 billion of that uplift at sort of the 1.5% uplift there, the $1.5 billion of revenue, what is it? The vast bulk of that is home loans. And I know that with our peers, report this slightly differently. So some call that have actually reported as commercial bank or business banking revenue and some call it retail. So that home loan revenue is sitting in Mileage [ph] business and over the year next, pretty decent ROEs, but actually finally enough.
In commercial, the commercial bank without the commercial – the non-retail part of the commercial bank is higher return than the home loan pace. Home loans, call it, double-digit, mid-teens sort of stuff, the commercial bank in and of itself is higher. Now where are the other drags. You know that institutional – institutional is lower and certainly certain parts of it. I mean, institutional, we’ve got into a much better shape and that’s above sort of at or about cost of capital and doing better and get some real benefits from the new capital changes, but it’s usually institutional at the lower end and they’re anchoring around cost of capital, slightly better commercial stand-alone better, New Zealand and retail somewhere in the middle.
Farhan Faruqui
Yes. If I can just add to that. I think maybe another way of looking at it, John, is that rather than looking at it as businesses look at it as customers. And if you look at our commercial bank customers, you’re right, they generate high ROEs, particularly when those commercial customers are also home loan borrowers. So from that perspective, you’re right. Retail customers are also high returning on a home loan basis.
And to be fair to my good friend, Mark Whelan, there is a very large institutional customer franchise that we have, which actually does produce strong returns, but is diluted by the fact that they are more risk weight heavy. But post APRA capital reforms in Jan 23, there will be a net beneficiary of improved risk-weighted outcome. So their returns should go up as well. So we’re starting to see over time is low but fairly steady convergence occurring, but it will take some time to get there.
Jonathan Mott
And just as a follow-up question. It actually comes from some of the things you said at the first half result. I think there was a comment from you, Shayne, that was quite just as your margin is my opportunity. And behind you also talked about when you have higher rates, margin goes up for tender costs and eventually your bad debts go up.
Do you still believe that? Are you still – even though rates have gone up a lot further than anyone expected 6 to 9 months ago that we’re in a really positive environment now for margins. But we’re going to see a peak and then eventually, especially, we need to see some of these very, very attractive risk-adjusted margins. are going to get competitor away. So this is peak for margin…
Shayne Elliott
I don’t know if it’s the peak. I don’t – I’m not going to call it as a peak, because I don’t know that we’re there yet. But thematically, yes, I agree with that general outlook. Yes, these are attractive businesses. Yes, when we see this rate cycle move, it changes the relative attractiveness of these various businesses and capital competition will flow over time towards the more attractive parts of the business.
Now that is – as you know, they can’t – that doesn’t happen overnight. That takes time to do, but one would imagine that yes, competition will start to bite. I just – our view is that we just – we’re not the – that doesn’t mean there isn’t competition. We know in home loans remains incredibly competitive. We’re starting to see competition come through in deposits, although it’s early days, because the system is still on a relative basis, the system is still really, really liquid, yeah.
But thematically, we have that view. The question is when. And our view is that certainly for the first half, we don’t see that being material, a material shift with and Farhan used the words, we think the first half is going to be – environment is going to be supportive for margins, and we expect any change from here to be more modest. We’re not sure we’re going to see the same sort of significant steps that we’ve seen in this half, but we’re certainly not calling a pivot to – back to the other way. And people will have their own views. We’ll have to wait and see what happens over the half. But I think we’re pretty intact for a period of time.
I think the last point, and we did talk about it at the half about when does it hit the – when does the credit cycle or when does it start having claims through the provision book? I mean the reality is try as we might, that is really hard to see for now. And part of the reason for that is that a lot of the risks that we’re seeing in the system, and I’m talking globally here, isn’t sitting on bank balance sheets,. isn’t sitting on bank balance sheets. It’s sitting somewhere else.
Now there is risk in the system. So you’re seeing risks sitting in like buying now pay later providers or nonbank financials or other sort of leveraged parts of the financial system, but not directly sitting in the bank.
So I think and we looked at our book, and I talked – I gave you some examples in there about why we think our customers are in a healthy position. That would suggest that even when things get a bit harder and of course, there are going to be some who struggle with cost of living and interest rate rises and all of those things, and we’ll step in and help them as we can. Even then, it’s hard to really see a material head-on provisions over the next sort of 12 months or in FY ’23.
Farhan Faruqui
Yes. And I think just to add, I think Shayne has responded to the credit part and the fact that we are kind of heading in the same direction, John, as we had indicated to you, which is we get the revenue benefit and then we get the expense impact, which we’ve just talked about earlier as well in my notes.
But I think the other thing, and Shayne, I’ve talked about this a great deal over the last few days that while it’s certainly a very unusual feeling that margins are expanding because we have a 12-year history of margins consistently compressing, and we were looking at this chart where, frankly, there’s only 2 periods in the last 10 years where in a given half, margins have expanded. One was in – during COVID and one is now.
The reality is that our margins still remain sort of below sort of where we were in 2018 and ’17, ’18. So it’s not that the margin expansion is – whether it’s over or not is a very difficult call to make in terms of what the timing is of that event occurring. But it’s not – we’re not out of line in terms of where margins were pre-COVID.
Shayne Elliott
And again, without prolonged the discussion, but – and at the end of the day, while it’s a really great see really proud of the results here. The ROE is 10.5%. , not 15, 10. So even with this, and so that’s for all sorts of reasons to do with capital and other bits and pieces. So I think there’s some real – I think the environment is still supportive for the banks to benefit from the current cycle for a period of time.
Jonathan Mott
Thank you.
Shayne Elliott
Thanks, Jonathan.
Operator
Your next question comes from Victor German with Macquarie. Please go ahead.
Victor German
Good morning and thank you. I had also two questions. One on noninterest income a follow-up on expenses. If I look at your noninterest income, half-on-half excluding sort of one-off noise in the first half, it’s been pretty strong noninterest income performance. And as you’ve alluded, you will get, as we go into next year, additional income from fees from the package change that you’ve done earlier in the year.
I’d be interested if you could maybe give us a little bit more color what drove noninterest income in this half? How sustainable is? And would it be right to assume that noninterest income should increase in 2023 ex markets that’s my first question?
Shayne Elliott
Yes. Why don’t we do that one and we’ll come back do one at a time, so it’s fresh in – so I think that was on Page 28, the other operating you want to talk a…
Farhan Faruqui
Sure. And Victor, I referred to it a little bit earlier. So the large part of the change or the delta has come in Australia retail, which is more than – is more seasonal, if you like, on card fees, et cetera. And that is going to continue to repeat next year in the same sort of pattern. But as you mentioned, the break fee – the fact that we’ve been impacted by break-free in the full year, there will be a reversal to that as we go into next year. So that’s a positive.
I think on institutional, we’ve seen heightened corporate finance activity, and we think that’s likely to continue, and it’s going to be sustainable into next year. On fee income, particularly around M&A activity, et cetera, or driven by M&A activity. And I think that’s going to be positive and sustainable.
But I also think that we talk about our payments and cash management business and sort of the mine goes immediately to cash rates going up and deposits benefiting, but it’s actually a great deal of transaction flows, which benefit from fee uplift as well. And those are beginning – continuing to increase. And therefore, we think that, that’s going to be a sustainable positive as well going into next year. So overall, I would say that it has positive momentum going into ’23 and much of the changes that have occurred this half are likely to continue.
Shayne Elliott
I agree. I think it’s a really good observation, Victor, because you can see the Instalift [ph] about $40 million in the half. And normally, that would be largely driven by foreign exchange, and it isn’t this time, it’s about 3 of it. So it is, again, a strong underlying volume flow. I mean, I think we disclosed it somewhere. If you look at the payment volume flows up 85%, that’s massive. And fees on those things are small, but when you’re getting that sort of volume uplift because of the kind of work we’re doing in payments and cash management, that’s why we’re talking about this infrastructure provision, these platforms that we provide that is enduring. That is very, very enduring kind of revenue, and I think there.
And then to Farhan’s point, corporate finance volumes have been elevated. That’s a bit lumpier and harder to say that’s sustainable. That’s a bit hard to know. But I think in general, I mean this is an outcome of the strategy we have to move institutional to be a far more what we would call a sort of platform infrastructure services business than a lending and a NIM driven one. So I think there is a sustainable uplift for that, but it’s not going to be a straight line. What was your second question, Victor.
Victor German
Thank you. So the second question, and I appreciate you’ve given us guidance on costs. One of the pretty ongoing features of results and for the sector, I guess, is you do have restructuring charges that are treated sort of outside of that guidance. I mean you talked about looking at positive sort of jaws,
I think given the trends that we’re seeing, be very disappointing if your revenue growth is under 5%, 6%, hopefully, it’s quite a lot more than that. Is this sort of the time for you to perhaps do a little bit more with respect to restructuring to better position – bank for ’24, ’25 – opportunity to invest more?
Shayne Elliott
Yes. I mean I think you’re right. I mean look, yes, and we – but as you know, it’s not the sort of thing you just decide to do today. I mean – but your broader question strategically, we are very manually oriented still system, a bank. We’ve still – even despite all the simplification we’ve done despite all the right things of derisking and simplifying the bank, there’s still a lot more to do when we look at some of our core productivity metrics. So yes, we should be looking at how we continue to simplify the business.
Now without banging on about it, that’s why we invest in things like ANZ Plus, which are essentially technology-driven, more or less 100% automated, very small sort of a very, very high operating leverage, if you will. So yes, we’ve got to do more.
You will have seen recently, I announced some changes to my executive team in terms of broadening Jared’s accountability and bringing Astron [ph] up to Exco. And those moves without those are precisely designed to strengthen our resolve around productivity and making sure that we structure the bank appropriately for the long term because I think this inflationary period where it’s just exposing some of that risk that we have in the business. And it’s sort of just flushes out the need to do even better.
And by the way, I think we’ve done a really good job on productivity. I know maybe Richard Wiles disagrees. But I think was on a really good job in terms of simplifying and getting better at our BAU cost. On one hand, you’d say, well, you clearly start with all the easy stuff. So it gets harder, that’s true. But on the other hand, we’re getting better at it. I mean, I look at our – we were sharing it with our board this week. You look at the kind of tools we have, the approach, the delivery excellence that we are building as a capability can certainly do more, but we’re also getting better at it.
Victor German
Okay. Makes a lot of sense.
Operator
The next question comes from Brian Johnson with Jefferies. Please go ahead.
Brian Johnson
Good morning and thank you for the opportunity. I have some questions. Two questions twice a year equals 4, if I could ask a fifth one would be about the massive divergence between the APRA stats on household deposits and home loans, but we won’t ask about that. So the two questions, I suppose I’d like this, first of all, is that when we have a look at the core equity Tier 1, the pro forma number ex Suncorp is 11.1 million but that’s actually a come dividend core equity Q1.
And when I have a look at the narrative from some of your peers, it’s basically that the number should never dip below 11%, which I also think is what APRA have said. We know that you’re not taking the Suncorp kind of one-off costs upfront, which means it just looks – I would have thought a little bit light. So I just wondered if you could reconcile the pro forma number ex deal [ph] with the 11% minimum that some of your peers have spoken to, given that it doesn’t include the one-off costs?
Shayne Elliott
Yes. No, thanks, Brian, for that question, and it’s a great question. The pro forma number for Suncorp of 11.1% that’s on that Slide 37 does not account – and you’re right, by the way, sorry, let me step back. You are right that APRA requirement is going forward post APRA capital reforms will be – will require banks to sort of operate between 11% to 11.5%, if you like, so that the low point on a post-dividend basis is 11% and pre-dividend, you’ll probably be closer to 11.5% and mid-cycle somewhere in the middle.
But if – but the 11.1% is not pro forma on this page for the benefit that we will get from RWA decreases on the ratio. So if you actually adjust that 11.1% for the increase that will come as a result of Basel IV, there’s probably about I would say, close to about 75 basis point increase. So if you pro forma for Suncorp and for Basel IV, we are probably closer to about 11.8 or 11.85, but neutral overall, if you like from a capital point of view. Does that make sense, Brian?
Brian Johnson
Yes. Okay. Yes. So it’s basically it’s got the Basel IV capital release that comes through in the institutional…
Shayne Elliott
Correct…
Brian Johnson
Okay. On to the next one, which is that when we have a look at your provisioning and it’s fantastic, you’ve given a lot of slides. But I suppose what I wanted to flag to you is what causes loan losses, I think falling house prices, it’s false prices with unemployment?
Shayne Elliott
Sure.
Brian Johnson
And when we have a lease case, thank you very much for disclosing it. That’s a big improvement. But I would flag to you when we have a look at Com bank [ph] Com bank have got about the same decline in house prices, 25%, 30%, but an assumed unemployment rate was 9.3% with a weighting of 42.5.
Now we’ve got 9.8% unemployment weighting of 40%. ANZ unemployment of 6.4%. When we actually have a look at that Slide 34, the other guys seem to have their downside scenarios seem to be much closer to your severe downside scenario. Why shouldn’t we be moderately alarmed about that?
Shayne Elliott
Okay. I think we’ll hand over to Kevin, our Chief Risk Officer, so you can just talk through that.
Kevin Corbally
Brian, thanks for the question. Look, a couple of things. I won’t comment on those peers who haven’t produced the results for this year as yet. But what I’d say is it’s important to look at where are we today in the cycle. We’ve got customers today – so we’ve got an unemployment assumption in – or unemployment today, I should say, a 3.5% in the economy.
We’ve got most of our customers telling us that actually they’re struggling to find people to work for them. What we’ve done in our downside because we have a downside and a severe – most of the others – some of the others have just one scenario, we’ll call it the downside that you referred to.
When you come up with a weighted average number of our downside and severe, it’s about seven and three quarter percent. We think from where we are today at unemployment of 3.5%, if we get to seven and three quarter percent that’s a pretty – there’s a lot that will have happened in that period of time. That is quite a severe downside outcome.
Our job is to determine an outcome that we think is prudent and appropriate. And based on our view of the future, we think seven and three quarter on a blended basis is a reasonable assumption in terms of future unemployment.
Shayne Elliott
And I think the other thing, and I don’t know, Brian, you probably will, but it’s also those – that’s a really important input, but also the – let’s – we’ve only weighted our base case at 45% probably. So we’ve got a 55% probability weighting that is worse than that. And our severe case, we’ve actually increased the weighting on that. So I think, as you know, there’s a lot that go into the…
Farhan Faruqui
And as is obvious mathematically from that statement, we have 0% on the rate on the upside.
Kevin Corbally
Yes, can I just add one other thing as well. I think modeling and outcome is one thing. What we’ve also done is applied some management judgment Shayne alluded to in terms of the scenario weights, but also some additional overlays on top of that. So in terms of the modeled outcome, we’ve added an extra $727 million in terms of management judgment on top of that for what – for a whole range of different things that could happen.
Shayne Elliott
Kevin, the fact is that you’re provisioning is probably based on what we can see is not as strong as CBA and NABs. Would you just grew with that statement?
Kevin Corbally
I don’t know. I can’t comment on their books, Brian, and the logic behind their analysis. What I’d say is – if I look at current unemployment at 3.5 for us to assume that in terms of determining an appropriate and prudent number that seven and three quarters is – we think that’s quite a significant uplift from where we are today and is appropriate for the book that we’ve got.
Shayne Elliott
And [indiscernible] after market share steps…
Brian Johnson
Book of market share basically up until August [indiscernible]
Shayne Elliott
I don’t know what you’re referring to and what’s not lined up with the commentary, Brian.
Brian Johnson
You’re still seeing well, you’re still losing even in the month of August, you’re still losing a lot of basically housing market?
Shayne Elliott
So what we say – okay, fair enough. Look, so obviously, that’s the latest. We’ll get the APRA data, I think, tomorrow or whatever. I mean you’ve seen our growth. We’ve told you what it is. The stats for September. Our growth in our housing book was up $6 billion, an annualized basis, 6.8% or 6.9%, and I mean we’ll find out whether that’s at system or not and whether that’s growing share or not, that we’ll find out in the next sort of couple of days. We’re pretty confident that’s at about system, if not a little ahead. So that’s that.
On deposits, I’m not so sure deposits is always a market share game. As we know, there’s lots of things moving around here. We’ve also got to manage margins, right? And I think what we’re trying to show here in our Iteris [ph] you can buy share. None of us solely we all understand that, but it’s got to be sustainable share and generate decent margins.
And so yes, we’ve had to prove we’re back in the game in terms of capacity. We’ve shown that that we’ve done that. I’d love to be able to – looking forward to see the September data. Clearly, looking forward to see the October data as well. We’re confident we’re back with the capacity. We’re confident we have our pricing right to generate the right balance between growth and also about generating returns for shareholders. Thanks, Brian.
Brian Johnson
It’s just an 11 basis point household deposit market share is pretty chunky. Thank you, Shayne.
Shayne Elliott
Thank you.
Operator
Next question comes from Brendan Sproules with Citi. Please go ahead.
Brendan Sproules
Hi, good morning. A couple of questions. My first question is on Slide 29, you talk about the market income. I mean I just wanted to get a feel of where you see the normalized level of this the second half looks like the run rate is at about $1.4 billion to $1.5 billion we previously talked to this business to be sort of $1.9 billion to $2 billion revenue?
Farhan Faruqui
Yeah. So I think – so our view is it’s still – the run rate on that business is still in that $1.9 billion to $2 billion. And actually, I produced this chart yesterday for the Board. If you go back over the last, pick a number 5 years and you’re just about a monthly, you look at this on a month basis, the revenue, including the mix stream trading and customer franchise.
Yes, the second half has been a little bit or the year has been a little bit lower than normal, but actually there’s no discernible trend in there. It’s not like there’s been a decline. That number, we’re still highly confident of that we should think about the business, call it a $2 billion business or there or thereabouts. We’re highly confident in that’s the case and we resource it appropriately.
I think what we saw in this particular year was just – no, excuse me, but there were four – and we put them on the slide there. There are four pretty extreme conditions that happen there. And what’s interesting about that – those things were really where the weakness was, is really in our balance sheet trading or balance sheet management, right? And that is a relatively – it’s an important part of the business. But our foreign exchange business continued to grow.
Our underlying customer franchise continue to go. And as we said, if you take out those four months, and I know it’s always selective to do those things. But if you just sort of take those four out of extreme cases where markets, particularly in credit markets dried up, the business was still running at that $160 million a month revenue on average, which again tells you you’re in that sort of $2 billion range.
Kevin Corbally
Yes. And I would just add also, Brandon, just for – because our peers are going to release results over the next week or so. It’s important to note that the balance sheet business sits in markets and is reported in markets, and that’s the one that Shayne pointed out, has been impacted most, whereas in some of our other peers, it sits in treasury. So when you look at market comparisons, I would just request for you to keep that in mind.
Brendan Sproules
And my second question is just on costs, particularly the investment spend. I just wanted to get a feel around the type of investment spend levels that you need into the medium term. Take 5% growth on the FY ’22. We’re kind of going to be around that $2.3 billion mark.
Is this something because as you mentioned to another question saying that there’s a lot of manual process in your business, and you’re going to have to maintain saying that there’s a lot of manual process in your business, and you’re going to have to maintain these level of investments where appears that are much less than this. Is that the way we should be thinking about it?
Shayne Elliott
I don’t know that our peers are much less than that. I think the – I don’t know that, that’s a fair some. But no, I – so let’s step back and look at – so we are not suggesting that the investments late in and of itself will continue to inflate, right? That assumes a steady state. The reality is that slate by definition has a lot of discretionary thing – there’s a program – LIBOR re-benchmarking, capital reform for APRA. These things come in to the slate because we need to do them, then they fall of BS11, right?
So there’s a demand issue in question of like what the number — what are the number of projects that out have within the slate? That’s the single biggest driver of whether it’s a 2 billion or 1.6 billion or 2.1 or whatever it might be, it’s just what’s the nature of the work that you’re doing. What we’re suggesting and what we’ve been talking about is we have had a bit of lumpiness in there. We’ve got – we had a significant spend in Basel 11 [ph]. And of course, we’ve made some proactive decisions to invest in things like ANZ Plus.
So – but for Farhan, in talking through and that’s I would make one other comment on that, Brendan, because it’s a good question. We also – something like Plus is an interesting example. So we invest to build plus, but now we’re running plus right? And so there’s still some investments we’re going to roll out digital home and that’s an investment. But we’re running it. There’s a run cost. So the cost of the sales force implementation that we have in Plus, we’re now using and so that cost is now sort of more of a run cost and investment.
So sometimes having the definitions isn’t helpful and can be a little bit misleading. It’s part of the reason for harm quite right, is I guess we move more to that sort of total cost view. But do you – I think the question is a fair one in terms of the outlook. We’re not suggesting that we are spending $2.3 billion on the slate in this year.
Farhan Faruqui
Yes. No, I think that’s right, Shayne, I don’t think, Brendan, that we should extrapolate that if we have grown by $200 million to $300 million every year for the last couple of years, we’ll continue to do that going forward.
As I mentioned, hopefully, and I touch wood, as I speak, some of the regulatory spend will moderate, particularly with BS 11 behind us or largely behind us. And therefore, we can allocate more of our funding to our important growth initiatives.
The – our sense is that depending on where we end up with Regan [ph] compliance, we should start to see this sort of peaking as we go into next year and the year after that and sort of or moderating, if you like, over the course of the next 2 years, assuming there aren’t any new regulatory and compliance obligations that we have to meet.
So that’s sort of our thinking. But from an OpEx standpoint, on the flip side of that, Brendan, the reality is that we are definitely expensing more. We ended 87% this year. It could be in the ’90s, early ’90s next year. So you’ll have the benefits of some moderation on spend, but perhaps a higher impact or offsetting impact, if you like, on OpEx as well. So it’s sort of there or thereabouts if you look at it for next year.
Brendan Sproules
Thank you.
Operator
Next question comes from Andrew Triggs with JPMorgan. Please go ahead.
Andrew Triggs
Thank you, good morning. Shayne, my first question perhaps on the margin. Since you first presented the outlook slide on rate leverage in the first half result. Maybe talk to – which did look like lower rate leverage than peers given the tilt your deposit book to institutional. Can you talk to which deposit franchises have provided a lot more rate leverage than you might have first anticipated when you set out those numbers?
Shayne Elliott
Yeah. So I’ll talk not so much mathematically, but just – so the commercial business, right? I mean not only is the commercial bank, for every dollar, we lean we’ve got $2 of deposits or whichever way you want to think about it. So it’s massive. That business has been much more robust in terms of liquidity than we would have thought, right?
So we know that – and again, we’re talking in averages here or in aggregate. We know that the sector was a significant beneficiary through COVIS of government support and that a lot of those businesses just put that money away for a rainy day. And so volumes grew much stronger there than we had thought.
By the way, they’re still growing. I mean, even as of now, our small business franchise deposits are still high and growing, even though the rate of growth has clearly slowed, and we wouldn’t expect that to continue. So that’s been stronger.
And as a result of that, going back to one of the earlier questions, there’s sort of less competition, if you will, less pricing pressure on that because of just the high levels of liquidity in general. So that is definitely performed the best. And the second area that has performed better than we would have thought is our institutional international side just because of the U.S. dollar what’s happened there. We’ve got a big U.S. dollar franchise. Let’s not forget we’re still one of the few AA rated banks in that business and our payments and cash management business, and that counts for a lot, particularly with the quality of customers that we attract.
And so we’ve had more leverage there than we had anticipated. I’m obviously very competitive, very sophisticated customers, et cetera, and price sensitive, but we’ve had a little bit more upside there than we had imagined. Does that answer your question, Andrew?
Andrew Triggs
Yes, it does, Thank you. And then perhaps just a really quick clarification for the second question. I think, Farhan, you said 11.8% pro forma post Suncorp post APRA capital change CET1 ratio. I just clarify, does that include the headwind from New Zealand RWA inflation from – from the IRB scale and the output floor?
Farhan Faruqui
Yes, yes, it does.
Andrew Triggs
Thank you.
Farhan Faruqui
Thanks, Andrew.
Operator
Next question comes from Ed Henning with CLSA. Please go ahead.
Ed Henning
Thanks for taking my questions. Just firstly, another one on deposits. You’ve talked today about modest shifts in the Australian book. Can you just talk about the New Zealand and Instabook – if you look at Slide on New Zealand, you saw some switching there. Now did that accelerate during the period to term deposits? And then just on the institutional side, you’ve seen strong growth there. Can you just talk about the outlook you’re seeing on mix? That’s the first question, please.
Shayne Elliott
Sure. So I’ll talk about New Zealand, if you want to – sorry, it’s on 51. Okay, sorry. So — good question. So one of the benefits we have of having this diversified portfolio as we sort of get somewhat further ahead than others. And that’s really kind of interesting insights you get about consumer behavior and competition, all those bits and pieces. And New Zealand is the most ahead. It started 7 months earlier than Australia in terms of rising rates.
It started probably in about the same position as Australia in terms of the health of our customer base and all of that sort of stuff. But maybe not surprising, but New Zealand has had that same experience. We actually liquidity levels have remained remarkably strong and customers have continued to be able to keep their savings really high, both retail and small business.
That is only just – and I think I mentioned this before. It’s only now we’re really starting to see that rates have risen to a level that they are sufficiently attractive to change customer behavior towards term away from that core. But it’s a relatively recent phenomenon in New Zealand. It is happening. But – and you would expect that to be the case now that rates are a little bit higher and a little bit more attractive, and that is continuing it. So New Zealand, yes, you would expect to see that continue to shift towards term.
Interestingly, we were literally in our board meeting yesterday discussing with Antonio, who runs New Zealand. However, we have a really strong franchise in New Zealand, as you know, number one bank, 31% share, all those seems great customer base. We are not – we don’t have to be the very sharpest on pricing. And so we’re not– we’re not leading on pricing. We’ve been fair and paying for in the market, but we don’t have to lead. And what we’re seeing is we are seeing some others. Some of the competitors really driving price competition. I would imagine that reflects the liquidity balance with within their books.
Farhan Faruqui
Yes. I think just on institutional, we’ve already seen a shift, if you like, Ed, on move to term deposits. As you can imagine, corporates, both in Australia and New Zealand, but also internationally are most sensitive to rate hikes and they shift their behavior much faster. As a result, as you can look at — when you look at that Slide 51, you’ve seen the term deposits going up substantially on institutional. I think that trend is likely to continue.
But the good news is, which sort of shows up in the payments and cash management part of that chart is that we’re continuing to replace the move to term deposits into our operational cash flow accounts which is really what I meant when I said transactional accounts are increasing, and those are the ones that are really important in terms of driving overall margin and revenue outcome.
So I feel pretty strongly about how we’ve managed that institutional pretty strongly about how we’ve managed that institutional PCM business because, while behavior is shifting fast, we are keeping pace in terms of replacing high-quality deposits as well.
Shayne Elliott
And it’s probably worth just again – and we talk about another time yet in others, but that payments and cash management flow. So that’s transactional nature. That’s when we are the core bank of our customers, and we’re processing flow, and this is the amount that generally, the way that we pay for those is on a contractual basis. So those are set as reasonably long tenured contracts.
You sign up for a year or two. We agree a pricing structure. So it’s not the sort of thing where pricing is moving every day relative. It’s not – it’s not like in the markets deposit business or even, frankly, in other parts of the franchise. So there’s more stability in the pricing there. Obviously, it moves. Obviously, there are built in there some repricing opportunities and as customers would expect, but it’s a very, very attractive business and part of the reason that we’ve been pushing investment even further into payments and cash management.
Farhan Faruqui
And I think it’s important – sorry, I apologize that I’m probably belaboring the point, and Shayne has covered it already. But I think it’s important that when we think about the payments and cash management business and institutional, it’s not taking deposits and pricing it to get an outcome. We’re actually providing a service because those operational cash flows are day-to-day part of the running of the businesses of those companies. And that effectively means that they tend to stay with us because we’re providing that broader service. So it is – these are not – I mean – and I think the fact that we have been keeping that balance stable to up is actually a great testament to our – the investments that we’ve made in that business.
Ed Henning
Thanks for that. And that was good insight on kind of the deposit side, you can see it holding up, you’re seeing some switching. Can you just also touch on the wholesale funding requirement if you look at current rates of where they are and if you look at your profile of rolling off wholesale funds, can you give us any insight into the headwind you’ll see into ’23 for that, please?’
Farhan Faruqui
Yes. I mean, I touched on this a little bit earlier, Ed, as well tha0t there is – the costs are increasing. There’s no question about it. The wholesale funding market is getting more expensive. But having said that, we are not – given the fact that our TFF refinancing load is reasonably limited. I mean we are we have a $20 billion TFF balance of which 12 actually matures in the course of FY ’23. So it’s much, much more manageable, particularly relative to some of our peers. We don’t think that the wholesale funding headwind is as strong for us. And therefore, we expect that we’re just going to return to what has been sort of normal for us pre-COVID, which is around a $25 billion to $30 billion target in terms of wholesale funding.
Also the other point which is important because sometimes there is an overestimation of the cost of replacing the TFF. The fact is that the TFF even today is hedged, so when – so as OCR increases, the cost is increasing. So we’re not starting from zero when we go to refinance that next year. The only difference and the delta when you refinance is going to be the credit spread, not the actual base cost.
Ed Henning
Okay. That’s very helpful. Thank you,
Farhan Faruqui
Thanks, Ed.
Operator
Your next question comes from Karl Katowith [ph] with Jarden. Please go ahead.
Q – Unidentified Analyst
Good morning. Thanks for the time to ask a few questions. Firstly, I just wanted to ask around on Slide 126, you have a chart there showing the share of borrowers who borrowed at capacity or near to capacity. I was just wondering if you could give us any detail around what that definition of near capacity, given based on ANZ interest rate forecast on capacity is going to fall by 30% to 40%. So I wouldn’t suggest that probably quite a few more borrowers may be impacted that 7%?
Shayne Elliott
Yes. Good question, Carl. So Karl, what that assumes is that the borrower when they took the loan at, we add a 3% buffer. So if you came to us today, we’d had a 3% buffer on to whatever rate you’re paying be that fixed or even variable. And in the case of a fixed rate, it’s on the variable rate that you’re paying at that point in time or you would have paid.
And in addition, what we also then says, do they have less than $50 per month of uncommitted monthly income. That’s effectively at capacity. So we add the interest rate buffer and we also assume that they have less than $50 of EMI.
Q – Unidentified Analyst
And what about that minimal capacity that 7%, would that be within 10% of borrowing capacity? Or is there any kind of rough figure you can give us to what that means?
Shayne Elliott
So generally, that is sort of between – they’ve got exactly the same 3% buffer, plus you’re looking at somewhere in the order of $100 per month of EMI.
Q – Unidentified Analyst
Thanks, that’s right. And my second question, just around the mortgage growth. Slide 7, , as you kind of discussed earlier, I showed you had a pretty material step-up in mortgage growth in the month of September, getting back to 7% annualized after the previous 2 months being around 2%. At the same time, you saw the NIM drag from mortgage competition increasing to 5 bps in the second half versus around 1 to 2 bps for the prior couple of halves. That suggests that competition is pretty material and stepped up and the prices are potentially playing a role in that driving those volumes.
Can you kind of, I guess, talk to talk to that is how are you coming back into the market quite aggressively on pricing? And given the rising rate environment, falling housing, et cetera, it’s now the time that you want to be, I guess, growing aggressively with price/
Shayne Elliott
Yes. That’s a fair question. I can’t remember sitting, I’ve been doing this for a long time. I can’t remember ever sitting here and saying the home loan market is not competitive at the moment. The home loan market is always competitive. And the nature of the competition shifts and who’s leading the competition changes and the nature, the moment the fashion, if you will, is for cash back seems to be the flavor of the day and what’s leading.
You have to be in the game on price, but we know and you know that actually roll price is important, of course, it has to be competitive. In and of itself, it’s not enough. And actually one of the big drivers is the confidence in getting a yes and getting a yes quickly. And that’s why building the capacity has been so important.
So I would say the other thing here, just remember, at ANZ, a little over half of our flow has traditionally been broker-driven. And price is important there, but actually the sort of service proposition is really important. And what that means is brokers need to know, again, confidence that if I submit this application I’m going to get a yes, and I’m going to get it within a certain time frame. And so that’s why we’ve invested so heavily and talked about on the slide, building capacity.
So yes, we’re in the mix on price. We are absolutely not the price leader, either at headline levels or with discounts and cash backs, absolutely not, but we are in the mix on price and we’re in the mix on capacity. And I think importantly, just to add to that, I mean, we put in here on these generally in the slides, a lot of focus on the risk-adjusted margins, a risk-adjusted NIM for a reason, it’s actually what we focus on pretty heavily in making decisions around growth and appropriate investment.
Q – Unidentified Analyst
Yes, that’s make sense.
Shayne Elliott
Thank you.
Operator
Your next question comes from Nathan Lead with Morgans. Please go ahead.
Nathan Lead
Thanks for the presentation. Just a first question for me. Book equity and I suppose, and we benefited from a fairly large item that went through the other comprehensive income and didn’t touch the P&L. So I suppose, could you just talk us through what that was and whether you think that will reverse over time?
Shayne Elliott
I’m not sure what we’re talking about here – yeah, I’m not quite sure. Sorry, Nathan, could you just point me to which slide you’re looking at?
Nathan Lead
Yes, it went through – in the slides in the P&L. So it’s impacting, obviously, the balance sheet– I’m sorry, so we went through the reserves, but looks of it. It’s about a $3-odd billion number.
Shayne Elliott
Why don’t you ask your second question? And I will look to get somebody to try and answer that one for you. Yeah, – maybe Adrian or Richard – has Sorry, sorry, nothing go ahead.
Nathan Lead
Replicating portfolio. So obviously, you’ve got the 3- to 5-year investment term. Just wondering when does the earnings rate on that portfolio really get the kicker from, I suppose, those low rates that came through over the last 2019 to ’21, when does the portfolio really get a kicker from those dropping out? Did you do anything clever to restructure the portfolio? Or is it just something where we should just add sort of 3 to 5 years on to that timing of those low rates to see when the higher rates come through?
Shayne Elliott
This is on the replicated portfolio. I don’t think it’s about doing something clever as much as it is to make sure that we continue to hedge against long-term rates, and that’s something that obviously we’ve been doing. We just – we keep changing the amount that we’re hedging, Nathan, as well as the tenor of hedge based on what the interest rate outlook is.
And so the reality is that if we hedged – let’s say, if we hedged last year at, say, 1% and then that tranche matures in 12 months and the rate has gone up to 2.5%, then effectively, you’re reinvesting at 2.5%, and then that’s when the benefit starts to crystallize. So when we talk about the 3-year view, it’s basically – what we are basically saying is that there’s about $3 billion to $3.5 billion that will continue to flow into our P&L as those tranches unwind, and we reinvest them at higher rates. So that’s sort of the value that comes through the replicating portfolio.
Just on your question on OCI. I’m sorry, I didn’t realize the number you were looking at. But basically, that, in fact, relates back to the talk because that’s the mark-to-market on our ITO [ph] hedges and the liquidity book. And that, of course, starts to unwind over the course of the next 3 years as those tranches mature as well. So this is – that has what has impacted the IRRBB from a capital standpoint that you’ve seen, particularly in the third quarter. And again, as I said, it’s mark-to-market and it will continue to unbind over the course of the next 3 years.
Nathan Lead
Okay, great. Thank you.
Jill Campbell
Thanks, Nathan. And we can – the team and I’ll come back to you this afternoon to go into a little bit more detail on that one. It can be a bit complicated if we get that. So that was the last question. And with that, we thank you, Shayne, I’ll just hand…
Shayne Elliott
Just thank you very much for the questions, and thanks for the engagement today.
Jill Campbell
Thanks, everybody, and we’re around all afternoon if you do have more questions. Thank you.
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