Bank of Queensland Stock

Good morning, and welcome to today's briefing. Following the opening presentations, we will move to a question-and-answer session. [Operator Instructions]

I will now hand over to the Bank of Queensland team.

Good morning, and welcome to BOQ's financial results presentation for the full year ended 31st of August 2026. My name is Jessica Smith, and I'm the General Manager of Investor Relations and Corporate Affairs at BOQ. On behalf of the management team, I would like to acknowledge the traditional custodians of the land we are meeting on today, the Gadigal people of the Eora Nation. We pay our respects to Elders past and present.

I'm joined in the room today by BOQ's Managing Director and Chief Executive Officer, Rod Finch; and our Chief Financial Officer, Racheal Kellaway, who will present the results. We are also joined in the room by BOQ's executive team. Following the briefing, there will be an opportunity for questions.

I will now hand over to Rod.

Thanks, Jess. Good morning, everyone, and thank you for joining. Today, I'll take you through the strong progress BOQ has made in FY '26 to position us for sustainable growth in FY '27. We set the foundations of a simpler, specialist bank, maintained disciplined cost management, strengthened our capital position and returned capital to shareholders. This year, BOQ delivered $358 million in cash earnings after tax, excluding notable items, with net interest margin of 1.7%. This was supported by the decisions we've made to optimize our balance sheet, improve our funding mix and grow with strong risk-adjusted returns. We completed our whole-of-loan sale. And in August, we paid a fully franked special dividend of $0.15 per share. Our on-market share buyback is also underway.

The Board has declared a fully franked final dividend of $0.20 per share, recognizing the group's resilient financial position and strong capital levels. This brings total dividends for the year to $0.55 per share. With the completion of ME migration, all ME customers and 68% of all retail customers are now on the digital bank. We have begun scaling the digital mortgage with 88% of application volume and 83% of settlements occurring through digital channels. Our remedial action plans are well progressed with 74% of all activities now complete. While there is more work to do, the risk frameworks we have built through the programs are being embedded across the organization, and our risk culture, measured through our people surveys, continues to improve.

In FY '26, we continued to recycle our balance sheet from home lending to business lending and established our capital partnership with Challenger. We supported 1.4 million customers across Australia. Our branch network has aligned to identify growth areas, especially focused on Queensland. We expanded our co-located retail and business banking center model and we continue to support the communities we operate in through deeply connected partnerships. Looking closer at the financial results, we delivered total income of $1.7 billion, up 1% year-on-year and strong cost management meant expense growth was 2% below inflation and in line with our guidance. We saw improved momentum in the second half with cash earnings of $182 million, up 3% half-on-half and a 6 basis point margin expansion. Racheal will talk to the financial results in more detail shortly.

Since we reset the strategy in 2023, we have worked through an ambitious transformation agenda with a clear strategy to deliver a simpler specialist bank. Over the course of 3 years, we developed and are now well progressed in delivering against our risk programs. This has given us strong foundations in our risk practices and operational resilience. Converting and optimizing our branch network to align more closely with growth corridors and our Queensland heritage has given us the ability to deploy more business bankers into key geographies and better reflect customer preferences. 74% of branches are located in Queensland, reflecting our strategy in this key market.

Our technology landscape has simplified throughout this time, and we have halved our core banking systems. We decommissioned 41% of technology assets and 90% of target state IT assets are in the cloud. We have delivered 82% of our simplification agenda with line of sight to the remaining benefits into FY '27. This program has delivered property footprint reduction, a simplified operating model and establishing our strategic partnership with Capgemini to create efficiencies. We completed the integration of ME, built the digital end-to-end bank and all ME customers are now on that platform. We are on track to complete the decommissioning of ME legacy technology by the end of this calendar year. After 3 years of building the right foundations, simplifying our operations, building and scaling the digital proposition, we now have the platform for a focused and disciplined return to growth. We remain committed to our strategy of becoming a simpler specialist bank, underpinned by our vision to be the bank that customers choose.

To deliver a sustainable return to growth, we have refreshed our strategic pillars. These are: growing our customer relationships, rewiring the bank for the future, accelerating the culture shift and optimizing the bank economics. I'll step through these pillars now in more detail. Growing our customer relationships. We are clear and deliberate on the customer segments we are targeting growth in. We are concentrating on the segments where we feel we have the experience and capability to win, family-owned businesses and everyday Australians. This focus is anchored to our home state of Queensland where our heritage and foundational strength means we are well positioned to capitalize on the growth underway. Deposits are central to how we want to grow, and we will use the improved offering in our digital bank to deepen relationships and fund our growth with quality deposits.

Rewiring the bank for the future builds on the investments we've made to date to create operational leverage. We will continue to simplify and scale, benefiting from a modern technology and data platform which supports faster delivery of customer features and has us well positioned to further deploy AI. We've simplified and better aligned our product suite to customer preferences and enabled more straight-through processing and we will continue to add automation to these simpler services.

Through accelerating the culture shift, we are creating a culture that is risk-focused, accountable and outcomes-based. We are committed to equipping our people with the skills they need in a dynamic environment, upskilling in AI capability and strengthening our leadership capabilities to adapt and better serve customers and compete in the future. Optimizing the bank economics is an approach to growth that is disciplined and accretive to returns. We will do that through the careful allocation of capital and growing capital-light earnings.

With our digital retail deposits fully in market, our funding mix will be a key focus in supporting profitable growth. Our Business Bank has continued to grow with commercial lending up 16%. Our proposition for Business Banking is underpinned by our strong Queens -- position in Queensland and the deep industry expertise we offer in key segments, especially health, agriculture and diversified industry customers. Half of our lending is to our target segment, established family-owned and managed businesses supported by bankers who have enduring relationships, understand their customers and are committed to their growth and success over the long term.

We have welcomed 42 additional business bankers since 2024, and they have provided strong volume growth. This year, we expanded our co-located business and retail banking hubs in specific growth locations. And these hubs have contributed 20% of the commercial lending growth. Within Asset Finance, we established a capital partnership for the $3.6 billion whole-of-loan sale for equipment finance assets. The Business Bank is focused on scaling equipment finance lending through the partnership, which generates capital-light earnings without funding requirements and no direct credit risk. Excluding the whole-of-loan sale, Asset Finance grew 5% this year. This was driven by structured finance and novated leasing, in particular, from continued strong demand for electric vehicles.

Turning to the retail bank, we had 2 key priorities this year: completing the migration and shifting mortgage origination to digital channels. We have delivered both. All ME customers are now on the digital bank, which offers greater automation, increased self-service and benefits the group with lower unit costs across both origination and servicing. As we focused on scaling digital mortgages, we exited the year with 88% of home lending flow through our digital channels. We've seen strong mortgage application volumes with a 14% increase in the second half, providing momentum into FY '27. While acknowledging this uplift is off a low base, it is a positive indicator of the platform's capacity to scale.

Digital home loan customers have 5.5x higher transaction account balances than deposit-only customers, which highlights the importance of our strategy to win a greater share of our retail customers' banking relationships. This will be a key focus as we return to growth. The digital bank is a material shift in how we attract and serve our customers with features and product types continuing to be rolled out through FY '27. There is a changing demographic of customers being acquired to a younger cohort with emerging wealth where we can serve more of their needs over time. We are seeing organic growth in deposits and customers with over $2 billion in new-to-bank deposits this year, and we saw a strong increase in customers using the platform as compared to FY '25.

As we return to lending growth, we remain sharply focused on quality deposit growth. As I noted, rewiring the bank is about leveraging the assets we've built and creating operational capacity for growth. With the simplified business and fewer platforms, products and processes to run, more of our time, investment and attention can go to customers and disciplined growth. We are focused on further automation of processes, less manual intervention and managing our cost base efficiently. Improving the cost to attract and serve customers is a key focus. We have reduced the cost to originate a home loan by 22% and remain on track to deliver a 50% reduction at scale. Further functionality releases are planned over FY '27.

Branch productivity across the optimized network has improved with an 8% increase in home lending applications per branch this half against the prior corresponding period. And we expect this to continue to improve as the digital mortgage is rolled out across the network in FY '27. Increasing banker productivity is also crucial. Since FY '23, we have seen 17% growth in business lending settlements per banker. As we leverage the tools we have built, further enhance our processes and deploy AI, we will free up our bankers to spend more time with their customers.

Turning now to how we will accelerate the culture shift to one that is more risk focused, accountable and outcomes orientated. Our remedial action plans are well progressed. We have completed 66% of activities in Program rQ and 83% in AML First. Our risk culture continues to be an important indicator of how this is translating into daily activities and one we will continue to monitor closely. We have maintained a steady people experience during a period of significant transformational change, which is a testament to the dedication of our people. Recognizing the dynamic environment we operate in, we are building ways of working and capabilities for our people to learn and adapt to emerging technologies.

Over half of our people have participated in training through our AI Academy and over 70% of our people are now using AI agents and tools as part of their day-to-day work. In supporting our customers, we prevented or recovered $7.5 million in losses to customers affected by scams and online fraud. Biometric capability in the digital bank intercepted over 99% of attempts to open fraudulent deposit accounts. During a period of further cost of living challenges, we supported approximately 4,000 customers experiencing financial difficulty. Optimizing the bank economics is an ongoing discipline between volume, returns and capital efficiency.

Our track record on strong cost management has resulted in sub-inflation cost growth in the last 2 years. We have, for several years, recycled the balance sheet towards higher returning business lending, particularly while we built the retail digital proposition. Alongside this, we've reduced our reliance on wholesale funding and increased our deposit-to-loan ratio. Ongoing cost discipline, thoughtful investment and rigorous capital management provide a more resilient, more flexible bank and allows us to pursue returns-focused growth. This will be enhanced through the scaling of new capital-light income streams through the partnership and attracting digital deposits.

As a Queensland bank with a 152-year history, we recognize the integral part we play in supporting our customers and the domestic economy and the communities in which we operate. Our community partnership model has continued to evolve with cross-promotional opportunities between our primary partner, Orange Sky Australia and supporting grassroots engagement through Queensland Rugby Union and the Queensland Reds. We contributed approximately $2 million to community partners this year, enabling support for community connection and vulnerable Australians. This year, we have delivered our first mandatory climate-related disclosures in our annual report and we'll continue to engage with industry, regulators and our stakeholders in this area.

I will now hand over to Racheal for more detail on the financial results.

Thank you, Rod, and good morning, everyone. Financial year 2026 was another transformational year for BOQ with the financial results reflecting cost discipline and the delivery of capital initiatives. Stepping through the result, total income increased 1% over the year. Flat net interest income reflects an increase of 6 basis points in margin, offset by lower assets as assets reduced following the sale of the equipment finance portfolio announced in May and the continued shift in our balance sheet from home lending to business lending. Noninterest income increased 12% driven by new origination and servicing fee income relating to our capital partnership and higher business lending fees.

Operating expenses, excluding notable items, increased 2%, below inflation, supported by simplification program benefits. Loan impairment expense increased largely as a result of the nonrecurrence of the prior year commercial lending write-back and this resulted in cash earnings, excluding notable items, being 7% lower at $358 million. Second half trends were positive with cash earnings, excluding notable items, up 3% to $182 million. Total income was up 2%, supported by a stronger margin, and there was a 1% reduction in expenses. This saw underlying profit increase 8%, which was partially offset by a higher loan impairment expense of $34 million.

As disclosed in August, a $33 million post-tax impairment was recognized as a notable item predominantly relating to technology assets. When including this, cash earnings were down 15% against both the prior year and the first half. Statutory net profit after tax of $250 million was an increase of 88%. The prior year included the impairment of goodwill. The most significant item in the current year was the $52 million impact of the Equipment Finance whole-of-loan sale as disclosed in May. Costs of $22 million related to the second year of the branch strategy conversion costs with the total cost of this program remaining unchanged.

The amortization of acquisition fair value adjustments and hedging and fair value impacts had a minimal impact in the year. Margin increased 6 basis points to 1.73% in the second half. Lending was a 5 basis point headwind with competition remaining elevated. There was a 2 basis point impact from housing and a 2 basis point impact from business lending. We saw a continued mix benefit from shifting our portfolio towards business lending and the portfolio sale impacted the lending side of the balance sheet by 1 basis point. Funding was an 11 basis point benefit as we transformed our balance sheet and required less funding.

We saw positive benefits from disciplined pricing on at-call savings and term deposits benefited from favorable spreads. There was a mix benefit as we retired higher-cost wholesale funding. Positive impacts from a higher cash rate environment benefited margin by 3 basis points across the replicating and uninvested portfolios. This was partly offset by a 1 basis point impact from holding higher liquidity assets -- liquid assets, which were deployed in the months after the portfolio sale.

Lastly, we saw the nonrecurrence of the brokerage benefit we called out in April. Bringing the impacts of the sale of the equipment finance portfolio together, in line with previous guidance, the margin impact was broadly neutral. Funding benefits offset the small negative on lending and the short-term liquidity impact. The slide also outlines considerations when looking at the first half 2027 margin, where we expect a modest first half uplift, noting the inherent uncertainty. We expect competition for lending and deposits to remain elevated with a higher interest rate environment and slowing of housing growth across the system. Our tilt to growth in higher-margin business lending is expected to see the continuation of a mix benefit.

As asset growth returns, we will remain disciplined in funding that growth with a focus on growing customer deposits. Lastly, the replicating portfolio will continue to be a tailwind. 2026 has been a transitional year for noninterest income. Our strategic model is to retain the customer relationship and origination and servicing capability while partnering where it makes sense for access to balance sheet or product capability. These partnerships are important and enable us to broaden our relationships with customers, diversify and increase capital-light income and are accretive to return on equity. In the year, noninterest income increased 12% to $159 million. Banking income increased 9% and was driven by higher business lending fees and the full year benefits from the branch conversion.

The capital partnership contributed $14 million from origination and servicing fees, which commenced in May. Lastly, we saw a temporary reduction in commission income as a result of transitioning to new partners. Looking to 2027, we expect the full year benefit run rate of the capital partnership, commissions income to marginally improve following partner transition and other items to remain broadly stable. At the half year, we provided guidance on the moving parts of the back book transaction and forward flow partnership for 2026 with Slide 24 showing delivery against that.

Net interest income reduced in line with guidance, and we saw noninterest income slightly above. Overall, resulting in no impact to total income, which was slightly better than expected outcomes. Cash earnings was a $3 million gain and within the guided range. The most meaningful driver of shareholder value comes from the optimization of capital. The on-market buyback commenced in August. As a result, the benefit to return on equity in 2026 was not material. We are planning to continue the on-market buyback through 2027 and expect the previously guided return on equity and earnings per share benefits to come through as the buyback completes.

Operating expenses increased 2% on the prior year, delivering on the sub inflation cost guidance provided at our first half results. When normalizing for the impacts of operating the branch network, underlying costs reduced 1.6% and is the second consecutive year of underlying cost reduction. There was a $25 million cost increase driven by inflation, higher risk and technology costs and amortization increased by $15 million in the year. Looking to 2027, we expect to see similar drivers of cost movements. Themes of elevated inflation, growth in technology costs supporting new digital platforms, ongoing investment in risk, including financial crime and higher amortization are expected to continue. These 4 categories of increases will be offset by ongoing benefits from the simplification program.

In 2023, we embarked on an ambitious plan to simplify the business and drive $200 million of productivity benefits into our cost base. This was increased to $250 million in 2024 as we restructured our operating model and converted the branch network. On exit of 2026, 82% of the program has been delivered and $60 million was delivered in the P&L in the year. 2026 included business processing transitioning to Capgemini, further branch and corporate property optimization and a structural decrease in telecommunications costs. We have line of sight of the remaining 2 components of the program. Decommissioning of the ME heritage environment is currently underway and 2027 will continue to see the transition of services to Capgemini.

Our track record of disciplined expense management gives us confidence in leveraging our cost base to deliver a returns-focused sustainable return to growth. In 2026, we invested $180 million into the business with the focus of delivery moving from building the core platform to migrating customers onto it. The digital home loan was also delivered. We commenced the work needed for migrating BOQ retail customers and continue to invest in business bank capability. The carrying value of our technology assets reduced 5% to $540 million.

Moving on to portfolio quality. Loan impairment expense is normalizing off a low base and is 8 basis points to GLA. The year-on-year increase reflects the non-repeat of the provision release in commercial lending, which benefited the prior year and a higher collective provision. Looking at the second half, there was a $12 million retail lending expense driven by a collective provision increase, reflecting uncertainty in the economic outlook, higher interest rates, ongoing cost-of-living pressures and a softening in house prices. 90-day arrears increased slightly to 104 basis points and reflects the contraction of the portfolio with balances in arrears broadly stable over the half.

Commercial lending loan impairment expense was $7 million, with stable 90-day arrears, stable impaired assets and low specific provision activity. In Asset Finance, loan impairment expense reduced to $15 million in the second half as the single name exposure we called out at the half year did not repeat. Normalizing for the portfolio sale, 90-day arrears increased from 96 to 103 basis points, while total balances in arrears reduced over the half. Impaired assets reduced 11% in the half and are 20% lower than a year ago.

Asset quality continues to remain sound. However, we are conscious of and are closely monitoring the pressures facing households and businesses. We have $274 million in provisions. During the year, we had the equipment finance sale and the sale of the ME unsecured lending portfolio. Those 2 portfolio changes resulted in an associated provision reduction of $32 million as that credit risk moved off our balance sheet. Normalizing for those impacts, our total provision to GLAs is at 38 basis points, an increase of 2 basis points in the second half. Retail coverage increased to reflect greater uncertainty in the economic outlook, including cost-of-living pressures and a softening in house prices.

Coverage in commercial and asset finance remained relatively stable, and we continue to hold overlays for industries where we see the potential for additional stress. We are holding $74 million of provisions above our base case scenario. If we were to enter the downside scenario, a provision increase of $32 million would be required. On to funding and liquidity, we took the opportunity to optimize the funding stack using the proceeds of the portfolio sale with funding reducing $4.6 billion in the half. Higher cost, long-term wholesale funding reduced 12%. Deposits remain our primary funding source, and we are looking to grow retail deposits to support the return to growth. Deposit funding as a percentage of total funding increased to 73% and our deposit to loan ratio increased to 87%.

Our liquidity metrics are strong with a quarterly average LCR of 136% and a spot net stable funding ratio of 123%. We ended the year with a CET1 ratio of 11.64%. Returning the capital released from the portfolio sale to shareholders provides an enduring benefit to both return on equity and earnings per share. The sale released approximately $3.2 billion of risk-weighted assets equivalent to 78 basis points of capital. And in August, we paid a fully franked special dividend of $0.15 per share and commenced an on-market share buyback. Pro forma for completion of the buyback, our CET1 ratio was 11.14%, above the top end of our management target range.

Looking at the underlying capital position, earnings generated 47 basis points and we returned 35 basis points to shareholders in the ordinary interim dividend. Growth in business lending increased underlying risk-weighted assets. This was partially offset by lower home lending and loan origination costs with a net impact of 15 basis points. The Board has determined a fully franked final dividend of $0.20 per share, representing 72.9% of second half cash earnings, excluding notable items.

The dividend reinvestment plan will operate with no discount and is expected to be satisfied in full by an on-market purchase of shares. Our strong capital position supports resilience and provides capacity to grow and invest in line with our strategy to be a simpler specialist bank.

I'll now hand back to Rod to talk to the outlook.

Thanks, Racheal. As we look to FY '27, there are risks in the economic environment. Competition for deposits is likely to continue as customers look for returns in a higher cash rate environment. This may be exacerbated by uncertainty in the wholesale funding markets. We are targeting a similar level of commercial lending growth and remain committed to returning to housing growth in FY '27. We expect the competition for quality lending to continue. In the first half, subject to market conditions, we expect a modest uplift in margin with the component parts as outlined by Racheal.

We expect strong growth in noninterest income with the full year benefits from the capital partnership and normalizing commission income. With the tail of our productivity program flowing into FY '27, we are targeting flat annual cost growth. We will continue to support our customers as they manage through a higher cash rate environment and continued cost of living pressures. We expect relatively stable loan impairment expense, and our portfolio quality remains sound. We maintain our CET1 target ratio of 10.25% to 10.75% and expect to complete our buyback in FY '27. Our dividend payout target range is unchanged at 60% to 75% of cash earnings.

The foundations we have set position us well for a sustainable return to growth, anchored on our strengths and differentiation in the market. We have a committed team delivering for our customers. Thank you to our people for their continued dedication and resilience. Our customers we're here to serve and our shareholders for their support.

I'll now hand over to Jess for Q&A.

Thank you, Rod. We will now move to questions. [Operator Instructions] Operator, can we please have the first question?

Our first question today comes from Thomas Strong from Citi.

Perhaps just a question starting on mortgage growth, Rod. I mean, you've been talking to return to growth in '27 for some time, and you've done your bit in terms of lowering the cost to serve. But can you talk about what sustainable growth looks like now versus what you might have anticipated 6 months ago, just given higher competition, slowing investor activity and pretty poor sentiment overall?

Yes. Thanks, Tom. So I think for us, the way we've approached this is similar to what we talked to at the half, which is, I think, this year, we've seen some major milestones completed, which is that really build out of the digital bank and the originations we now see flowing through it, which the numbers we talked to earlier, around 88% is originating onto that platform. That gives us a different set of economics as does the conversion of the branch network that we completed a couple of years ago. So for us now, that is the basis for which we can think differently about the returns there.

We're very mindful about the outlook that we're looking into. I come back to what we are focused on and that is sustainable return to growth. So you should expect to see growth where we're comfortable with an acquisition margin that's accretive to current ROE and are ultimately supporting us to get back to returns above the cost of capital, but we recognize it's a challenging environment out there. We are focused on returning the balance sheet to growth this year, but it really needs to be at the right conditions.

Great. And the second question, just, I guess, on market conditions as well. Can you just give some commentary around the capital partnership with Challenger? I mean, again, you made the comment that you've got flexibility to originate on balance sheet or through the partnership, like how are you navigating that split of business, given we're a few months into that partnership now in terms of what's attractive in the market?

Yes. The partnership is where we want it to be. That is well underway. We've established a good working relationship. Really for us, it's about serving more customers and capturing the opportunity that we saw in the market. So in terms of where the Challenger partnership is, which is in line with our expectations.

Our next question comes from Matthew Dunger from BAML.

Yes. I just wanted to follow up on the mortgage growth question. The application volumes on Slide 37, you show if I just look at August, you're annualizing over $25 billion of volumes. So what's the right level to grow the book here, Rod? And what returns do you think you're writing new mortgages at?

Thanks, Matt. So as I mentioned, the volume that we have seen in application momentum at BOQ, we are coming off a low base. So as we've talked over previous periods, we stepped back while the economics weren't working for us in that mortgage portfolio with those big structural and transformational pieces now in place. We're more confident stepping back into the market. So that 14% is off a low base. And it is a portfolio approach that we're taking, so across both first and third parties. Where we have kind of banked ourselves is ensuring that the acquisition returns that are coming through on the margins are accretive to our current ROE. And it's really over time working to get that back up to the cost of capital.

So we're comfortable with where we're at the moment. It is a mix across both first and third parties. We're also looking at different segments within the portfolio in terms of product type and features. We recognize, as I said earlier, to Tom's question, it is a different market than it was 6 months ago. But what we've really built is an ability to work through the cycle and work through the segments that we feel like we can generate accretive returns.

Great. And if I could just follow up on costs. We can see that the investment spend is rebased lower to around $370 million over the last year. Large composition shift in the cost base coming in FY '27 with ME's decommissioning and Capgemini. Can you just talk to what is the right level of investment spend going forward for your business?

Yes. So in terms of where we're at in the transformation, the big heavy lifting in terms of remedial action plans and replatforming of the technology environment is behind us. So as we've guided to, we're getting to a level now that we think is consistent with investment going forward. I think what I would say is with the strong capital position that we have, we do have capacity of where we see the right investment and right business case to have the capacity to invest, but it really will be driven by the returns that we see from that investment. So we're comfortable with where we're at. And really now it's about making sure we're investing thoughtfully to support improved returns.

Our next question comes from Brendan Sproules from Goldman Sachs.

Brendan Sproules from Goldman Sachs. Look, Racheal, I just have a question on your second half bad and doubtful debt expense. I mean, you've shown us $34 million. But when I look on Slide 29, the collective, in total fell, I think, $16 million, and I think you called out the sale of the equipment finance as one of the drivers of that. So given that write-back, can you maybe talk about the individual provisioning charges that you've had to take during the half? And what's the source of them?

Yes. Brendan, so yes, there's actually 2 drivers really of the overall reduction in provisioning and the first -- they're actually nearly equally attributable. But the first, as you called out, is the sale of the equipment finance portfolio. The second is the sale of the ME unsecured, mostly credit card portfolio that occurred around close of the first half. We noted it then minimal impact to P&L but actually did have a, as you would expect on an unsecured portfolio, had a collective provision associated with that, which was, sort of, outweighed given the size of the balance sheet.

So if you remove those 2 impacts, actually, the collective provision is sort of broadly flat to the same period last year and up about 6.5% half-on-half. And so there is an underlying increase in the collective provision, noting also that the sort of balance sheet has declined given the home lending contraction as well. So the biggest increases in collective provision really come from the retail lending portfolio where we have taken effectively a more pessimistic view on the economic outlook in our downside and severe downside economic scenarios. So we have about 45% weighting to those downside scenarios and the weighting hasn't changed, but we think compared to when we were talking to you in April that the economic outlook has deteriorated.

Just a follow-up question. So those portfolio divestments that you made, you've called out the credit card and unsecured and the equipment finance. Do those write-backs run through the P&L?

So the -- well, effectively, they will be in the lower loan impairment expense number, yes. The equipment finance portfolio write-back was wrapped up in part of the transaction cost. So that benefit went into the overall below the line sort of cash adjusted statutory number that you see. I think it's $52 million in total in the year.

And just a second question in your NIM on Slide 22. In the first half, you indicated that you had a -- on the asset lending side, a 4 basis point headwind from the timing of the cash rate. I was wondering whether that has appeared here in the second half as a reversal or whether that is still to come in FY '27?

Yes. So it was in the first half when we talked to that. If you recall where we were in the cash rate cycle, we had actually seen in the period prior, we had seen reductions in the cash rate, and then they had -- and then the cash rates started picking up quite quickly in what was our first half. And so the dual impact of that created what was quite a visible net interest income impact in the margin walk. This period because we've just seen effectively 2 periods where we've seen rates rising, the delta hasn't been as great. So it's not an impact in the margin walk.

Our next question today comes from Brian Johnson from MST Marquee.

Congratulations on some of the stuff we can see coming through. Two questions. If I have a look on Slide 50, I can see that your business lending book has got a lot of property in it and property has got a lot of issues at the moment. I know you're telling us that most of it is well secured, but there's a lot of argument that values could actually be falling. Is there any chance that we could get a little bit more detail of what that actually is that 92-point -- that quite substantial balance like 35% is pretty chunky. But could we get some kind of breakdown on that by sector?

Yes. Thanks, Brian, and thanks for the question. So on Slide 13 of the deck, we've tried to outline a couple of lenses through which we think about our business banking franchise and how we manage the business. So on the right-hand side there, you'll see from a commercial lending perspective, one of the lenses from an exposure point of view with which we cut the bank and it gives you a sense of the profiles and then the industry segments. And I'd call out there the diversified industries that you see on the right-hand side of that chart on the left section of the chart. The most of the lending that we're doing, you see that's where the growth is. And a lot of the lending we're doing in that part, these are operating or trading businesses, and they're also investing in existing properties as part of a wealth diversification strategy as part of their business.

And that is a kind of key strategy they're deploying, and we're supporting that with our customers. The difference you see there to what you've called out on Page 50 is the Page 50 definition is on a pure ANZSIC basis. That is where it reflects the income source that's driving -- servicing the asset underlying. And in those cases, it's where the primary income is coming from. So the difference is there is where our customer is choosing to service the commercial property through the lease payments that would be coming through as a property lend even though they are running a wider trading business or an operating business as part of their overall kind of businesses that they run.

So again, we think it's a business that we understand. We are really comfortable with the quality of the assets that we're lending to. We understand the credit risk that we're taking. And we're very thoughtful about the outlook, and we take that into account when we're thinking about the future pipeline and the deals that we're doing.

So Rod, it's existing business customers just going and buying the building that they're operating out of. Is that kind of what it is?

Or an investment property as well. So we have clients who are kind of buying the property next door or they're seeing it as a way to diversify their asset base and their income streams off their trading business.

Okay. The second question, if I may, just on Slide 26. Just thinking about the productivity kicker for next year. We know you get the $13 million run rate comes through in FY '27 that you didn't realize in this period. How much of that $45 million do you reckon actually hits the P&L in '27?

So Brian, we've called out really the 2 initiatives that will deliver the residual amount into P&L. So we are planning to see that benefit dropping to the P&L and that's the decommissioning of the legacy ME systems, that's currently underway. We're currently in the process of archiving and literally turning things off. So clear line of sight. And then through 2027 the residual amount is the transition of services to Capgemini, which comes at a lower cost. So that full P&L benefit will come through in 2027.

Does that imply there's another benefit to come through in '28 when you get a full period impact of it? So what you're saying is it's actually greater than 45%. Is that the way to think about it?

No. I mean there's -- the component relating to the legacy ME Bank systems, that's sort of occurring really the -- like let's just say, towards the end of the first quarter, maybe into the second quarter. So there will be a small benefit come through into 2028 off the back of that very sort of small that will continue. The transition of services, that will just come through, through the year. There will probably be a tailwind that continues into 2028, but we will still be looking at how to manage the cost base into 2028 off the back of all of the moving parts, including inflation, higher amortization and things that will continue through to that period again.

Rod, can I just push my luck with a third question, if I may. When I have a look on the data set, I can see Bank of Queensland just saying you're going to be very disciplined on housing. I can see that you're going more and more digital, which is great. You say that at the moment, the cost reduction is 22% goes to 50%, but I'd suggest to you that's kind of like miniscule relative to the competitive margin dynamic that we see. But if I have a look on the data sets, I can see ME Bank with basically matching Macquarie with the most aggressive owner-occupied rates in the market. Can you just reconcile that for us? If you're going more and more digital, where basically price is the option, it just doesn't seem to ring true matching the price with the most aggressive player in town, particularly through digital. I mean how can we wrap those things together?

Thanks, Brian. So for us, we very much take a portfolio approach. So we recognize that brokers are a key factor in this market. Customers are choosing that. They choose that through the cycle. So we -- to participate in the mortgage market, we need to have a good proposition in that space. And that is really our ME brand that we take to market. I think the way we've built the digital mortgage and thought about that business more holistically is absolutely -- we need -- it is continue on that efficiency route of making it a very efficient platform to originate and serve. But increasingly, we're thinking really about those first-party channels as well, both through our BOQ brand and our Virgin brand where we are in market with the digital mortgage as well.

When we look at that composition and we look at the different product sets into as well, it's really about looking at that overall. And certainly, the returns in first party we're very comfortable with. And in that overall approach, that portfolio approach, which is a mix of channel, different product types and where we might sit on the risk curve albeit facing into the -- being really conscious of the market we're facing into. That is how we get comfortable with returning to growth overall in mortgages.

Our next question comes from Andrew Triggs from JPMorgan.

Just on the NIM. Obviously, the -- these figures benefited from strong funding cost management post the equipment finance sale. Can you talk through, please, just your confidence around a sustainable return to NII growth in what is a competitive mortgage market world? And as a related point to that, I mean how can you be sure that while growing digital deposits, they're just not deposits that are the leading price hedge.

Yes. Thanks. I'll start with the deposits and then I'll circle back on the mortgage. So deposits, it's how we've grown over the last couple of years. We've added some stats in there. And I think it's that mix of transactional accounts along with at-call as well. Obviously, the way those products are constructed and similar to the answer for Brian, it's a portfolio approach that we take. So there will be different price points that we take for certain segments that we're looking to attract. I think we are balancing that growth in the context of the wider portfolio and how we're optimizing that through wholesale funds and also third-party deposits.

And I think the other factor that we take into account in how we're looking at funding mix and optimizing that going forward is the Challenger partnership and the fact that, that is funding that we're no longer required to support to grow asset finance. And so for us, very much a portfolio approach again. Underlying that is obviously just growing transactional balances. I think the other area, Andrew, that we recognize we have an opportunity to grow is deposits for our business customers. We don't do a lot of that. We have some gaps in the proposition. And that's something we're addressing strategically. But I think we also see some areas there that we can do more in the near term and that's something we're focused on as well, and we think there's some upside for us. So it is a long game. It's shifting that mix over time. And we think that's an important part. And really what underpins our return to growth overall as a business.

On mortgages, as I said earlier, it's really about being really disciplined around where we want to play, understanding what role our brands play in the mortgage market, looking at leveraging particularly those first-party brands that we have and looking to grow more there but balancing that in an overall portfolio sense.

Yes. But overall, would you say that the cost of your digital deposits is improving, is it relative to history or relative to peers? Do you have a lens on that? Transaction account aside, really just the savings account. If one of your regional bank peers is doing a very good job in growing digital savings accounts and that is leading to NIM improvement. I'm just wondering whether there's a similar story here.

Look, we're comfortable with where we're sitting. We see -- it's core to our strategy, which is really deposit-led growth, and we've been really thoughtful around how we want to grow. And so the product settings are very deliberate. For us, continuing to grow those retail deposits, and I would to include business deposits in that definition. That is we see there's an opportunity for us to improve our funding mix over time by focusing in that space. We recognize it takes time to build that up. But we're really comfortable that we've got a proposition that's winning, and we're comfortable that, that's supporting the kind of returns aspiration we're looking for over the next couple of years.

And just a quick one on mortgage originations or applications, should I say, in the fourth quarter. Could you give us a number in terms of perhaps, Racheal, the mix of broker and proprietary on that fourth quarter application flow. We've got the FY '26 flow number, but just interested in the period where actually you saw a pickup in applications.

Yes, the sort of broker proprietary mix is still -- it's in line with market, but heavily broker, as you would expect for us, given we are just launching the digital channel. We have seen through our branches an increase in productivity. And so we've seen uplift in momentum or some momentum through our branch network in the period as well, but still largely in line with market, which is broker-led.

And Racheal, the period over time that might start to change?

Yes. We -- that is our plan, for sure. I mean, whilst we have been in the build of the digital home loan mortgage, we have been effectively relying much more on broker than we see going forward. But look, customers still tending to like to use brokers for lots of different obvious reasons. And so we expect that to remain a very important channel for us.

Our next question comes from Richard Wiles from Morgan Stanley.

I have 2 questions. The first relates to the mortgages. As we've discussed, you've highlighted the improved applications. Can you also comment on how much of that increase in applications is driven by refinancing and also what trends you're seeing in runoff?

Thanks, Richard. So look, I think we're -- the market we're operating in one at the moment, which is more of a refinance market. So that is underpinning a large percentage of the application volume. So purchases have really softened, given what we've seen in the market. So that's what we reflected in the second half. If looking forward from there, look, I think we need -- will play out where the market goes to from here. I think for us, it's about maintaining a really clear understanding of the acquisition margin we're acquiring it and making sure we've got those settings right. So at this stage, it is really driven by refinancing.

So Rod, historically, refinancing has been about 35% of volume. I've heard anecdotes that at the moment it's 60% to 65%. Is that consistent with what you're seeing? And could you also comment on the runoff of your book?

Apologies, I missed the runoff. Yes. So in terms of refi, that's ballpark, I think that's reasonable to see where the market is at, at the moment in terms of refis. In terms of runoff, look, it is kind of improving a little over recent time, and that's really a feature of less property sales in the market less purchases, less properties changing hands, you tend to see that segment of people are upgrading and changing out properties. So -- sorry, runoff has slightly improved, given that market that we're seeing with purchases dropping off.

I might just add, just in terms of the implications on margin and particularly retention discounting, which is a theme in the industry at the moment. If you look back sort of beyond 12 months ago, we saw high levels of retention discounting, so high volumes and high amounts of retention discounting in the market. You saw that come through our margin sort of through 2025 and the beginning of 2026. It did actually come down through 2026. So less volume and at a less discount. The last couple of months, probably the last 2 to 3 months, we have started to see that trend back up again. So you should expect to see across the industry some margin headwinds relating to retention discounting, I expect.

Okay. And just a question on deposits. In your Slide 22, you say that TDs provided a 4 basis point benefit in the second half '26. Can you give us some sort of indication of what you're expecting to be the impact in the period ahead? I assume TDs will become a margin headwind for a short period given some of the recent pricing dynamics?

That's right. That's exactly what we are expecting to happen. So what we saw through the second half was swap rates increasing and market typically not really following as fast. And so there was some repricing effectively on the term deposit portfolios. That gave us a 4 basis point benefit in the second half. We are assuming that, that is a slight negative into the first half of our 2027 given spreads and where they're at and the fact that we are needing to start to return to growth and that part of that funding mix will likely come from term deposits.

Our next question comes from Jon Mott from Barrenjoey.

Question on Slide 13, which you've given us a lot more detail on both in the commercial lending book, I think BJ talked about this a little bit earlier. But I just wanted to go into a bit on the growth that you're seeing. So over the last 2 years, you've seen that commercial book growth by $3.7 billion up to $15 billion, so about 30%. And you've given us the breakdown in the size of the customer, so about half of it is family-owned but also about 26% of that is in wholesale and syndicated loans, which are very large, over $50 million in size. You give us what that breakdown between the family owned and syndicated look like 2 years ago. And so how much of the very rapid 30% growth in business lending, commercial lending has actually come in large customers.

Yes. Look, I think what we've tried to outline on 13 is how we go to market and how we think about it. We -- I would say that wholesale and syndicated business has been part of our business bank for a long time, and it's something that we do see an opportunity to grow with the right customers. We have a lot of our long-standing Queensland customers in there, but we also participate in syndicated lending at the right margin, and that's how we think about the composition strategy going forward. So we have seen growth across all dimensions, but we have also seen growth in those higher lending or higher kind of credit balances.

For us, it is really consistent. We understand the segments we're playing in. We're looking for that balanced growth across the board and participating in credit that we understand and that we have a track record in. So for us, it's really just continuing on that path. As we've called out, what we really want to focus on is that family owned and operated businesses, our health business is part of that. We classify the kind of specialist segment that we offer or we go to market for there. But overall, we're really looking for a composition that's balanced across the board and where we see the opportunity for lending growth in segments we understand, including that wholesale and syndicated business, that will be part of our strategy going forward.

Okay. And just following up, if I go over to Slide 28, where you break down the loan impairment expenses and you break down the housing consumer or commercial and in the asset finance, over the last couple of years, you've grown that commercial book by $3.7 billion. But even if you exclude the $24 million that you released in the first half '25, the total credit charge this book's only been $12 million, having grown the book by $3.7 billion, and only put little aside for prudent impairment charges. It doesn't look like much of a provision being built against that especially when we are in a more challenged economic environment. Can you explain why the credit charge is so low for that commercial book given the rapid growth that you're seeing?

Yes. I mean, look, the performance of the current portfolio is actually quite stable. So we have seen stable arrears. We have seen lower actual impaired assets, which are 2 of the inputs. Our modeling assumes, as I said before, sort of a more pessimistic outlook into the future. Jon, you're right, the actual loan impairment expense to assets at the moment is about 9 basis points in the second half, taking it to -- it's about 7 basis points over the full year. We think the long-run average for that portfolio is higher than that. And so to kind of get us to that total portfolio view, which we've been talking about now at maybe sort of 8 or 9 basis points of GLA, which is kind of where we're at, at an aggregate level.

So there are always going to be swings and roundabouts within the portfolios. We are still under what we think our long-run average is in terms of provisioning or in terms of expense, sorry, over the GLAs in the period. But everything that we are seeing in the portfolio is actually quite strong.

Okay. But it only takes 1 or 2 individual provisions for that to move very, very quickly because there's not much collective to put aside for that rapid growth that you've seen over the years?

Yes. Look, I think we're conscious of the risks that we're taking. I think for where we are focused, we understand the risks we've been working in these segments for a long time. We have really clear policies that we're working to. Those policies haven't changed. We're very disciplined around where we allocate capital. We want to do it at the right margin. So we recognize the risks that we're taking. We have experience in it. And I think for us, we go through the provisioning process every 6 months. It's a robust process and to the points that Rich has talked to, we think we've got the provisioning where it needs to be, but we're conscious of the outlook we're working -- we're facing into as well.

Our next question comes from Christian Mazza from Jarden.

Throughout the presentation, you've mentioned quality deposits a number of times. Could you please define your view of a quality of deposit. As we've seen on Slide 54, deposits paying more than 5% has gone from 4% of total deposits in first half '26, up to 44% in second half '26?

Yes. Thanks. Look, I would define it as retail or business customer. We're holding their transaction account. We're also supporting them with their at-call needs as well and that those deposits are persisting over time. I think for us, one of the big strategic headwinds that BOQ has always faced into is that lack of that kind of everyday banking transactional deposit offering. We're seeing traction in that space. It takes time to build up. And we think that is good business for us. Even at higher funding costs, and I think you're seeing the rate cycle play out here, their customer rates. So there's obviously an increasing rate cycle playing out in the numbers that you've seen on 54.

We price in the market where we think we need to be to grow those deposits over time. This is -- we see this is good funding for us. It's reducing our reliance on wholesale funding cost. It gives us benefits. We think there's more we can do on the business banking side. And so for us, we think this is the core to our strategy, growing retail deposits thinking differently about how we might go to market in this space to grow. So we're really comfortable with the proposition that we've got. We recognize in this market, there is more focus for customers in a high cost of living environment about looking for a good rate. And as an industry, it is much easier to switch for customers now between their savings at-call and transactions accounts. So for us, we think we've got the right proposition. We want to grow in this space. That's the price that -- we set the price really optimizing at a portfolio level across the whole funding stack. So it's something we're going to continue to focus on.

Okay. And secondly, on nonhousing loans following the back of Jon's question. It's gone up to 26% of the book up from 22%. But provisions to non-home loans has fallen from 1.9% to 1.4%. How do you reconcile this with an outlook that's more risky and uncertain going forward with the turbulence in private credit and even falling house prices on the back of that in commercial property prices?

So look, it comes back to my -- sorry, the same answer, really, which is that we look at the quality of our portfolio, we are not seeing indicators at the moment. As I said, sort of impaired assets are low arrears is tracking low both in 90 days and also 30 days. We have a slight increase if we're getting really granular in arrears in the full year, but that was 2 customers where we don't expect there to be actually any losses. And so all of the indicators that we look at within our portfolio are suggesting that it is high-quality portfolio. Obviously then, we overlay a view of the general economic outlook in the way that we look at the ECL modeling, and we have taken a more pessimistic view of that, which results in a slight increase overall in the collective provision.

But there's nothing we're seeing in our portfolio at this point that suggests that we need to take any more expense there. As I said, though, we are still off long-run averages in that portfolio. So there could be an expectation that impairment expense could increase in that portfolio going forward.

Okay. And just interesting, considering on Slide 4, you were saying the economic forecast that you put out has deteriorated materially since 1H '26. So we thought maybe there should be some extra provisioning based on the back of that, but that makes sense.

Our next question comes from Ed Henning from CLSA.

Just following on asset quality for a second. You've obviously touched on a couple of times here that you're below the long run average. Can you just talk about on Slide 52, where -- what industries you've got overlays for? And then on Slide 59, you talk about a peak in a cash rate, is that assumed in your forward-looking provisions that the cash rate has peaked? And if we do get another increase, will that see a worsening economic outlook from your forward ECL provisions?

So just on the first point, the industry overlays we have include construction and transport predominantly. And particularly the transport overlay largely relates to our asset finance portfolio. We had a small industry overlay on agribusiness, but our portfolio size here is actually not material. In terms of the general economic outlook, we have assumed -- I mean, we run 3 different scenarios. Obviously, we run for the base case downside and severe downside. They're all outlined in the disclosures. You can -- other than the severe downside, which is, as you can expect another kind of material reduction in GDP growth, higher -- significantly higher unemployment. And so in that example, actually, cash rates start to come off, but not materially.

Okay. Next question, just going back to the margin for a second. And obviously, you've talked about slightly higher in the first half. Can you just break down the components a little bit? You talked about there's a headwind now potentially for TDs because you did some repricing in the previous period, but you're pushing back into growth. You talked about deposit competition. I'm specifically interested in just more the funding costs beyond TDs, which you highlighted at-call. Is that still going to be a tailwind for you or potentially with the growth in the book and deposit competition that may not be as big a tailwind for you in the next half?

Yes. I might just give you a couple of the component parts outside of funding as well just to kind of outline how we get to the sort of modest uplift in the first half '27. And so, if I take lending for a minute, we expect the home lending impact on margin to be broadly consistent with what we've seen not only in the last half actually, but in the couple of halves prior. So that is largely driven by our retention discounting, but we still do have a small front to back book difference, and that includes our sort of quite disciplined return to growth on home lending. So you should not expect a significant impact on margin in the first half driven by pricing for growth, for example.

Commercial lending is a little bit more interesting. So whilst we saw a 2 basis point impact in the second half, we expect that to still be a negative to margin overall, but just slightly less. And so that's largely off the back of -- what we saw in the first half was a significant shift in sort of industry dynamics in competition for business lending. It was quite intense. So the impact on margin was felt. It continued through basically the kind of flow on impacts from that continued through the second half. But what we have seen in terms of pricing in that portfolio is that it's still competitive and elevated but not as intense as it was particularly through the end of the first half. And so that will be still a negative, as I said, but it's just slightly less so. We'll see the mix benefits continue at a similar level as we have the past couple of halves as we shift the balance sheet still from home lending to business lending at a total level.

And then you won't see the impacts of the sale repeat. So that's all behind us now. Funding is definitely the sort of -- I would describe it as the swing factor in our margin outlook, and that is not only because of the average turn to growth, but also where cash rates go, whether there's a possibility of another increase, how the industry and the competitive market reacts to that. And so we're assuming certainly no funding benefit to continue into the first half but we're not expecting a significant negative. And we are expecting it to be broadly flat, but there is definitely some risk to the upside and the downside depending on rate -- interest rate environment and competitive dynamics.

And then largely, the kind of the confidence we have in the modest uplift then comes through as a result of the most recent cash rate change that happened in late September. So our first month of this half ongoing tailwinds from our replicating portfolio and the normalization of liquidity. So that will be a slight tailwind into the first half as well.

Our next question comes from Nick Dalton from Jefferies.

Rod and Racheal, just a quick one for me on returns. Your answers to the previous questions have touched on this previously. So maybe the answer is the summation of everything you've said so far. But your returns are still well below the cost of capital. And what is the pathway in your view of getting the ROE back to at least the cost of capital level? And what are the levers do you expect that are going to have to do a lot of the heavy lifting to get there?

Thanks for the question, Nick. So for us, there's really 3 key pillars. And our strategy is structurally aligned to this. And they are the drivers of ROE from our perspective. The first is optimizing our funding mix, and that is talking to what we covered today around growing our transactional deposit base, increasing the deposit needs that we're meeting with our customers and continuing to grow that over time. Optimizing our funding mix more broadly than that in terms of the capital partnership is a core element. As is other elements, covered bonds are a core part of our funding stack as well. So, funding mix is the starting point. I think continuing to generate operational leverage as an organization. We've invested heavily in technology. We're well placed to continue to leverage upside from that from a productivity point of view. So continuing to see that leverage in the business in terms of getting -- serving more customers, supporting growth through the existing cost base and maintaining that disciplined cost management approach that we've maintained over a couple of years now.

And the final element is around optimizing the balance sheet, and that's really continuing to look at the efficient and disciplined allocation of capital, recycling capital into higher-margin business and where we see the opportunity to extend the partnership model that we've established, that is another element that we'll continue to look at. So it's really those 3 key pillars that provide us a pathway back to returns at or above our cost of capital.

Our next question comes from Carlos Cacho from Macquarie.

First, I just wanted to ask on your outlook comment for stable impairment expenses. I was just wondering, are you kind of thinking about that on a financial year or second half basis, just given there was a release of provisions in the first half. So kind of how we should think about that going forward?

We're looking at it over the course of the financial year is the short answer. And I think for us, it's really informed by those comments we talked to earlier. As Racheal has said, we've called out for a couple of periods, we do see ourselves getting back to that long run average. And so we're approaching that given the results that we've got. So -- but in terms of the specific question on the outlook guidance we've given is over the course of the financial year.

Sorry, I meant more kind of is that if we look at '26, it was kind of 9 bps -- sorry, second half '26 it was 9 bps. Like is it kind of should we think about that? Or should we think about FY '26 as a whole for second half '26 as being the relative starting point?

Yes, you should assume that the actual expense is broadly consistent with FY '26. So as you said, we had 9 basis points in the second half. It was 8 basis points over the full year. Obviously, it's going to be largely dependent on the timing of growth in the balance sheet. But look, I think we've given pretty specific guidance on this actually, which is that we expect the expense amount in the P&L to be broadly consistent over the full year. So this year's expense repeated through next year.

And then just secondly, just curious, you did make some comments that business competition is probably a little bit less intense. Anecdotally, we've heard through the industry that the distress is emerging in private credit, there's been certainly a pullback on the availability of private credit and an increase in the cost of it. I'm just wondering if you're seeing any opportunities to might pick up customers who might have previously gone to private credit, given you do a lot of property-backed lending, and that's obviously where most of the private credit playing in. So it does seem like there probably the reasonable bit of overlap or maybe some of those good customers that were competed away over the last 2 years when private credit became so prolific?

Yes. Look, I think, Carlos, we are seeing business lending is resilient at the moment. We're seeing that coming through the market stats. For us, I wouldn't say necessarily that we're seeing customers coming across from private credit. We're really clear on the segments we're playing. They're established businesses that are up and running and have been for some time. We kind of got a really clear view of the customers we want to target. We're not seeing a lot of it. Most of our growth comes from our existing customers. There is an element of new-to-bank, but it is really in line with those key segments that we called out that we're looking to extend or deepen relationships with customers and grow more. So for us, it's really just focusing on that customer cohort. We're not seeing too much come across there.

Our last question comes from Nathan Lead from Morgans.

Rod and Racheal, just 3 or so for me, if you don't mind. So first up on Slide 24. And within the outlook statement is also you talked about strong noninterest income growth coming through in FY '27. Do we sort of go to that Slide 24, look at that $14 million that was actually delivered and annualize that? Is that the sort of expectation for FY '27?

Nathan, the way that I think about this is the partnership really sort of got off the ground in May. And so annualizing it from my perspective is the base case. I would say there's upside given momentum in that forward flow arrangement sort of picked up even through the last quarter of our results. So it's a good starting point. I think you should probably think that is our base case.

Okay. That's fantastic. Second, just on the cost base, there's no comment within the pack that I can see about getting to work on the BOQ sort of heritage legacy cost base. Can you sort of talk us through what your targets are there when you expect to really get going on it, what the potential for cost out is on that element of the business?

Yes. Thanks, Nathan. So where we're at is still absolutely part of our kind of strategic forward plan where we'd like to get all of our customers on to the digital stack and benefit from the better proposition there. Planning is underway. We're still, as Rach called out earlier, looking to just complete the final steps of the decommissioning of the legacy technology for ME. We are turning our attention to the BOQ heritage side of the business. There's some different characteristics to that business that we need to take into account. The primary one being it's a branch-based model as well as being digital. So a slightly different approach to how we think about managing the change experience there for customers. We learned a lot through the migration that is also getting built into the BOQ.

I would think about this in the same time frames as the ME migration. There are things that are complex, and we want to make sure we do it safely and minimize disruption to the organization and customers. So around the same time frame around 2 to 3 years is the right time frame and then similar cost kind of step-down that we've called out for the ME migration and decommissioning as well. I think that's the right way to think about it.

Okay. That's great. And then the third one for me, you're saying about the loan impairment charge on a $1 million basis being flat in FY '27 versus '26. You've got home lending returning to growth. You've got some pretty strong business or commercial lending growth. Please just if you could clarify just whether that's on a dollar basis or on a percentage basis, what the target is there? I'm just interested you've -- if you've got that amount of gross loan growth coming through, how is it that the loan impairment charge actually stayed flat also in FY '27 -- more into FY '27?

Just to answer the more specific part of that question, it is on a dollar basis. And look, it is heavily caveated as you would expect, given the uncertainty in the economic environment, as Jon called out earlier, the need for any sort of one-off specific provisions that need to be raised through the period if a customer does kind of fall into arrears or into trouble. And so our assumption is that it's on a dollars basis because we've looked at our current portfolio with the current inputs that we've looked at in terms of forward-look assumptions around the economy, but that can shift really quickly. We've seen a much sort of more volatile environment in the last few months, in the last probably a year, I would say. Then in a few periods before that. And so we will come back to the market and update if that changes. But at this point, that's our sort of our best expected outlook for loan impairment expense.

Okay. So it's going to decline on a basis points of GLA basis into FY '27?

Look, there's always a number of one-offs in the portfolio. So we've looked at those. So we did take some specific provisions in this year. We don't expect that to repeat as we stand here today. But as I said, that is a risk. The portfolio growth, we've talked about a sustainable return to growth. It's about the same level of growth that we're assuming from a business lending perspective, but we won't take on any of the credit risk relating to asset -- the equipment finance part of the asset finance portfolio, given the forward flow arrangement we have with Challenger.

And then lastly, our return to growth in housing is not a hugely ambitious undisciplined return to growth in 2027. It is very much a slow and steady, ensuring we get the right returns, as Rod outlined earlier. And so we don't see a material impact on the collective provision relating to housing. It will obviously come with a collective provision but not material.

Great. And Racheal, you talked about your long-run expectations for loan impairment expense is sort of like 8 to 9 basis points, could you actually just talk us through what you're thinking in terms of the different segments on a long run base consistent with...

Yes, I mean, we -- sorry. I could just...

Please fire away.

Yes. Sorry. Look, so the 3 kind of broad categories, housing, we think that sits between 2 and 4 basis points; commercial lending can be sort of around 20 basis points; and then asset finance is obviously the highest at about 45 basis points. There are different subsets of that asset finance portfolio that can vary quite significantly, but at an aggregate level, about 45 basis points, noting that for equipment finance, that's largely not coming on to our balance sheet going forward. But look, these are long-run averages and there are just as many arguments to say that history -- the future is not going to look like the past. But that is, as we stand here today, our sort of best estimate as to where we think long-run average is seen.

Thank you. There are no further questions. I will now hand back to Jessica.

Thank you, everyone, for joining today's call. If you have any further questions, please reach out to the BOQ Investor Relations team, and we look forward to connecting with many of you over the coming days. Thank you.

Good morning, and welcome to BOQ's financial results presentation for the half year ended 28th of February 2026. My name is Jessica Smith. I am the General Manager, Investor Relations and Corporate Affairs at BOQ. On behalf of the management team, I would like to acknowledge the traditional custodians of the land we are meeting on today, the Gadigal people of the Eora Nation. We pay our respects to elders past and present.

I'm joined in the room today by BOQ's Managing Director and Chief Executive Officer, Rod Finch; and our Chief Financial Officer, Racheal Kellaway, who will present the results. We are also joined by BOQ's executive team. Following the briefing, there will be an opportunity for questions.

I will now hand over to Rod.

Thank you, Jess. Good morning, everyone, and thank you for joining us today. Our first half 2026 results reflect disciplined execution against our strategy and ongoing delivery of the group's transformation. Over the half, with strength and resilience across the bank and work to position BOQ to deliver more sustainable earnings through the cycle. We continue to deliver against the milestones and initiatives we have previously outlined, making further progress, simplifying the group, strengthening our operational foundations, advancing our digitization agenda and reshaping the balance sheet to optimize returns. At the same time, our focus on customers and communities remain central.

In an environment that continues to test households and businesses, we provided targeted customer support, invested further in fraud prevention and financial crime capability and maintained a strong and visible presence in our core markets, particularly Queensland.

The operating environment remains complex with geopolitical uncertainty weighing on consumer and business sentiment. That said, our approach has not changed. We continue to prioritize resilience and sustainability of earnings while progressing our transformation to improve returns and ensure the bank is well positioned for future growth.

From a financial resilience perspective, BOQ remains in a strong position. Capital and liquidity levels are robust, asset quality remains sound and our balance sheet provides the flexibility to support customers, navigate uncertainty and continue investing through the cycle.

I'll now turn to performance for the half, beginning with our financial results. For the first half, cash earnings were $176 million, down 4% on the prior comparative period. Underlying profit increased by 2%, reflecting revenue and expense growth associated with the completion of the branch network conversion in March 2025.

Loan impairment expense was $20 million compared to $3 million in the prior comparative period, which contributed to the 4% decline in cash earnings. We have maintained a strong capital position, which remains well above our management target range. This provides the group with flexibility to support future growth and capacity to absorb potential economic shocks. Reflecting this position, the Board has declared a fully franked interim dividend of $0.20 per share, representing a 75% payout ratio for the half. Racheal will provide more detail on the financial performance shortly.

Turning now to the key drivers of our strategy and the strong execution during the half. The digital platform remains a core enabler of our retail strategy, supporting customer growth, improving customer experience and progressively enhancing the economics of the retail bank. Following the launch of term deposits during the half, the core build is now complete, and our focus is shifting to ongoing enhancements that further extend our proposition.

To date, we have migrated more than 300,000 customers with over 70% of active retail customers on the platform. Growth and engagement are particularly strong across younger demographics, which was a key strategic objective of the digital bank. From a funding perspective, the digital bank is supporting lower cost deposit growth. The majority of new personal deposits are now originated digitally, supporting higher transactional balances and stronger customer engagement than our legacy platforms.

This is also translating into improved lending outcomes. The platform is scaling mortgages in line with plan, with 75% of group home lending originations processed through the platform in March, supporting lower origination costs. Scale increases and enhancements are delivered through the second half of '26 and into FY '27, we remain confident in achieving an improved time to decision and a 50% reduction in origination costs. Overall, this progress reinforces our confidence that the digital bank is delivering on its role, materially improving customer experience, enabling scalable growth and improving retail banking economics.

Our productivity program remains a critical enabler of our strategy, reducing complexity, strengthening operational resilience and reducing our cost to serve. Since FY '23, we delivered tangible productivity benefits through a simpler operating model, exits from noncore activities, technology rationalization, a reduced property footprint and continued simplification of our distribution and processing environment following the branch conversion.

Our strategic partnership with Capgemini is delivering efficiency through the business processing arrangement. More broadly, we continue to evolve the use of AI across the business with the establishment of a central AI hub to drive adoption and deployment of use cases, including near-term opportunities in the contact center, commercial lending and technology development.

When we set out to deliver the $250 million program, we recognized it was ambitious and that the pathway to delivery was unlikely to be linear. As priorities and initiatives have evolved, we expect the full run rate benefits to be achieved of FY '26. With the decommissioning of ME heritage systems and our Capgemini partnership key drivers of that outcome.

Importantly, productivity improvements have been sustainably embedded into the way BOQ operates. We have reduced complexity, improved efficiency and created capacity to absorb cost pressures while continuing to invest in our transformation.

We expect that on exit of FY '26, we will have generated simplification benefits equivalent to more than 20% of our cost base compared to when the program commenced in FY '23. This is an important outcome in what has been a complex operating environment and reinforces our focus on embedding sustainable efficiency into the way the bank operates.

Looking beyond FY '26, we acknowledge there is more work to do. Continued simplification alongside the increasing use of data, automation and AI provides a pathway to drive further productivity and to support operational leverage over time.

The capital partner with Challenger announced earlier this month represents an important evolution in our approach to balance sheet optimization and capital efficiency. Our strategic intent is to deliver sustainable returns through shifting asset and funding mix to optimize risk-adjusted returns and grow capital-light income. The capital partnership supports is providing balance sheet optionality and the opportunity for scalable noninterest income growth without the need for capital or funding.

The partnership includes a sale of approximately $3.7 billion of our equipment finance back book alongside the establishment of a forward flow arrangement. This structure supports scalable growth in equipment finance without increasing balance sheet concentration or funding requirements while maintaining customer relationships.

Under the whole of loan sale, the assets are fully derecognized from BOQ's balance sheet. Risk funding and ownership transfers to Challenger, enabling BOQ to reduce approximately $3.4 billion of higher cost funding, strengthening shareholder returns and further reinforce capital resilience.

The forward flow agreement enables us to continue originating new lending using our existing capabilities while scaling the customer offering without increasing balance sheet intensity or concentration risk. Over time this model generates capital-light income through origination and servicing fees, while Challenger provides funding and absorbs credit risk. For BOQ, this supports returns and the ability to do more with our customers.

As announced, our intention is to return capital release from this transaction to shareholders with the objective of optimizing return on equity and EPS over time. We are planning to do so through a combination of a fully franked special dividend and an on-market share buyback subject to regulatory and board approvals and market conditions. We expect the transaction to be completed by the end of May.

Turning now to progress on our remedial action plans. Delivery of our remedial action plan meeting our regulatory obligations remains a key focus for our management team. We continue to make strong progress across both programs. At the end of the half, 61% of total activities were complete with both Program rQ and AML First transitioning from implementation into the embed phase. This reflects not only delivery against milestones but also a clear shift towards embedding changes into day-to-day business as usual processes. The program remains well governed and appropriately resourced, and we continue to progress in line with regulatory expectations, further strengthening BOQ's risk governance and control frameworks.

Turning now to our Retail Bank. Our priority in retail banking remains clear, to reset the economics of home lending and improve returns by scaling a lower cost-to-serve digitally enabled model. We have made considerable progress in reshaping the Retail Bank, including reducing origination costs through the digital platform, delivering term deposits on the platform, which completes the product suite with all deposit products now available on the digital bank and optimizing distribution following the branch conversion.

We've also been deliberate in allowing portfolio runoff where returns were uneconomic while improving funding efficiency at the same time. We are now at a key phase as the digital bank scales. More than $23 billion of home lending sits on the platform with approximately 75% of flows originated digitally. The branch conversion has stabilized on a smaller, more efficient footprint and distribution is now better aligned to evolving customer preferences.

Foundationally, operating on a modern, cloud-enabled digital platform is also creating a strong underlying capability for the deployment of AI and automation. This has allowed us to explore introducing AI-driven automation across customer operations, particularly in the contact center with further opportunities to improve customer experience and reduce cost to serve. As noted at our full year results last October, the rate of home lending decline has moderated. While we will continue to prioritize returns over short term volume, we expect home lending to return to growth in FY '27, supported by lower origination cost and improved customer experience.

Moving to our Business Bank. We are seeing the benefits of focused execution in targeted higher returning specialist segments. Over the half, commercial lending grew above system by 7%, driven primarily by health care, agribusiness and well-secured commercial property. This reflects deliberate portfolio positioning in a sector where we have deep expertise. Housing contraction within the business division reflects targeted runoff where returns were less attractive. The branch conversion continues to support this strategy, enabling banker deployment into key growth corridors and regional SME markets while maintaining strong customer relationships and attracting experienced bankers aligned to our specialist focus.

Banker capacity is being further augmented by AI within commercial lending to free up bankers to spend more time with their customers and grow their portfolios. Overall, the Business Bank remains well positioned to deliver sustainable growth, underpinned by strong relationships, quality bankers and deep industry expertise in our key segments.

I'll finish by reinforcing the importance of our purpose and values. As a bank with more than 150 years of Queensland heritage, supporting our customers, communities and people remain central to how we operate and make decisions. Across the half, we continue to invest in regional and SME communities and strengthen partnerships supporting vulnerable Australians.

At the same time, we remain focused on our people, strengthening the leadership capability, investing in learning and development, including the launch of an AI Academy and sustaining a strong risk culture that supports discipline execution and long-term performance. Together, this underpins the transformation we are delivering, building a stronger and simpler BOQ for our customers, communities and people.

I'll now hand over to Racheal to talk more about the financial results in more detail.

Thank you, Rod, and good morning, everyone. The first half 2026 result reflects a steady and continued delivery of our strategy, including bold choices and the disciplined allocation of capital. We delivered cash earnings of $176 million in the half, down 4% against the prior comparative period and 12% against the second half 2025. When compared with the second half of 2025, total income reduced 4% driven by margin compression, fewer days and lower asset balances. There was an uplift of 4% in noninterest income, and we delivered another period of strong cost management, holding expenses flat.

Loan impairment expense increased 11% to $20 million. This was primarily driven by one specific provision within the asset finance portfolio, and at 5 basis points to GLA remains below historical levels.

Against the prior comparative period, total income increased 5%, primarily driven by revenue uplift from the branch conversion. Expense growth of 6% included bringing on the cost of operating the branch network and is down 2% excluding these costs. Pleasingly, underlying profit increased 2%. Higher loan impairment expense compares to $3 million in the prior comparative period, which included a write-back in commercial lending.

The progress we have made on executing against our strategy, including positive lead indicators of success in the digital bank, growth in our Business Bank and our capital partnership and multiyear proof points on cost discipline leave us well positioned as we enter the second half.

As outlined to the market earlier this month, there was a $31 million post-tax impact driven by the equipment finance portfolio being recognized as held for sale. Further changes to number will primarily be driven by market movements in swap rates. The impacts of which will be known at completion.

There was a further period of amortization relating to the branch strategy with $8 million incurred this half. This program has been delivered on time and on budget as announced in 2024, adding in a small impact from hedging and fair value changes resulted in statutory net profit after tax for the first half of $136 million.

I will now spend some time looking closer at the net interest margin given the number of moving parts. On mortgages, we saw ongoing competition, and we experienced slightly higher-than-expected retention discounting, particularly to support branch customers early in the half.

Commercial lending competition was in line with expectations and came with strong growth in our Business Bank. We have seen acquisition spreads stabilize through the half. We saw a 1 basis point benefit from continuing mix shift from higher margin -- towards higher-margin business.

Outside of these underlying lending drivers, cash rate movements contributed a 4 basis point headwind, driven materially by the non-repeat of benefits in the second half result as rates reduced.

Funding contributed a 3 basis point uplift with equal contribution across term deposit optimization, wholesale pricing and funding mix benefits.

Liquidity and other was a negative 1 basis point. This included higher HQLA balances, impacting margin by 2 basis points, replicating portfolio, benefiting margin by 1 basis point. However, this was offset by unhedged exposures where the average cash rate in the half was lower than the prior period and less exposure to basis risk and improved basis cost provided a small benefit.

Finally, we had a 2 basis points -- we had 2 basis points of a nonrecurring benefit. This is made up of an adjustment to brokerage GST. And as our fast-growing novated leasing portfolio matured, we have an updated view on the average life of that portfolio. Net interest margin for the period was 1.67%.

We exited the half with a stronger second quarter margin than the first. Looking to the second half, we will see the benefit from the February and March cash rate movements. Retention activity is expected to continue to feature as households and businesses look to manage their budgets in a rising rate environment and as inflation persists, continuing the trend on underlying price competition.

We expect to see ongoing benefit from reshaping the balance sheet toward business lending. We anticipate increasing funding cost benefits from current favorable term deposit spreads, retail deposit optimization and funding mix benefit. Replicating portfolio will continue to be a positive with higher attractive rate.

We will optimize liquidity following the sale of the equipment finance portfolio, while impacts from the sale across lending and funding will be broadly neutral to net margin. The 2 basis point benefit one-off I described in our first half will not reoccur.

Despite there being somewhat uncertainty and volatility in our outlook, there are more tailwinds than headwinds for margin as we enter the second half. This half, we delivered another period of strong expense management with costs flat on the prior half against a backdrop of high inflation. We are in the final period of our 2023 simplification program, which since its commencement has almost entirely offset annual inflation and new costs to operate the branch network from conversion.

This period, inflation and investment across technology, risk and business banking were offset by productivity benefits, seasonality in employee leave and a modest reduction in group investment spend. Whilst we have seen early success in our business processing partnership, we are experiencing some delays in the transition of our technology outsourcing, which is contributing to the multiyear $250 million productivity target and our 2026 cost guidance. The full $30 million of annualized benefits remains on track for 2027.

I do want to take this opportunity to reiterate our commitment to sub-inflation cost growth for the full year 2026 against the prior year. This requires a planned reduction in our cost base into the second half.

Our guidance on costs remains unchanged. We have continued to invest in the business at a sustainable level with $77 million invested in the first half. As outlined at the full year result, we are moving to a more sustainable level of investment for our business, following a number of years of high investment, including the integration of ME Bank, investment in the Business Bank, the build and scale of the digital bank and risk and regulatory uplifts.

85% of our software intangible assets are now in use and amortizing following the successful delivery of the digital bank and as we acquire and migrate customers and see more features released.

Moving now to portfolio quality, and we remain strongly provisioned at 39 basis points to GLA. Impaired assets reduced on last half to $84 million. This includes a reduction in commercial lending and housing impaired balances and an increase in asset finance. Loan impairment expense increased to $20 million or 5 basis points to GLA, remaining at a low level.

Looking at each portfolio in more detail over the half. Home lending remains supported by strong underlying asset prices and a decrease in 90-day arrears. There was a $7 million credit to loan impairment expense, driven by the improvement in arrears and house price increases over the period. Commercial lending 90-day arrears saw a slight increase with 2 single name exposures, contributing to a 5-basis-point increase off a low base. Specific provision equity remained low. Total loan impairment expense on the commercial lending portfolio was $3 million.

A modest increase in asset finance arrears was largely driven by seasonality with loan impairment expense of $24 million, impacted by a single name exposure, contributing almost half of the expense.

BOQ remains well provisioned for a change in the cycle. We hold $298 million in provisions, which is $68 million above the base scenario. We had a reduction in the total collective provision due to the sale of a noncore credit card portfolio, which occurred in the period. Our weightings remain unchanged in the period. However, we have adjusted downwards the economic assumptions, underpinning the base and downside scenarios.

We continue to hold collective provision overlays for unique portfolio factors, including specific industries. If we were to enter a 100% downside scenario, a provision increase of $24 million would be required. Our downside scenario assumes residential house prices declining, negative GDP growth and an unemployment rate of 5.6% this calendar year. Whilst we consider our provisions to be appropriate, with current volatility in the broader economic environment, we are remaining vigilant.

In a period of sustained lower home lending growth, as we recycled the balance sheet, there was a reduction in total funding. We continue to focus on deposits as a primary source of funding with runoff in less stable deposits and held deposits as a percentage of total funding at 72%, with a broadly stable deposit-to-loan ratio of 85%. There was targeted runoff in term deposit portfolios of 6%. This was both a strategy around optimization for cost of funds but also as we migrated customers onto our new digital platform. Customer deposits remained broadly flat outside of this. Our average LCR remained strong at 141%.

As we near completion of the whole of loan sale, we are prudently managing down our liquidity position. We will then see a temporarily elevated LCR before managing this to normalized levels through the second half. Our optimization plan will take the opportunity on our long-term wholesale maturity through our short-term wholesale portfolio and on retail deposits more broadly.

Capital ended the half above our target management range at 11.18%, a 24-basis-point increase was driven by earnings, net of dividends.

Business lending growth increased underlying risk-weighted assets. However, this was more than offset by a reduction in deferred acquisition costs, adding 2 basis points. Investment consumed 2 basis points. And lastly, other movements increased CET1 by 13 basis points, including mark-to-market gains in the available-for-sale reserve of 9 basis points, deferred tax assets in excess of deferred tax liabilities benefiting 6 basis points and equipment finance portfolio sale impacts of 3 basis points.

Our strong capital position supports our planned capital return following the sale of the equipment finance portfolio and as we enter a period of higher uncertainty.

As announced earlier in April, we have entered the partnership -- into a partnership with Challenger on the sale of our equipment finance portfolio and the establishment of a forward flow arrangement. Today, we have provided some further detail on the expected impact on our '26 outlook. These impacts do remain subject to change through to completion date, which is on track to occur ahead of initial expectations by early May. In addition, the ranges provided include assumptions on the key moving parts, including the expected benefit from what loan impairment expense would have been without a sale and movements in swap rates.

Lastly, while we won't comment further on the detail of the capital management plan, which is subject to Board and regulatory approvals and market conditions, we intend to complete this in an efficient way to support current shareholders and to provide an enduring benefit to both ROE and EPS.

In closing, this period saw our focus on costs and capital management did the positive results for the group. 2026 is a key year of delivery against our 4 strategic pillars, in particular, our digitization initiatives, which, in addition to simplifying our business, enables us to grow customer deposits, supporting our commitment to return to asset growth in 2027.

We have shown that we will be bold and disciplined in how we deploy capital. With heightened volatility and uncertainty in our environment and how this may in particular, impact funding, margins and losses, commitment to our transformation is even more critical. We continue to remain sharply focused on improving returns over the long term.

I'll now hand over to Rod for closing comments and outlook.

Thanks, Racheal. The external environment remains highly unpredictable with geopolitical uncertainty continuing to increase risks to the economic and financial outlook. We will continue to support customers through these conditions while maintaining disciplined risk settings and strong balance sheet resilience. We will maintain focus on optimizing our balance sheet settings and growing in specialist segments. Growing at system in business lending remains our target heading into the second half, while home lending contraction is expected to continue easing with a return to growth anticipated in FY '27.

On the funding side, potential market volatility and further increases in the cash rate will influence competition for deposits. As Racheal outlined, we anticipate tailwinds to margin in the second half through expected funding benefits. We are targeting sub-inflation cost growth, including the full year impact of branch conversion and higher amortization while continuing to progress productivity and simplification initiatives.

Loan impairment expense is expected to remain below long-run average loss rates in the near term, though downside risks are clearly present given the global environment.

We expect the capital partnership to complete as planned and remain open to further partnerships. We have not changed our management target for CET1 or dividend payout ratios. Overall, we remain focused on disciplined execution, resilience and sustainability as we continue to progress the transformation of BOQ.

I want to close by stepping back to where we are in the group's transformation. Our strategy to become a simpler specialist bank has been clear and consistent: strengthening foundations, simplifying the organization, digitizing the retail bank and improving returns. Since resetting the strategy in 2023, we have made tangible progress against each pillar and embedded new capability across the group.

We are now entering an important next phase with several near-term milestones approaching, completing the ME retail customer migration and materially decommissioning the legacy ME Bank environment over the next half is the culmination of several years of foundational work. These milestones represent a further step in unlocking lower costs, better customer experience and improved returns over time. They reinforce our confidence in the strategic direction and our continued focus on sustainable performance.

On a personal note, when I stepped into the CEO role 8 weeks ago, I reflected on the responsibility that comes with leading a bank with more than 150 years of history. It is a privilege to be a custodian of a brand that generations of Australians have trusted.

I'm leading a committed team with a strong focus on the next phase of our transformation with a continued priority of improving returns and supporting customers, in particular, improving our cost of funding as we scale deposits on our digital bank, extend relationships in the business bank and leverage our capital partnership to support a sustainable return to growth.

We face into this coming period of uncertainty from a financially resilient position with strong capital, liquidity and asset quality. As I look ahead, our focus is on the continued disciplined execution of our strategy to deliver a better experience for our customers and increased returns for our shareholders.

I will now hand to Jess for Q&A. Thank you.

Thank you, Rod. We will now move to questions. [Operator Instructions] Operator, may we have the first question, please?

First question today comes from Ed Henning from CLSA.

The first one is just on asset growth and mortgages and thank you for your comments today and talking about returning to growth. And I understand continuing to focus on profitability. But can you just talk about as you move forward, both in the near and the medium term, are you willing to continue to lose market share on housing? At what point do you have to step back into the market? Or do you just don't think you need to, if you continue to see margins contracting like you are, are you willing to grow below system in mortgages.

Yes. Thanks, Ed. So in terms of the mortgage portfolio, the focus is really on returning to growth in '27. If we think about the economics of the mortgage portfolio. The key areas we've been focused on is first is really scaling the digital bank. That's a really critical capability in terms of reducing cost to serve and providing a better experience for both customers, brokers and our bankers.

We've talked today to some of those metrics. That platform is scaling to plan. We had around 75% of the originations flow through that in March. So we are well progressed. There's more work to do. I think that also combined with the branch network is really shifting the economics for us in that channel and in that mortgage portfolio. So for us, we're not going to chase short-term returns. We're really focused on the pathway back to returns above our cost of capital, starting with writing business that's accretive to current ROE and then making sure we're contributing to the fixed cost base and being really disciplined as we continue to step our way back to return to growth in '27.

And just on that, I understand the return to growth, but growth doesn't mean growing at system, I would imagine, or is your plan to be at system in '27?

We're not putting a target on growth relative to system. I think our positioning is returned to growth from a book perspective. I think the priority there, Ed, is making sure that the growth that we are achieving is within the return profile that we're comfortable with.

Okay. And then just a second quick question. And again, thank you for your comments on the cost outlook and growing below inflation. As you move forward, you've made some significant changes in your cost base and you talk about the reducing investment spend. Over the next few years, in the medium term, do you still think you can grow below system or around system in costs? Is that your goal that we should be thinking about?

We won't give long-term guidance on cost. I think for us, we have worked really hard on the productivity program. As I said, it was an ambitious target when we set it. We're making progress against that. I certainly think leveraging the investments we've made in technology and seeing further opportunities there around automation, digitization, there's continued work that we can do there. We have the benefits of the partnership with Capgemini also flowing through. So for us, we really think that's a key aspect of how we want to organize the business and run it. We think being disciplined on cost management and driving operational leverage in the business, given the investments we made will be a key focus for us into the future.

Our next question comes from Andrew Triggs from JPMorgan.

Racheal, a question for you, please. Just on your exit NIM commentary, which you said was higher than the average for the half. Does any of that apply to -- or is any of that driven by lower liquid assets? I'm wondering if the same comment would apply on an ex liquid asset basis?

There is benefit, Andrew, for the liquids portfolio. And so there's 2 elements of that. One is lower HQLAs and the second is a high yield on that portfolio. But it would still hold excluding the sort of comments around it being higher would still hold excluding the specific liquidity impacts.

And presumably, that 2 basis points of nonrecurring brokerage and amortization adjustment actually turned into -- does that reverse in the next half? Or just is it -- it will be a non-event in the walk for next half?

It will be -- you'll see it as a negative 2 basis points because it's a non-repeat. So there won't be a P&L. There'll be -- it would come out of P&L, yes.

So what moving parts sort of moved in the right direction, therefore, to drive that to cycle that headwind, please?

Yes. So I mean, there's a couple of things in the second, in the first half result, that will not repeat that are negative. And so the first of that really is, if you think about the timing of our end of half, it was the 28th of February. So our half actually saw the negative impacts of cash rates reducing. So there was 3 basis points of negative in this half from the non-repeat of benefits we saw in the second half last year that we called out.

If I step back from that, the tailwinds into the second half are cash rate related. So we have seen February and March cash rate increases, that gives us a benefit, both the timing benefit sort of -- but also on the unhedged portfolio. So that is a benefit into the second half. And we have expectations that it is most likely that we will see more cash rate increases through the period as well.

The other big driver is really on funding costs more broadly. And so currently, term deposit spreads, for example, are positive. We are expecting that to continue through the half. We're seeing favorability in terms of savings, repricing and then also some funding mix benefits both on an underlying basis, but then also as we optimize from the proceeds of the equipment finance sale.

Our next question comes from Andrew Lyons from Jefferies.

Just a first question just on your provisioning. Geopolitically, a significant amount has changed in your result in October, your second half result in October, which appears broadly negative for the economy and your outlook comments appear to confirm this. However, your provision assumptions imply lower dollar value provisioning for each of your scenarios and you've also made no changes to any of your weighting. This does seem a bit at odds with the evolving macro conditions the economy is faced with and also what your peers are doing. Can you just explain why that is the case?

Yes. Look, I mean, as you can imagine, we have thought a lot about our provisioning levels and continue to do so. A couple of comments. The weighting of our collective provision is 45% weighted to downside and severe downside economic scenarios. We have got a worsening outlook within those scenarios. So whilst the weightings haven't changed, the economic assumptions within those scenarios have.

If I then step back just more broadly as to your comment around the collective provision in dollar terms reducing, there are 2 idiosyncratic kind of things happening for BOQ in that number. The first is, we did sell a credit card portfolio. That was all settled in the half. It's very small from a balance sheet perspective, but it did mean a reduction in the ECL of $8 million. So that was a step down.

The second factor underlying here is our reduction -- overall reduction in assets. And so as our GLA balances have declined, that is also a driver. If you then take those and take those out of the impact, we have increased our CP balance by about 3%. That is actually in line with what we've seen really recently, some of our peers also do. So it's about a 3% increase in the CP. We're very focused there on specific overlays for industries.

To call out accommodation in food services, construction, transport, particularly. And so from an overall provisioning perspective, excluding those movements that I called out as sort of one-offs, then we feel that at 39 basis points, we're well provisioned for what could come. But obviously, this is not an area we are really, really comfortable with, and we will remain super vigilant on this.

Great. That's really helpful. And then just a second question on costs. On PCP, software assets are up about 86% and yet your amortization charge is up just 23%. Now I realized your FY '26 expense guidance does take account of higher amortization in the second half. But can you perhaps talk to the extent to which the P&L faces a headwind into FY '27 from amortization? Or maybe as an alternative, where do you expect the amortization charge to ultimately peak? At what level and exactly when versus the $43 million 1H '26?

Yes. So we have, as you just called out, we have been really clear that we expect amortization to increase and that is one of the key drivers into the second half that is requiring an offset from our productivity initiatives. So we'll see an increase into the second half.

We'll then see quite a similar increase actually into the first half of '27 and again in the second half. So if you look into 2027, we will have higher amortization again, so effectively another half. It will then largely stabilize. So sort of through the end of FY '27 into financial year '28, you can expect our amortization profile to sort of normalize and flatten out at that point.

And can I hazard the question as to what that peak level will be in '27/'28?

Look, I mean, we'll end this year close to $100 million. You can sort of expect that to increase by 20% to 25% through until that peak period.

Our next question comes from Matt Wilson from Jarden.

Matt Wilson, Jarden. Just look broadly, the balance sheet shrinking and you're only yet -- you're only getting a small amount of capital being released, you hope to return the loan sale capital to shareholders, but at the same time next year, you want to return to system growth, your returns are very low. Do you need that capital to fund that future growth? And given the uncertainty in the macro environment, would it be better to hold on to that capital? It would be a shame if you had to raise capital next year because we went through a credit cycle.

And I've got a second question, as per Slide 27, you highlight the impact of the loan sale. If we take the impact on your net interest income, it implies the loss spread of selling those loans, impacts your margin by about 7 basis points. Could you confirm that? And then how do you offset -- that's a lot of work to do by reducing liquids?

Yes. Thanks, Matt. I'll respond to the first question and I'll just pass to Racheal on the question on the capital sale -- sorry, the capital partnership. Look, in terms of our capital level, we're, as to Racheal's comment, the way we've approached provisioning for the half, she’s going to give an outline of how we're viewing. We note that within the result, we've returned to CET1 well above our management target range of 11.18%. We -- in considering how we approach dividends and shareholder return the capital management plan, we obviously factor into how we're looking to grow and how we want to continue to deploy capital in a really disciplined way.

And so when we look into that future scenario into '27, from our perspective, it accommodates how we want to grow within the Business Bank, where we think we have an opportunity to do that in a sustainable way with returns that we're comfortable with, and also in the mortgage portfolio as well as we talked to earlier, which is a pathway to returning growth within the mortgage portfolio. So from where we sit today, recognizing there is some uncertainty in the outlook. We sit here with a strong capital position. We have some flexibility of how we approach it. We have clear plans of where we want to grow, but we are going to be kind of continuing to watch really closely as the market evolves and respond accordingly. But Racheal, I'll pass to you on that.

Yes. So look, on the capital partnership, I will answer your specific question, but I do want to just take the opportunity to step back and talk about the overall P&L impact because I think that is really important and also the sort of capital impacts of that as well.

The impact on our 2026 NIM, so the end of this year, is broadly neutral. And so that is a reduction in the net interest income as you described and by sort of 1 or 2 basis points and then that will be offset by funding, largely offset by funding benefits by about the same amount, so broadly neutral to NIM specifically.

I think what's really important in this structure is that whilst we recognize there is lost net interest income, we are generating noninterest income, which is capital-light revenue. And so that is the really key thing to look to here. It is also a cyclical business, so you can remove the loan impairment expense that we would have otherwise had. And so this is not a partnership or an arrangement or a structure that really is driving cash earnings impacts in a material way.

It is about capital partnership. It is about capital release and then the ability to grow the business, scale the business and to generate more noninterest income capital-light fees without having -- without taking that onto our balance sheet.

Just to follow that up, it's -- if you do the math, you're generating 150, 160 basis points of spread on those assets that you've sold. You don't -- that spread you've given up, so that captures the less funding, et cetera. And then when you look at the origination side of the business, 90% of it comes through the broker channel, yet your call out an origination capability, the economics don't make sense either because you're obviously paying brokers.

Yes. Look, Matt, in terms of the way we think about this business, obviously, it has driven the portfolio. It is a broker-driven industry as well, but there's also significant opportunities within our proprietary franchise as well. We see it as a really core need for many of our customers. If you think about our sector specialization in health care, it's a core need set of those customers as well as wider portfolio. So we see growth not just through the broker channel. We also see work within our proprietary channels as well.

As we talked about when we announced this, we see an opportunity to scale growth in this portfolio. And this capital partnership gives us the foundation to do that, driving capital-light income.

And on the spread?

Look, I don't think you've quite got the spread. We can go through the detail this afternoon, Matt, if you like. I mean I think I just need to really take you back again though, like we will absolutely be reducing our NIM as a result, of this, but we are looking at this much more broadly than just looking at the NIM. We will be generating noninterest income, as I said, and we will not see a cyclical portfolio and the impacts that, that tends to have on our earnings profile. And so there is a much more benefit to this structure than just the impact on margin.

Our next question comes from Jon Mott from Barrenjoey.

I just got a question on the commercial portfolio. Obviously, this is a part of the book, which is growing very rapidly. So if I turn you over to Slide 42 of the presentation, which goes through this in a bit of detail, when we look at it, we can see the commercial book by industry. Property is now at 41% of the book. And if I look at that same slide from last half, it was about 37% of the book.

So you work the math out and expand by the growth of the book. The commercial property book is growing at close to 20% half-on-half. This is the commercial properties, so it's growing 20% half-on-half and 40% versus the previous corresponding period. And then you sort of work the rest of the portfolio out, healthcare is pretty flat, agriculture is up a touch, and there's really no growth at all. And then if we look by state, nearly all of this is coming in New South Wales. So a couple of questions about what's driving this. Are you participating in any syndicated facilities that could come through? Can you continue? Are you comfortable with this rapid growth in New South Wales commercial property? And why is the rest of the book not growing?

Thanks, Jon. So just a couple of comments. What you're seeing in terms of growth in the business portfolio is really the deliberated and targeted approach we've taken to growth corridors. So we have invested in bankers in New South Wales. We thought there was an opportunity to grow there. We were underpenetrated. And so that is really coming through. And more broadly than that, when we look at the types of loans that we're doing, we're really comfortable with the security that we're taking over it, these are quality assets that we're lending. We're well secured on that lending as well. We're operating in industry and sectors that we know well, and that's the experience of our bankers and the credit policy we're applying.

So look, that is the composition of the portfolio. We are kind of continuing to focus on growth in the key sectors from a specialist perspective that we're looking at. But as we stand today, we're comfortable with the quality of the growth that's coming through as well.

Why so heavily in the commercial property and no growth in health care and all the other sectors, a little bit in agri, but everything else looks flat?

Yes. Look, I think it's a reflection of where we've targeted growth. And so obviously, as we bring on bankers, they will build their portfolios and that is reflected, I think we take a really balanced approach to where we want to go. I think, obviously, we are well diversified across industries and geographies overall, and we're going to continue to kind of plan that out in terms of how we construct the portfolio. So I would view this as the lending we have done. It's really reflective of where we've looked to invest from a sector and geography perspective. But we're going to continue to take a really balanced approach as we think about growth in business banking.

Okay. And finally, is any of this syndicated or is this all purely originated by those banker teams?

Look, there's some elements of syndication in there as well. From a syndication approach, our philosophy there is really following our customers and supporting our existing customers through that. So there is elements of it, but our really key core focus is on -- is working directly with customers on lending facilities.

Our next question comes from Sally Hong from Morgan Stanley.

I just have 2 questions. The first being on the margin. For the outlook commentary on the deposit pricing and mix sounds quite favorable, and you talked about benefits from higher cash rates. It does sound like margins are going up in the next half. Is that a reasonable assumption?

Yes, Sally, that's absolutely reasonable. We don't usually go into as much detail on, in particular the quarterlies, but we thought it was important for the market to understand that we have a stronger second quarter than the first quarter and that we are seeing tailwinds into the second half.

Great. And you guys -- on costs, you guys reiterated that FY '26 cost growth should remain below inflation, and you've also talked to further benefits from Capgemini, decommissioning the ME Bank platform and as well as broader productivity actions. As we think about the medium term, how should we frame the cost outlook for FY '27? Should we assume that will come down again?

Look, we're not giving guidance on FY '27, Sally. The way I think about it is, as I said earlier, we think we have more opportunity and more to do in terms of how we simplify the organization and creating the operational leverage, building on the investments we've made, particularly in technology. So coming into next year, we obviously have the decommissioning benefit and Capgemini coming through, as we called out.

I think over the medium term, as we've completed the ME migration, we're turning our attention to the BOQ legacy environment. That will again be something that we work on over the kind of medium to longer term given the time it takes to safely migrate customers over time. So we've built really strong execution capability in that regard. We are redirecting the team to that as we close out ME migration. So that, combined with scaling the platform and leveraging the kind of leverage it allows you with the digitization and AI opportunities starting to emerge, we think this is going to be a key priority for us going forward as well.

Our next question comes from Brian Johnson from MST.

I have 2 questions, if I may. The first one is just on the agreement with Challenger. Two aspects of this. You speak about ROE and EPS growth. You've actually got about $600 million in surplus franking credits. You've got a share register skew very much towards retail shareholders who get a disproportionate benefit from the franking. I get the fact from a management perspective.

ROE and EPS growth makes a lot of sense. But Rod, I'd just be interested, how should we be thinking about the fact that your share register is skewed to the group that get a disproportionate benefit from the massive balance in the surplus franking accounts that have not been able to be distributed thus far?

Thanks, Brian. In terms of the capital management plan, as we've indicated, we're looking at a combination of a special dividend fully franked and an on-share market buyback, still subject to regulatory and Board approvals. And obviously, the conditions in the market in a buyback scenario.

For us, the priority is really thinking through, as you said, the composition of our book, but also the efficiency in returning capital to shareholders, and it's really -- that principle that's driven how we're thinking about returning the capital post the transaction completing.

I might just add...

But Rod, just going back to that point, why isn't it all 100% of special dividend?

Yes. Look, I think it's a combination of recognizing the shareholder, as you say, we do have a lot of retail shareholders today and they will benefit from the dividend. We want to reward shareholders who have stuck with us over the last few years, and certainly, that's a component. But we also recognize there's benefit for them going forward in a reduced share count in a buyback as well. So it's a combination of the 2 that we're looking at.

Okay. The second one is, if we have a look at home loan profitability, and I appreciate the amazing efforts that you guys have made to digitize everything, but the operating costs in originating a home loan somewhere between $600 and $700 versus the net interest income is about $6,000. If we have a look at it, Patrick Allaway have been telling us that front book mortgage pricing was below the cost of capital. I'd nearly go so far as suggesting that Macquarie is still pricing the way they are, both deposits and home loans.

Even with the digitization benefits that we get, can we just get a feeling about what your view is on front book mortgage pricing relative to the cost of capital regardless of whether it's done through, or through the 3 channel, digital, branch and broker?

Yes. So I think just in terms of the way we've designed and built the digital platform, it is multichannel. So we'll support -- supporting brokers at the moment through our ME brand. We will roll it out over the next 12 months to our proprietary channels, both banker and direct as well. And so those benefits will kind of flow through across all channels.

When we think about mortgage profitability, there's obviously the cost and the cost to serve and cost to originate funding cost is another element as well. I think the branch conversion also helps the economics in terms of that margin returning to us overall.

Brian, for us, I think our priority is really the walk back up to returns above the cost of capital. Our focus is on returns above our current ROE and making sure we're contributing to the cost base of the wider group or the fixed cost base of the wider group. We're getting to a position where that is the case. And so for us, it's really continuing to work through that. We feel as though, that is a clear pathway for us. Obviously, it's subject to competition in the market. But I think the investments we've made and those priorities we'll called out are the right combination of activities to get us to where we want to be.

So Rod, it's still below the cost of capital there, even through the 3 channels when you put all this through?

Look, in terms of what's recent acquisition, I think we're above our current returns, and it's contributing to our fixed cost base with the pathway to get back up to the cost of capital.

Our next question comes from Carlos Cacho from Macquarie.

I just wanted to get a bit more detail around those cash rate impacts you mentioned on the margins. You call out 3 bps to the non-repeat benefits in the second half. I'm guessing that's the timing benefit of taking a little bit longer to pass on the lower rates to some products. Is that going to work in reverse? Are you going to get a timing headwind with the rate cuts we've just seen the 2 in Feb, and March and potential if we look at market pricing and another 1 or 2 in the -- to come still in this half?

Yes, Carlos, it's a great question. We, so the 3 basis points is exactly for the reason you outlined. So you're absolutely right. As you can see in the walk, we've called out a negative 4, which is cash rate timing. Negative 3 relates to the non-repeat of the benefit in the second half '25 and negative 1 actually does relate to the February cash rate increase. So yes, there is an opposite effect that happens as cash rates increase.

I think though, if you step back, there are other benefits, obviously, in a cash rate environment, cash rate increasing environment for margin and particularly on the unhedged component of our low-cost deposits.

Great. And the second one, I just wanted to ask about provisions. I understand the economic forecast might be the product of the -- of your economist, but if I compare your economic forecast for a downside scenario versus major bank peers. They look to be quite a bit more optimistic. And unemployment rate that's in a downside scenario 1 to 2 percentage points less fall in house prices and commercial property prices, that's 20% small.

Only 10% versus 30%. It looks to me like the downside scenario, the very modest downside and not quite as severe, how comfortable are you with those forecasts? Or take it that you're provisioning top-up to get your downside scenario is not significant, but it seems like the downside scenario itself is quite a bit more optimistic than what peers are forecasting their downside scenarios, which is more like 10% unemployment and 30% fall in property prices.

Yes. Look, we -- what we haven't shown you here, and we do at the full year result is actually what the severe downside scenario looks like as well because we have a 45% weighting from a downside and severe downside and the kind of some of the measures that you just called out, the economic assumptions that you called out, actually, are much more aligned to our severe downside scenario, which has a weighting on the overall collective provision.

I think if you were to take a view that we would get to 100% downside in this calendar year, so a fairly quick worsening of the economy, you would be taking an extra $68 million above the base scenario. And so that's the kind of -- that is one of the ways we look at this.

I think as you can expect, we would obviously also look at and peers as a sort of outside-in-view on our provisioning levels, and as I called out earlier, if you take out the 2 one-off kind of benefits that we're getting from a CP perspective, we are increasing our collective provision, largely in line with the rest of the industry. And so we are tracking to industry metrics more broadly. And one of the ways we've done that this period is in the form of some specific industry overlays.

I think just to summarize, our view is that we are -- as we sit here today, well provisioned, but we have definitely got a cautious bias when looking ahead. We are remaining very vigilant. Things are moving quickly. And so I think whilst we are well provisioned as of today, this is an area that we will closely monitor.

Our next question comes from Brendan Sproules from Goldman Sachs.

Congratulations on the appointment to CEO role, Rod. Look, I just want to get a bit of a medium-term view of Retail Banking division. Obviously, as you've stated that you're resetting the economics here and the return you're scaling through lower cost and digital to serve. Slide 35 shows us. And in the last 12 months, the pre-provision profit has dropped around 20%, and this is despite the branch conversion.

So a couple of questions for me on this. Firstly, on the deposit side, when do you think we'll start to see growth in lower-cost transaction deposit accounts? And I guess what is the medium-term outlook in terms of how much will that type of product fund the loan book. I mean you have one of the lowest funding in terms of mortgages from those particular products? And then I have a second question.

Thanks, Brendan. So look, retail banking, I talked to this earlier just in the presentation. The economics of this has really been driven by a couple of factors. One is moving to a modern digital core. We're making great progress on that. We're really comfortable with the metrics that we're seeing both from the customer response. So it's a much stronger proposition than our legacy environment and customers are responding well to it and also the economics of the platform in terms of cost to serve and cost to originate. We do see a real opportunity to grow more transactional deposits on that platform. That is a long slow burn in this industry. I think our view is we've got the right product portfolio on that. We want to compete in that space.

One of the key things that we've been looking for to really help that growth is bringing mortgages onto the platform. And what we actually see is mortgage customers are a good source of transactional deposits over and above what sits in their offset account just in the transaction account on balance, they tend to higher -- carry a higher average float than non-mortgage customers, mortgage customers. So from our perspective, that is the real focus with the build now completed and migration of ME. That gives us the capacity to really drive that growth. I would also say over the last 12 to 18 months as we've made the portfolio choices, the funding profile has really been reflected in the growth that we've required of what we needed from a funding perspective. So that is a big priority for us.

I would also say outside of the Retail Bank, if we think about those lower cost deposits, we think there's a big opportunity in our Business Bank. We know that the proposition there has some gaps in it, and that's a priority for us in the near term to address that. And we think we can do more with our business banking customers and help meet their needs on the deposit side of the portfolio as well. So for us, we think we've got the right proposition. We want to get out there and compete and win more of those balances into the future. And we think that's really key to supporting growth for us in the longer term.

That's a very detailed answer. And just my second question is on the cost-to-income ratio, which is now moved into the mid-80s and a few years ago, particularly prior to the ME Bank acquisition, it was more like 50s or 60s. To what extent will this move to the lower cost to serve materially move that ratio? Or is there other initiatives that you have to put in place to really get that back to what has been the longer-term cost-to income within that business over a very long period of time?

Yes. Thanks, Brendan. It's certainly not where we want it to be today. For us, the pathway back is a combination of factors. One is it's moving on to a simpler digitally enabled modern core, as I talked to, and that's -- we're seeing the metrics that we want in that space.

I think more broadly, we still have complexity in the business that we obviously -- these numbers today still contain the ME legacy environment and the BOQ legacy environment as well as the digital bank. Our intent is to move all of our Retail Bank onto that modern core. I think the other element is what that provides is operational leverage. And so we see this is about returning to growth as well.

As we talked to earlier, in response to other questions, we've been really thoughtful about planning for a return to growth in mortgages, what we want to see from a returns profile and how we work our way back to it. So I think it's 2. It's -- one, it's a combination of the operational leverage we're looking for from the platform, but also returning to growth through obviously our BOQ brand and the other brands that we have in the Retail Bank as well.

Our next question comes from Nathan Lead from Morgans.

Just 3 questions, if you don't mind. First one is about the digital bank. Your Chairman at the 2025 AGM seems to suggest that the Heritage Bank customers would be migrated across onto the digital bank platform starting in sort of 2027. And then your previous CEO also said there was a very large prize from that migration. So I just wanted to know whether you can sort of give us a bit more of a definitive target on that migration and if you can sort of firm up what the quantum of that benefit could be?

Thanks, Nathan. So look, the way I would think about the migration of legacy. There's actually 2 legacy environments we talk about. There's the ME legacy environment, which we're kind of 80%, 85% done with final migration events planned for later this half and then we move into decommissioning. And then our attention, as I mentioned earlier, will turn to the BOQ legacy environment. I would be thinking towards what we've done on the ME migration is a good guide to how we'd approach it for the BOQ side. They are long exercises. There's obviously risk to migration. We've developed a great amount of experience on how to do that. We need to support customers through the friction that's caused with migration, and we also need to do this in the context of running the wider business. So we've got good capability in this space.

We think our intent is to start migrations for BOQ in '27 and then work our way through it there. Obviously, as we've done with ME, we will take a really thoughtful approach to making sure we just manage the risk of that. But the types of benefits we see from decommissioning that environment, I think the ME is a good guideline to think about how we view the benefits you'll get from that as well.

Okay. Great. Second question is just the comment about returning to home lending growth in FY '27. Is that an intention that you expect the end of year balances to be higher than the start of the year? Or is it just some point within FY '27, you're going to start to see growth again?

Look, our focus there is, we really want to do it in a way that we're not chasing short-term volume. We really want to prioritize returns. And so I think what we've established over the last couple of years is a really disciplined approach where we won't deploy capital if the returns aren't meeting the levels that we're looking for.

So I won't put a data or a timing on it. It's really about us making sure we've got the capability in place, which, as I said, there's a little bit more work we need to do, but then really stepping back into the types of lending that we want to do, getting the balance across the composition of growth and making sure it meets the return profile and then over the course of the year, our return to balanced growth.

Okay. Great. And then final one for me. Just Slide 22 with the investment spend. Could you give us an indication now about what you're sort of thinking in terms of like where steady-state is in terms of that investment spend and the expensing rate attached to it?

Yes, Nathan, we have clearly peaked in terms of investment. And so the way that we think about the overall envelope is we are looking to rightsize that investment to our earnings profile. However, we will always look for opportunity to go after investments if there is an appropriate benefit profile. And so we don't give specific guidance. It is about disciplined management of that portfolio just to ensure that we are getting appropriate returns for what we are investing in. And pleasingly, as we've described today, we are starting to see some of the benefits emerge from the investments that we've been making over the past few years.

Our next question comes from Matt Dunger from BofA Securities.

Yes. I just wanted to follow up on the deposit growth. You've called transaction deposit growth a slow burn, and we've seen about $2.5 billion runoff in the term deposits year-on-year. Rod, are you able to give us a sense of how you'll fund the return to growth?

Yes. Look, I think there's -- Matt, I come back to we have built a great proposition on the retail bank. We want to see growth there. Look at transactional growth -- transactional banking growth is important, but I would say -- would call as well and pricing discipline in that space, that all helps build that stable retail funding base. I would call out, I think we can do more in business banking, a real opportunity to get our fair share of our customers' deposit business. And so that's something we're going to be focusing on over the next period as well.

I'd also say if we think about the funding stack and optimizing that overall, we also have the capital partnership is an important element of that, not needing to fund growth in asset finance with the capital partnership allows us to think differently around how we optimize that stack. And so it's really a combination of both growth in retail deposits, and I would call out both across our consumers and our Business Bank but also having the opportunity to optimize the funding stack with capital partnerships is another tool that we have available going forward.

And just a follow-up on that, if I could. On the branch conversion, are you able to share with us what impact they have had on deposit funding? Is there a future headwind from those OMB conversions?

Look, we've worked through that over the last 12 months. We've reset onto a kind of optimized network. We've got a strong team in place now, and we're working to really grow the productivity through the branch network and customers. So we're comfortable with where we're at. We think with the digital bank available in deposit sense through the BOQ brand, there's a great opportunity here to continue to grow through the branches as well, and it's part of our thinking going forward.

Our next question comes from John Storey from UBS.

Appreciate it's been a long call. I just wanted to ask you, Rod, last year, so you go look at your presentation last year and BOQ obviously called out the fact and have done a lot of work, I guess, ultimately to bring across the owner-managed branches, and you're pretty excited about proprietary channels, right? If you go and have a look at your flow rates during the course of this year in mortgage flows from brokers have gone from 60% to 70%. Just wanted to get your insight into why the proprietary channel is not yielding the expected benefits that you guys laid out last year?

Yes. Thanks, John. Look, I think we've worked through -- it was a big transition the branch network in terms of part of what we had to do as part of that is go out and hire the existing teams from the franchisees to work into our branch network.

So look, the change journey that we've been through, that change program has taken some time to work through. We've obviously optimized the footprint as part of that as well. We do have some stats in the back of the pack. We are starting to see the productivity we would expect on that network. That is, again, more work to do there, but we think we've got the right, as I said, the right team in place and the right focus on productivity. And going forward, it's a key part of our thinking of the proposition that we've got.

And I think one of the other aspects of the OMB conversion is, it's really allowed us to think about where we want to invest from a geography perspective, not just for home lending managers or from a retail perspective, but able to put our business bankers in key growth corridors where we see an opportunity to grow as well. So we've got more work to do in the branches, but we think we've got the right set of activities to lift productivity over the near term.

And then just on the 2 half trading and obviously, results for the end of Feb, right, but maybe if you could just give a little bit of color on some of the trends and trading conditions that are starting to evolve through March and I guess, into April, interested to get your insights into things like mortgage applications, business activity. Have you seen any kind of increased flows into arrears? Just general kind of trends that you can comment on, particularly over the last kind of 2 months, March and April?

Sure. Thanks, John. So look, at this stage, we're not seeing anything material. And we're being really -- we're looking hard, we're looking very closely to see the impacts.

In terms of the mortgage portfolio, you'll note that the arrears are down. I think that we reported for the half. We're seeing hardship levels remain consistent with what we expect. We are starting to see some impacts come through probably that transport sector with fuel prices. Again, that's probably more a compounding factor than a factor in its own right that's driving some of the deterioration there.

I think in agri, we are conscious of the agri sector where they're getting both the fuel price impacts as well as fertilizer. But again, we're staying very close to our customers and working through it with them. So at this stage, we're not seeing anything significant emerge, but we are staying really close to our customers, as you'd expect and being vigilant.

I might, John, just take a perspective on market more broadly as well, which is we have seen absolutely sort of a higher volatility experienced due to those energy-led inflation risks, but functioning is still remaining intact actually, and conditions are how we would describe as orderly. We are starting to see some spreads repricing quite selectively. We think that is largely driven by kind of underlying valuation as opposed to any sort of significant market disruption or funding disruptions, but it is certainly a little bit more volatile out there. We have seen sort of a slowing in overall market activity.

Our next question comes from Tom Strong from Citi.

Just a follow-up, on the capital partnership numbers on Slide 27. In terms of the FY '26 noninterest income guide of $8 million to $10 million, to what extent is there seasonality from an origination perspective in that in terms of -- and how to extrapolate those, that run rate into '27? And then, I guess, more broadly, how are you thinking about the origination opportunity in '27 versus FY '26 just given the potential slow?

Yes, I think I caught the question, just cut out there at the end. But look, noninterest income in that portfolio, there's 2 elements of the numbers that you're seeing on the page. The first is the servicing fee that we will receive on the sale of the back book. So that is broadly stable. We will see some runoff in that portfolio. As an asset finance portfolio, it is a bit shorter, but that is one driver of the fee income coming through there.

And then the second is the new originations as you've called out. And so that is the establishment of the forward flow partnership. This is a really exciting development for us. From our perspective, we have the opportunity to do more in this market. We are a strong player in asset finance across the industry, but we certainly think there's opportunity to do more. That's obviously subject to conversations with Challenger, but there is the intent certainly for this partnership to be not only long term but to do more business over time as well. And so this is something that we think even despite sort of a slight downturn in the market, we would be able to pick up more volume.

So you think that the arrangement with Challenger would allow you to do more business that you wouldn't have otherwise done on balance sheet? Is that the implication?

Well, look, I think the way to sort of think about that is we have concentration of it as a balance sheet. And so that was certainly going to be something that we were going to find a constraint at some point. And so we are absolutely looking to do more business. We have a very strong SME business in our Business Bank, this is a core product for those customers.

And so the ability to do more of that, to generate income and do more with those customers that we have and then also to kind of get more customers as well, I think, is really exciting. The parameters are really clear with Challenger, but there is certainly opportunity for us to do more business in this space.

Thank you very much. I will now hand back to Jessica.

Thank you for joining today's call. That's the last of the questions. If you have any further questions, please reach out to the Investor Relations team. We look forward to connecting with many of you over the coming days.

Good morning, and welcome to BOQ's financial results presentation for the full year ended 31st of August 2025. My name is Jessica Smith, and I'm the General Manager of Investor Relations and Corporate Affairs at BOQ.

On behalf of the management team, I would like to acknowledge the traditional custodians of the land we are meeting on today, the Gadigal people of the Eora Nation. We pay our respects to elders past and present.

I'm joined in the room today by BOQ's Managing Director and Chief Executive Officer, Patrick Allaway; and our Chief Financial Officer, Racheal Kellaway, who will present the results. We are also joined by BOQ's executive team. Following the briefing, there will be an opportunity for questions.

I will now hand over to Patrick.

Thank you, Jess, and good morning, everyone, and thank you for joining us today. I'm pleased to take you through our FY '25 results. I have three key messages to leave you with today. We've improved financial performance, grown our strong business bank franchise and our retail bank transformation is well progressed. In 2023, we reset our strategy to become a simpler specialist bank with a superior customer experience and enhanced shareholder returns. We outlined four strategic pillars to transform BOQ: strengthen, simplify, digitize and optimize performance. We are now well progressed through this ambitious program of work to uplift operational resilience, simplify the way we operate, scale customer growth with improved digital experiences and shift our balance sheet mix to deliver more sustainable returns.

Turning to our strong performance on Slide 8. This year, we delivered on what we said we would do. One, we supported more customers with a greatly improved experience for the 44% of retail customers now on the digital bank. Two, we improved key financial metrics with a 12% uplift in cash earnings, 70 basis point improvement in return on equity, 210 basis point reduction in our cost-to-income ratio and an 8 basis point uplift in margin. Three, we delivered on our retail bank transformation commitments. We converted 114 franchise branches on time and on budget, creating a high returning proprietary channel. We are well progressed in the customer migration and launched our digital mortgage. Four, we shifted balance sheet mix, recycling low returning capital to support 14% commercial lending growth. Five, we progressed our remedial action plans with 44% of activities now closed. And finally, six, we simplified our business, which resulted in a 4% reduction in underlying costs. We will achieve the $250 million productivity target as we exit FY '26.

With capital above the target range, strong funding position and well-secured portfolio, we are well placed to continue the structural shift of our balance sheet and growth in high-returning segments. The Board declared a final dividend of $0.20, a full year dividend uplift of 12%.

Turning to Slide 9, outlining the financial results. The 12% growth in cash earnings to $383 million was driven by increasing revenue and the flat cost base. We've maintained discipline in growth and our focus on returns delivered an improvement in return on equity to 6.4%. There are adjustments to the statutory earnings this year, including the impairment of goodwill, a portion to the retail bank, reflecting uncertainty in relation to industry structural shifts and restructuring costs to simplify our distribution channels and operations. Consistent disciplined execution of our strategy is generating tangible financial and operational benefits and an uplift in returns to shareholders. Racheal will speak to the financials in more detail shortly.

Turning to Slide 10. We are the bank of choice for 1.5 million Australian households and businesses with 3% customer growth on last year. The customer voice remains at the heart of everything we do as we continue to invest in bankers and technology to provide a superior customer experience. This includes improvements over the past 12 months in the experience on our new digital platform, contact center greater service, hardship response times and faster resolution of customer complaints. We're providing additional support to customers through migration of our heritage systems and have provided support and individual solutions to over 4,000 customers this year facing financial difficulty.

To help protect customers from scams, we've introduced biometric capability in the digital bank, which has had an average intervention rate of 98%. We also introduced cryptocurrency restrictions, recognizing the prevalence of investment scams. In building on our foundational strength in Queensland, we launched our Bank of Queenslanders campaign, increased the number of bankers in regional growth corridors and announced partnerships with the Royal Queensland Show, the Ekka and the Queensland Rugby Union. We're investing in more bankers to leverage our strong heritage and competitive strength supporting Queenslanders.

An important aspect of our business is how we contribute to the communities in which we operate. For us, this year, that has meant deepening our partnership with Orange Sky Australia, who provide important support for vulnerable Australians. Our cultural transformation remains at the forefront of our broader transformation. This year, against the backdrop of significant change, our people experience index increased 2 percentage points to 73%. Our risk culture index increased 3%, and we're particularly pleased to note 83% of our people feel safe to speak up.

Turning now to Slide 11, how our strategic pillars are driving progress. Our strengthened pillar is building stronger operational foundations to ensure we deliver better customer, people and risk outcomes. We're delivering a stronger bank with improved operational resilience, risk maturity and culture. We're well progressed through delivery of our remedial action plans and continue to engage productively with our regulators.

Our simplification pillar is driving material productivity benefits. We're reducing complexity across our ways of working and products, simplifying distribution channels, decommissioning heritage technology, optimizing the cost of our supply chains and improving processes.

Our digitized pillar is transforming the retail bank to a scalable, low cost to serve digital model, improving the experience for customers and our people and will allow us to be more effective in competing in a highly commoditized retail market. Our digital end-to-end bank is largely built and customer migration and scaling to the platform is now the focus. In FY '26, we will complete ME customer migration and decommission ME heritage systems, the next important proof point in our transformation, delivering a step change improvement to both our cost base and operational resilience.

Our optimized pillar is focused on improving returns, which we are progressing across a number of initiatives, including the organic shift in the mix of assets and liabilities on the balance sheet and progressing third-party product partnerships, leveraging our distribution capabilities to grow noninterest income, initially for superannuation and insurance products.

The next step in exploring off-balance sheet partnerships with forward flow agreements to scale customer growth and noninterest income. This provides optionality as to which assets we hold on our balance sheet or through partners, enabling scalable growth with capital efficiency. As we announced in August, we're exploring a whole loan sale agreement for up to $3.8 billion of our equipment finance portfolio, which would include a forward flow origination and servicing arrangement. This segment of our portfolio is ideal for a partnership as it would allow us to scale customer demand without balance sheet limitations for more cyclically exposed assets. To be clear, this is not a sale of the business. Our asset finance business remains core to our strategy. There would be no impact to our customers who would continue to receive a dedicated support through BOQ. We're in an active process with strong indicative demand. We will provide a detailed update to the market if the transaction proceeds.

Turning to Slide 12 for more detail on our $250 million productivity program. This is well progressed, and we expect the full run rate benefits to now be delivered on exit of FY '26. Having delivered more than 50% of the program, the remaining key components to be delivered in FY '26 are the decommissioning of ME heritage and the operating model restructure announced in August. Our considered approach to customer migration has shifted the sequencing of material annualized cost savings benefits from decommissioning 40 technology platforms and vendors, which will now flow to the expense line in FY '27. We will drive further benefits through our recent strategic partnership with Capgemini, a leading technology and transformation company. This partnership will unlock greater operating efficiencies and scalability in technology and business processing and leverage AI in improving how we service our customers and operate.

Turning now to Slide 13 and the growth of the digital bank. The build of our digital bank has been a considerable success. And what sets it apart in the market is that it is fully digital end-to-end, including the customer interface, back-end processing and documentation. The end-to-end build enables migration and full decommissioning of our heritage core banking platform, reducing complexity and duplication of costs. The benefit to customers is a reliable, secure and intuitive banking experience with extensive self-serve capabilities. This year, we completed the migration for the majority of ME deposit customers. We now have 474,000 customers on the digital bank with over $10 billion in deposits. ME Mortgage migration has now commenced with completion targeted for the first half of 2026.

Moving to Slide 14. As I said earlier, 44% of our retail deposit customers are now on the digital platform. And in August, 81% of new-to-group deposits were originated through the digital bank. We're seeing a greater representation of active digital customers in a younger demographic with strong average balances, increasing our ability to service more of their banking needs. The digital bank is core to our deposit strategy, growing stable funding for the group. The initial phase of the digital home loan rollout has shown early success. We're delivering conditional approval in less than 90 seconds and unconditional approval on the same day. We've seen a 20% reduction in the cost to originate compared to heritage. And on delivery of the full functionality through FY '26 and FY '27, we will reduce our cost to originate and service home loans by half.

Turning to Slide 15 and how we're optimizing our balance sheet. An important part of our strategy to optimize returns is the structural shift of both the asset and liabilities on the balance sheet. Intentionally running off home lending and reallocating capital to business lending, which we accelerated in FY '25 has resulted in improved asset mix. We've increased business lending mix on the balance sheet now by 4% to now 17% of our portfolio.

We're also focused on optimizing the mix of home lending origination. The converted proprietary branch channel, combined with our origination on our lower cost to serve digital platform will improve home lending returns. In the period of deliberate low growth, we've built capacity in our funding base for future growth and reduced wholesale funding in favor of deposit customers. While the shift towards a more optimal customer deposit mix takes time, we're seeing strong performance in the digital bank.

In considering asset growth, we will continue to exercise discipline. We've flagged that FY '25 will likely be the peak of home lending contraction. We expect slowing decline in FY '26 before returning to growth in FY '27. Early indications from the digital home loan launch provide confidence in this approach, and we're targeting the vast majority of new home lending on the digital bank by the end of FY '27.

Turning to Slide 16 for an overview of our retail bank, for which FY '25 has been a considerable year of transformation. The retail bank delivered cash earnings of $109 million, a year-on-year improvement of 24% in an increasingly competitive environment. This performance was driven by an uplift in margin, primarily from the conversion of the branches to our proprietary channel and productivity initiatives to lower our cost to serve, partially offset by GLA decline. The retail bank performance continues to reflect our conscious decision to focus on transformation and returns as we reposition to a scalable, low cost to serve digital bank and recycle low returning capital.

We again grew home lending on our low cost to originate ME channel. Supporting the remix of our balance sheet, declines in both VMA and BOQ home lending were on plan as broker origination on heritage platforms remain pause for these brands, and we converted and consolidated the BOQ branch network. We've seen branches return to pre-conversion levels of origination and are focused on supporting customers' evolving preferences with a strong national digital platform complemented by targeted BOQ physical footprint, predominantly in Queensland. Finally, on the retail bank this month, we entered into a distribution partnership with Virgin Australia to leverage their 13 million Velocity Frequent Flyer members to grow both transaction accounts and home lending.

Turning now to Slide 17 for an update on the progress on our specialist business bank. The business bank delivered cash earnings of $279 million, an increase of 10% on FY '24. This was driven by a 6% increase in income and 3% increase in expenses, including our investment in new bankers. Commercial lending increased by $1.6 billion, representing a 14% growth rate, driven by core strength in health care, agriculture and well-secured commercial property. During the year, we simplified our product offering in the asset finance business, ceasing origination in cash flow finance. On an underlying basis, asset finance grew by $237 million or 3%, predominantly through novated leasing and structured finance. The BOQ specialist housing portfolio runoff reflected our decision to reset pricing to a more sustainable return, aligned to our broader home lending strategy.

The business bank had a 20 basis point uplift to margin in the half, primarily driven by the branch conversion and deposit mix, offsetting increased competition. Our banker value proposition is enabling the hire of quality bankers in a competitive market for talent. We've now onboarded 35 new business bankers, and we'll continue focusing on attracting quality bankers in targeted growth corridors, particularly in Queensland.

I will now hand to Racheal to provide more detail on the financials. Thank you.

Thank you, Patrick, and good morning, everyone. Performance in financial year 2025 is evidence of the discipline shown in the execution of our strategy, making decisions benefiting BOQ over the long term. We saw higher income and held expenses flat, absorbing a half year of operating expenses from the conversion of the branch network to a proprietary channel. Underlying profit improved 10% on the prior year. Loan impairment expense of $21 million was up 5% against the prior year, though at an aggregate level remains low as compared to historical averages. And as a result, we delivered $383 million in cash earnings, an uplift of 12% on 2024. Trends were broadly consistent when looking at the second half with underlying profit up 14% as compared to the first half and cash earnings up 9%.

Set out on Slide 20 are the adjustments made to cash earnings. FY '25 statutory profit was $133 million. In the second half, we reduced the carrying amount of goodwill allocated to the retail bank to zero, resulting in an adjustment of $170 million. This goodwill arose from historical acquisitions by the group over a number of years, including the 2007 acquisition of Home Building Society. There is now no goodwill allocated to the retail bank. We saw $27 million relating to the previously announced branch strategy, which will see the cost of conversion amortized over approximately four years. The total cost remains unchanged.

In August, we announced restructuring costs of $25 million and an increase to the remedial action plan costs of $14 million. And we saw minimal impact from hedging and fair value adjustments.

Net interest margin increased 13 basis points, a 12 basis point uplift came from the step change from the conversion of branches. Underlying margin also improved 1 basis point in the half. There was a 6 basis point lending benefit, 4 from pricing and 2 from positive mix shifts on the balance sheet. Funding costs impacted margin by 4 basis points. Deposit pricing and competition was the major contributor to this in the period. In term deposits, we saw swap rates reduce while pricing across the industry lagged. Competition for our core savings continued. And lastly, a replicating portfolio benefit of 1 basis point was offset by the uninvested portfolio as cash rates reduced, and we saw an impact of 1 basis point from liquidity. The result was a second half net interest margin of 1.70%.

Turning now to expenses. In line with target, we delivered flat expenses in 2025. Underlying expenses were down 4%, the result of strong commitment to expense management. With all branches converted from the 1st of March, we took on a $42 million cost base to operate those branches. This, along with ongoing inflationary impacts was more than offset by the delivery of the benefits from the simplification program. The program delivered $71 million of cost reductions in the year. As called out previously, ongoing investment in the business is coming through the expense position with higher amortization, particularly in the second half. We also invested in additional business bankers who are supporting growth in the business.

Looking at our investment profile in more detail on Slide 23. We have, over a number of years now, invested a significant proportion of our annual earnings with a long-term view of transforming to a simpler specialist bank. This has included integrating the bank, investing in the cloud, building a retail digital bank, supporting risk uplift programs and growing our business bank. This year, we invested $188 million, coming off recent highs as we near the completion of building the digital bank and progressed migration of customers off of our heritage systems and onto our new core platform. These events see assets move from being under construction to being in use and commence amortizing. Higher amortization in the second half was as expected and will continue to put some pressure on earnings going forward. We see the level of investment spend in 2025 as a healthy level to invest in the bank on an ongoing basis. However, we will continue to recalibrate this against market dynamics and as strategic opportunities arise each period.

Turning now to portfolio quality. Asset quality remains sound, supported by increasing property values. Loan impairment expense for the year was $21 million and remains below historical averages at 3 basis points to GLA for the year. Looking at the trends within each of the portfolios. Housing saw another year of benign loan impairment expense. Whilst we experienced a very small increase in later-stage arrears, we aren't seeing increased actual losses. In the commercial book, we had resolution of some long-dated impaired assets, resulting in a net write-back and three halves now of improving arrears. Asset finance had more normalized levels of specific provisions and write-offs, and we took an increase in the collective provision in the second half. Arrears increased in the first half of the year. However, there was some improvement in the second half.

Slide 25 shows total provisioning, where you can see $307 million of provisions held, representing 39 basis points to GLA. Scenario weightings remain unchanged in our forward-looking models with a 45% weighting towards downside and severe downside scenarios. This results in us holding $70 million above the base case scenario. Should there be a 100% downside scenario, our provision would increase by $21 million. We consider our provision levels to be prudent when we look at the level of uncertainty in the economy and as we review against peers on a standardized credit RWA comparison.

Moving to funding. With our strategy of recycling capital, the overall funding task was relatively low, allowing for flexibility in the mix of funding to drive optimization of cost and create capacity for growth. The quarterly average LCR at the end of the year was 143%. We have maintained a focus on growing stable customer deposits with a historically high deposit-to-loan ratio of 86% and stable deposit funding as a percentage of total funding at 72%.

On to capital and the group's strong capital position is reflected in the ending CET1 of 10.94%. Earnings generated 50 basis points of capital, and we returned 30 basis points to shareholders through dividends. RWA benefit of 9 basis points is made up of 8 basis points from a reduction in underlying RWAs, along with 7 basis points from lower loan origination costs. This was partially offset by 6 basis points from runoff in securitization. We saw 15 basis points of impact from the branch strategy as a result of the conversion with payments made to former owner managers. Other impacts include the statutory adjustments, as I outlined earlier in my presentation.

We maintain our target capital ratio of 10.25% to 10.75% and dividend payout ratio of 60% to 75% of cash earnings. We are in a strong capital position, which has enabled the fully franked dividend of $0.20 per share, representing 66.2% of cash earnings and at a yield of 5.5% at the year-end share price. We will offer a nondiscounted dividend reinvestment plan, which will be satisfied through the on-market purchase of shares.

In summary, our results are evidence of considering the volume, margin risk trade-off and a disciplined approach to the allocation of capital. Strong cost management through the simplification program pleasingly resulted in an underlying cost reduction. The demand we have seen from potential capital partners in equipment finance is encouraging, particularly the appetite for us to originate and service more customers with this product in a way that generates capital-light revenues and diversifies our income streams. We will continue to be sharply focused on making decisions that improve our returns and drive long-term value for our stakeholders.

I will now hand back to Patrick for some closing comments.

Thank you, Racheal. Moving to Slide 29 for our outlook. We're confident we can continue to execute on our strategy and FY '25 is validation of this. Despite this, we're cautious about the outlook for FY '26 due to geopolitical uncertainty and elevated industry headwinds. We continue to operate in a highly unpredictable macro environment, which has increasing risks. Domestic economic growth is improving, buoyed by higher household incomes, lower inflation and cash rate reductions. We welcome the recommendations from the Council of Financial Regulators review of small- and medium-sized banks aimed at strengthening competition in the sector. If implemented, these recommendations have the potential to materially improve BOQ's return on equity, reduce funding costs and ease regulatory impulse, enhancing our ability to service our customers and communities while delivering sustainable returns to our shareholders.

We expect elevated industry competition to continue into FY '26 in home lending and for quality business lending, which is likely to put pressure on margin. While our housing runoff will be slow, we're targeting a system growth at system growth for business lending, driven by our areas of competitive strength.

Our focus remains on controlling what we can control. We expect next year's cost growth to be sub-inflation despite the material uplift in our expenses from the annualized impact from the branch conversion and increased amortization. With robust asset quality and strong provisions, we expect LIE to remain below long-term averages but drift higher over the longer term.

Finally, Slide 30 sets out our FY '26 priorities, anchoring to our competitive strengths, leveraging our Queensland heritage, specialist business bank capability and the scalability of our end-to-end low-cost digital bank. Our focus remains on enhancing our customer experience and improving shareholder returns with six key priorities for FY '26, optimizing balance sheet mix and performance across both lending and funding, scaling deposit and lending through the retail bank digital platform and proprietary channel; accelerating the growth of our business bank in targeted specialist sectors, implementing and embedding improved risk practices through our remedial action plans. delivering the full run rate of the $250 million productivity target and driving further efficiencies into FY '27. And finally, continue to transform our culture.

Before I hand over to questions, I want to reiterate the strong execution and improved performance of the group this year. We're delivering on what we said we'd do and are well progressed through an ambitious transformation to a simpler specialist bank with an improved customer experience and people experience. The playing field in banking is evolving. Our agility, proven execution capability, preparedness to confront challenges head on and make bold decisions will remain critical to our ongoing evolution and success.

Thank you to all our people and shareholders for your continued support.

I'll now hand back to Jess to open for questions.

Thank you, Patrick. We will now move to questions. To ensure all participants have an opportunity to ask questions today, if you could please limit to two questions each.

Operator, may we have the first question, please?

[Operator Instructions] Our first question today comes from Matt Dunger from Bank of America.

I wanted to start off on the net interest margin. And you showed there was a 4 basis point benefit from asset pricing in the half. In first half '26, you're calling out competition. So could I just confirm the NIM trajectory, are you now suggesting that it will be lower given the increase in competition? And was the exit NIM below that 1.70% level?

So, Matt, we're not being bold enough to give an outlook for NIM. What we are saying is that we are seeing ongoing competition across both the asset and liability side of the balance sheet, but also in business and home lending. We do see risk to margin. But our strategy is really, really clear. We've defended margin over four halves now and increased our margin in the last half. And all of the strategic initiatives that we are pursuing are really, really focused on return. And so we will continue to pull levers that we can and control what we can, but we're not going to give an outlook for margin into FY '26.

And if I could just follow up with the advertised term deposit rates and some of your comments made there. Your pricing appears to be broadly in line with peers on what's being advertised, but you've seen some strong term deposit runoff. So how sustainable is this runoff? And given Racheal's comments that the swap rates have reduced versus pricing lagging, do you expect that this is just a short-term reduction in your term deposit growth? Or can we see sustained pullback from term deposits?

Matt, so there's a couple of parts to that. The first is, as swap rates fell in the period, as I said, we didn't see pricing follow as quickly. And so that's had an impact in the period across the industry.

I think probably -- and so that's a short-term impact, I would say. Your question around whether it's short term or long term, actually, what we are seeing is particularly given the spread difference between term deposits and savings has come in, that customer behavior has changed. And so if you -- if there's only a 40 basis point difference between a term deposit and a savings product, for example, customers are preferring putting their money into savings products, which is a really rational thing to do. And so we expect that, that could be a trend that would continue.

In saying that, term deposits remain a very important funding tool for us. We find that when we shift price, it can dramatically change the inflows. And so as we look into the future and depending on where swap rates go, we would still consider term deposits as being a good funding source.

Our next question is from Andrew Lyons from Jefferies.

Andrew, you are there?

Yes, can you hear me?

I can hear you now. Thank you.

Great. Sorry about that. Just a first question, just further to Matt's question, just around your NIM. The second half NIM walk implies pricing was a 4 bp tailwind for lending and a 3 bp headwind for funding. So it kind of implies a small tailwind in the second half, net-net from competition. But looking forward, your outlook comments do imply elevated competition for both lending and deposits.

Now I certainly don't want you to give an outlook for the margin. But is there anything towards the back end of the second half that you saw in pricing trends that deteriorated to such an extent that you are more concerned just around the state of competition at the moment?

Yes. Look, thanks, Andrew. So there's nothing that really is causing us to be cautious. I think what we are saying is competition remains elevated. And so we're taking quite a cautious view. But we are really, really focused on being disciplined about where we want to grow and how we grow and how we manage our balance sheet. So we will be doing everything we can to protect margin. But I think we just want to call out that there is risk to margin, and that's an industry phenomenon.

I think, Andrew, just to add to that, there were two cash rate movements in the second half as well. With that comes some of those timing impacts that you typically see. So keep that in mind when you're thinking about the next half.

The other thing we did in the period is we reset profitability on two small segments of our portfolio, which gave us a benefit in the second half. If you really pull back from those two elements, so as Patrick has outlined, we are expecting there to be continued intense competition for both business lending and home lending, and that will be an impact as we look forward.

Okay. That's helpful. Thank you for the detail. And then just a second one on expenses. Slide 12 suggests the productivity program benefits actually accelerate in FY '26, obviously, and you mentioned that the exit will be at the target of $250 million. Despite this, your guidance still implies some expense growth in FY '26, albeit sub-inflation and you've highlighted, obviously, amortization and the like as headwinds. However, just given the acceleration in benefits over the course of the year, can costs actually fall or at worse remain flat in FY '27, given the full impact of those FY '26 productivity benefits?

So, Andrew, I'll make some comment, and Racheal might want to add to that. So, look, I think the biggest step change, which we called out in our talking points was that in FY '26, we are going to be decommissioning about 40 core systems in our Heritage Bank for ME Bank. That will be a significant step change reduction in our cost base. That really flows through into FY '27. So you shouldn't expect to see any material benefit of that in FY '26.

Outside of our productivity program, we also announced in August our partnership with Capgemini. And we did say that we'd expect in excess of $30 million of cost benefits into FY '27 as well. So we are outside of the productivity program, continuing to consider what other initiatives we can take to lower our cost to serve and drive productivity benefits going forward. But I think the big one, which really comes into FY '27 is decommissioning. I think we're also, at the same time, investing.

So whilst we've said there's inflation and increased amortization and you've got about a $40 million to $42 million uplift again on the branch conversion. We are continuing to invest in bankers. We're investing in new regulation as well. We have said we're going to take any restructuring costs above the line in FY '26 as well. So I think where we've landed is we think it's prudent to call out of a sub-inflation cost outcome for '26.

Our next question comes from Brendan Sproules from Goldman Sachs.

Brendan Sproules from Goldman Sachs. I just have a question on your business banking outlook. Obviously, you've had pretty good commercial loan growth, and you've talked about the specific segments. One thing that's noticeable on Slide 17 is the decline in deposit funding in that division. Could you maybe talk about the deposit strategy around these particular segments and what we can, I guess, expect into the medium term for deposits in business banking?

Yes. Thanks for that, Brendan. And so look, we have called out at the half year, we see this as a big opportunity for us. The business bank is being funded by -- largely by our retail bank. As we sort of grow, particularly in the SME segment, we see a huge opportunity to grow lower cost funding through the business bank.

So our current technology that we offer is not a great experience. And so we are really, really focused on leveraging that opportunity and investing to build transaction banking capability and lower cost funding in the business bank. But we're not there yet. We focused the transformation and the digital bank on building the retail digital capability. That's becoming a really strong deposit engine for us. But I think you should expect us to obviously focus on servicing business customers and growing that funding base as well.

And my second question is just on Slide 23 around the transformation investment. Obviously, you've gone through a few years now of elevated investment spend as you build out that digital bank. 2025 showed you had about $190 million. Is this a normal level going forward? Or as you point out, there's some additional things you need to do like digital deposits in business banking, for example, as you just mentioned, that we can see that start to rise again in the medium term?

Brendan, so the way that we think about the investment portfolio is -- and you've called out the digital bank. We also had the integration costs from ME Bank in that period as well. So we were investing quite a proportion of our earnings every year back into the business.

At the moment, we think about $190 million to $200 million is the right amount to invest in the bank given our earnings profile. In saying that, we will always look at opportunity to use capital if we can see value for shareholders in the long term. And so at the moment, we're not flagging an increase to the investment portfolio. We do have the capacity to remix that portfolio though. And some of the points that Patrick made around investing further in the business bank could come from remixing what's actually being spent in that portfolio.

Our next question comes from Jonathan Mott from Barrenjoey.

My first question just relates again to the growth in the business bank. If you see the commercial loans, the growth rate has really accelerated over the last few halves. First half '24 was flat, second half 3% sequential then 5% and this half at 8% sequential. So that's growing for SME more than twice system. In the outlook statement, you say that you want to grow business banking at around system growth. Does that actually imply you actually you're going a bit stronger than you'd like to when you actually need to pull that back just given how strong that growth has been?

Not at all, Jon. I think we would like to accelerate and continue to accelerate. I think what we're doing is being prudent on pricing and recognizing we're operating in a very competitive market. So there are some deals that we just won't do because we're being really disciplined about price. But clearly, the objective is, and we called this out a year ago, we haven't seen growth in our business bank.

Actually, if you look at the portfolio, the growth really come from the housing portfolio and BOQS over previous years. But this is a core focus for us. So we're investing in it. It's a core strategic priority for us. As I called out in the six strategic priorities when I concluded in my presentation today, we want to accelerate this. We think growing at system is an appropriate call out in terms of where we are, but we would love to grow faster than that, and we certainly would recycle and support that growth if we're getting the appropriate returns.

Okay. So just clarifying that you're actually saying that you'd like to grow system is a bit of a conservative statement because it's currently growing twice system, but you're not applying the brakes. Is that correct?

Yes. Look, I think, Jon, as we sort of said, we've been very cautious in our outlook statements. We want to underpromise and over deliver. And so it's a core strategic priority for us. We would like to continue and accelerate our growth rate. We're bringing on more bankers, which suggests that, that should enable us to continue to accelerate. But we're not going to give targets that are difficult to meet, and we are unsure about what margins are doing. So we will really focus on the sectors where we've got core capability where we've got competitive strength and continue to push really hard.

Queensland will be a key part of that. You would have seen through the presentation, we are reemphasizing our Queensland capability, our competitive strength in Queensland. We're the last-standing major bank in Queensland, and we're a Queensland bank, bank in Queenslanders.

And Racheal, in the very end of your comments, you mentioned that demand from capital partners for whole loan sales and forward flow rents is very strong. You've talked about asset finance already. Are there any other areas of your book that you've had inbound inquiries on in recent times?

Well, we won't speculate on sort of portfolio sales, Jon. But I think what I would say is that there is strong demand in the market for origination and servicing capability, and that is the capability that we have and have been strengthening over the past couple of years with our investment profile. So where there is demand and liquidity and we've got an origination and servicing capability, you can expect that, that would be a nice partnership to have.

For us, it means diversified income streams. It means capital-light revenue, and it means the ability to actually do more with our customers. And so it's a pretty exciting space from our perspective.

I might just add to Racheal's comments. What we've said previously that the first step in our optimization was to shift our balance sheet mix. I think what capital partnerships give us and this is the next phase is real optionality about what we book on balance sheet and what we take off balance sheet. And there are some assets that might well be better suited to partners.

So I think you should assume that we're looking at a whole portfolio approach across our asset mix. And we will make appropriate decisions to manage our capital and funding where we feel that we can optimize returns but also grow noninterest income, but most importantly, scale customer growth without the capital and funding requirements. So I think you should see this as a first step, but we will continue to explore other parts of our balance sheet as well.

Our next question comes from Richard Wiles from Morgan Stanley.

Patrick, your answer to Mott's question sounds like the guidance on business loan growth is conservative. I'd like to ask you about your guidance on mortgages. I think from memory, you were previously expecting stability in the mortgage portfolio during the second half of 2025. That hasn't happened. So could you give us some reasons why the decline in the mortgage portfolio is continuing at a greater clip than what you might have previously expected?

Sure. Thanks, Richard. So we had said that we expected peak contraction in FY '25, and we would continue to have slower contraction through '26 and only return to growth in '27.

I think if you think about the impact on the second half, there were two big decisions that we made in the first half. So the first was that we have paused on our broker channel in both BOQ and VMA. But the second is that we converted our owner manager channel, and we also consolidated branches. And so both of those have had an accelerated impact on runoff. They're certainly within our plans. And as I said earlier, we now have a converted proprietary channel that is delivering much higher returns. And the productivity that we're now getting from that branch channel is now equivalent to pre-conversion.

So I think there's no surprise to the fact when you withdraw from the broker market and pause broker lending in two brands, but also the branch conversion and consolidation, that certainly has accelerated the runoff. We would expect that to slow into this year and certainly grow into next year.

Clearly, we are taking a very dynamic approach. This is all about return for us. So we're going to continue to make decisions, which really reflect where we're going to get appropriate returns. So whilst that's some guidance, I mean, clearly, if markets shift and things change and we can write mortgages with much higher returns, we might accelerate that growth. But if we can't, then it might change. So I think what we're saying to you is we feel that's probably the trend, but we'll continue to evaluate that as we go.

Okay. And then just like you to talk a little bit more about asset finance loss rates. Slide 24 shows that the charge has gone from 2 to 15 to 25 in the last three halves. I think Racheal referenced the -- an increase in the collective provision charge. So could you maybe talk about how bigger impact there was from that increase in the collective provision. Are you sort of indicating that, that was a one-off increase in the CP? And what do you think is a sort of more normal underlying loss rate going forward? What should we be thinking about for '26 when it comes to the asset finance loss rates?

So the loan impairment expense experience in the year is definitely higher than what we would consider to be a long-run average by a significant portion.

There are two parts to the story. The first is -- and it's actually split about 50% either way. So about 50% of that increase came from specific provision increases. So they are write-offs. That was very much focused on our dealer commercial broker portfolio. It's a small portfolio, but it has had a disproportionate impact on our loan impairment expense. We have since ceased originating business through that business.

And then on the other side, the other 50% really does relate to the collective provision that you just talked to. What we saw was an increase in arrears through the first half we took an increase through the collective through the second half by actually increasing our overlays on that portfolio, specifically looking at two industries that were construction and transport industries. We think we're being prudent, but there's certainly a watch out on this looking forward.

And so I won't give necessarily next year guidance on that specific question, but it's certainly running higher than what we would consider to be an average over the long run.

And Richard, I might just add to Racheal's comments. I mean, we've said this is a more cyclical part of our book. Certainly, what we're seeing is no different to what's happening in the industry. So it's not related to our book. Yes, we have seen and you would have seen in the slide are starting to stabilize, but it's something that, obviously, we're very focused on ensuring that we are prompt on collections and managing through that, but it's a cyclical industry-related part of the book that we're seeing those movements on.

Our next question comes from Brian Johnson from MST.

Congratulations on being one of the few banks that's actually addressed goodwill. I had two questions, if I may. Patrick, a lot of your narrative has been that front book mortgage pricing has been below the cost of capital. And everyone loves to say that the digital cost of origination really will make a difference. But relative to the net interest income, it's a pretty small line. So I'd just like to understand why it is that last -- how you can rationally justify the fact that about two weeks ago, you chopped the front book pricing on ME Bank which is the businesses out there that you actually chopped it down to pretty well Macquarie's rates, which clearly you were previously saying were below the cost of capital. So can we just understand what's going on there?

Thanks, Brian, and thank you for your question. Happy to clarify that. So, look, I just wanted to reaffirm, we remain absolutely focused on return, and you're seeing the return growth profile delivering improved margin through FY '25. We are taking a very disciplined approach to lending. And so we recognize we also need to be dynamic in how we manage that, and we take a portfolio approach when we set our pricing.

We are not saying to you today that we're delivering a return in home lending above our cost of capital. But I think you would be very aware is we are balancing runoff and revenue and cost. So we can't sit back and basically just take all of the assets off our balance sheet if we haven't managed the cost side of the balance sheet. So as you see our pricing in market from time to time, it's really focused on balancing that revenue cost mix, which is really important and ensuring that the runoff is moderated such that we can continue to deliver profitable improvements from year to year.

So don't take any one-off pricing on any product as a suggestion that we're back in the market looking to scale and grow. I think it's more around how we continue to think thoughtfully about dynamically managing our balance sheet and ensuring that we are getting appropriate returns across the portfolio, but also managing the revenue cost mix.

So, Patrick, that pricing pulse is not flowing through to basically the branches?

I beg your pardon.

That pricing pulse that we've seen on ME Bank, and it's pretty chunky. That's not indicative of what we're seeing the real rate that you get when you go into a branch at the moment, a BOQ branch.

So if you look at BOQ branded pricing, Brian, that would be in line with market. It's a different price point than our brand.

And Brian, I might just add to that as well. Just so that converted branch channel now, we are generating a much higher return through that proprietary channel now than we previously were. And so I think you should expect that our pricing will reflect that as well.

The second question, if I may, just on the equipment finance, this forward flow agreement. Having read the ASIC independent report, it was pretty scary. And one of the things they spoke about is basically the private credit investor basically effectively getting the yield that the loan is made to an SPV and the manager is basically stripping out an even higher rate that basically the SPV is lending to basically the company. So the end investor gets a lower rate. So I'm just interested, is that if we have a look kind of in the private credit space, we've got -- they don't run a lot of balance sheet liquidity. There's some pretty unusual fee retentions by the manager. Could you just give us a feeling who are the potential customers?

And what would you do -- and how would it flow through if we were to see a redemption cycle basically in the forward flow agreement, what would happen if we would actually see a redemption cycle? What would be the end risk that Bank of Queensland would run? Because when you think about it, Patrick, most of the equipment finance is originated through a broker. You're then basically effectively giving the distribution. So the distribution margin is largely given away. You're doing the underwriting, but it's actually the SPV investor that's actually taking the funding margin. It's not -- I know you get a bit of capital relief, but I'd just be interested on how you're thinking about that retention that BOQ would keep under that mechanism.

Thank you, Brian. And there's quite a few questions in that. So I might start with the first one. We are dealing with very credible, large organizations. This is not the low end of the private credit market of funds that have decided that this is a new growth area that they want to be in. These are large global insurance companies that basically have strong demand for these assets. These are large organizations that are very credible that have been in these credit markets for a long time and managing credit assets professionally and appropriately. So I would distinguish between some of the issues being called out by ASIC in the growing credit market compared to the bidders that -- and the partners that we will be dealing with, with respect to this portfolio. I think just to clarify, we are not taking the risk on our balance sheet. So the risk is fully passed to the asset holders. And so that enables the release of capital from our perspective.

And in relation to forward flow agreements, I mean, we have flexibility to continue to book on balance sheet if we require. But I think what we're saying to you is there's an opportunity to scale untapped demand in this sector where we would have concentration limits on our balance sheet. We've also said these assets are more cyclically exposed. And so we see this as an opportunity to continue to support our customer demand and really meet their growth requirements with optionality. And so we could bring those back on balance sheet if we wanted to or we could grow through forward flow agreements.

Our next question comes from Ed Henning from CLSA.

Can I just start the first one on costs. And I just want to understand kind of what changed from your guidance a little while ago when you were talking about costs in line with FY '23 and FY '26, slightly up for the branch conversion largely offset by productivity. Has that really been impacted just with the -- you're getting the decommissioning benefits coming through in '27? And just further on that, you talked about Capgemini being a $30 million benefit in '27, but the decommissioning a big one, does that imply the benefits for the decommissioning is bigger than the Capgemini?

I'll make a couple of comments. So thanks, Ed. So first of all, what's changed? We have been managing our migration in a very considered manner and responding to our customers' needs and supporting our customers through that migration. That has resulted that there's a slight sequencing pushback of our decommissioning. And so what we're saying to you is some of those material benefits that we thought that we'd get from switching off the legacy in FY '26 are being delivered in FY '27. So I think that's the sort of material change. But we're also continuing to invest in the business. And we did call out in August that we didn't want to basically make decisions for the long term that stopped us from doing investment in the short term, which impacted our performance.

So, certainly, with the Capgemini partnership, we are going to spend some money in FY '26, which is impacting FY '26 cost as well because we're going to get some material long-term benefits from that partnership. So they are the two sort of material changes as you think about where we go.

To your second question, is the decommissioning a bigger cost benefit than the $30 million that we're going to get from our partnership. Yes, it's material.

Okay. That's great. And then just the second one, just a clarification. Today, you talked about the loan loss charge running below the long-run average or the through-the-cycle loss rate. Can you just clarify what you think the long-run average is or through-the-cycle loss rate is that you'll be running below next year?

Yes. I mean I'll talk about the long-run average, but it may be that we don't get there next year. I mean, I think I've been calling out a return to long-run averages for a couple of periods now and have been pleasingly wrong, but still wrong. And so if I think about the portfolio mix as it stands today, I would expect up to about 10 basis points in terms of a long-run average.

Obviously, there's quite a significant mix difference there with housing at one end of the spectrum and sort of asset finance at the other in the more cyclical times. And so we do think that it could get up to 10 basis points. I mean the other thing, though, is really over time, as we've been calling out, our balance sheet recycling and the remixing of our balance sheet may mean that, that long-run average does shift over time depending on mix.

Our next question comes from John Storey from UBS.

Patrick, congratulations to your team on a good set of results. I just got a little bit of a follow-up, I guess, just on the mortgage strategy. And just wanted to get your views just on the economics between proprietary and broker as it obviously stands today. And then how would this ultimately evolve as you become more digitally focused? I mean what does the economics look like there?

Thanks, John. So just in terms of our proprietary compared to broker, clearly, with the conversion and with the proprietary channel we've got now, we will be delivering higher returns through the proprietary channel. Our core strategy going forward is to leverage that capability, and we are looking to shift the mix. Broker will remain an important part of our portfolio. but we will certainly look to shift the mix to a greater share coming from proprietary. So you should expect that ongoing focus.

In terms of digital mortgage, ultimately, we want to originate all of our mortgages on the digital platform. We started with broker. And as I said in my script, the objective is through FY '27 to have the vast majority of our mortgages originated through that platform. That is going to significantly and is significantly lowering our cost to serve. So that will benefit both channels. So it will support a lower cost to serve in our proprietary channel and in our broker channel.

But most importantly, it's giving a fabulous, improved experience to customers. We're seeing really quick response times, as I said, conditional approval on the same day. And so we're quite excited about the growth, both through our converted proprietary channel that we've got now, our digital mortgage and the broker channel through ME Bank in particular, will continue to be an important channel for us.

And Patrick, just on that, that obviously gives you the confidence to kind of reengage with the market. And obviously, you've kind of changed your views to some extent, I guess today just around the runoff in the book and the pace of the runoff and obviously reengaging in the market in '26 and '27, right? Just the change in the economics just around digital is a driver of that, right?

Yes. Look, I mean, we've always said our strategy, John, is to shift to a digital module. And we really have to be one of the lowest cost to serve in the marketplace for us to compete in a more commoditized market.

But as I said earlier to one of the questions, we will continue to assess returns. And our whole strategy is focused on return over growth. And so we'll continue to look at what margins are doing in the marketplace and determine where we want to grow and which levers we pull to manage our balance sheet going forward.

So whilst we're giving you indications that we've got a much higher returning channel in our proprietary channel, digital mortgage will provide higher returns. We're going to continue to evaluate that, and that will determine how fast our growth is in our balance sheet mix going forward.

Our next question comes from Nathan Lead from Morgans.

Just two questions for me. So, first up, just wondering about the timing and the size of the benefit of migrating your non-ME legacy customers across on to the digital platform. That's the first question.

Thanks, Nathan. So look, that's a core part of our strategy. We started with ME. But obviously, the objective is to convert all of our retail customers and the biggest cohort of that are BOQ customers. Now we are seeing a number of BOQ customers self-migrate. We're also seeing new-to-bank customers obviously come on to that channel. But I think you should expect us -- we are planning now. So you should expect us to start BOQ migration into this financial year. I can't give you an end date, but the size of the prize is very big.

We're running two banks at the moment. So we've got duplicative cost across our digital bank and our Heritage Bank. What we've said to you is it's a material benefit, and that's a big proof point that we'll deliver in FY '26 for ME Bank. But the bigger prize is actually to shut down our BOQ heritage and have all of our retail customers on the digital bank. That's going to take some time. I don't think you should expect that to happen in FY '27. We need to carefully migrate customers and support them through that migration. But obviously, our learnings and efficiencies that we've got from running the ME Bank migration will help us do that in a faster way. So it's a core focus for us.

One of the key priorities for us is to have all of our customers on the retail digital bank and to decommission all of our heritage core platforms. I think one of the big benefits to call out is this is not just a front-end digital bank. This is an end-to-end digital bank. So unlike many of our peers, we are migrating customers and shutting down legacy. And that will, one, create a lot of simplicity for us; two, reduce a lot of cost, but also give us a lot more operational resilience as well for a far better experience for our customers. So we're quite excited by it.

Great. The second question for you is just on the goodwill impairment. If I look at the notes, the accounts there, you've lifted the discount rate from like 10.15% to 12.7% for the retail bank. So it seems like a far higher discount rate than what your peers are running with. What are you seeing that justifies such a big increase in that amount? Or is it just a lever to ultimately help with the cash ROE?

So, actually, what's happened there, Nathan, is the base discount rate has not materially shifted, but we took a view of increasing the risk factor, and that's what's driven the biggest increase up to sort of 12.71% as you call out. And so our view, as we've been calling out for some time now and has been reinforced in our messages today is that structural headwinds exist in the retail bank, and so we increased the risk factor.

Our next question comes from Matthew Wilson from Jarden.

Obviously, it's clear from today that the business bank is a clear part of your growth strategy. However, when we look at it, we've had 6 divisional heads of the business bank in five years, the last one only the last two months. We never hear when they go, but we hear when they come from a market perspective. Could you please add some color to sort of what's happening in the leadership there, given it's such an important part of the growth strategy, how you're pitching to bankers with that constant change in leadership? And I have a second question.

Thanks for that question, Matthew. Look, I think that the ultimate test is how is the business bank performing, and we haven't missed a beat. So we have shifted the strategy. We decided to change leadership with that shift in strategy when we called out to market what we were trying to do. The leadership team within our business bank across our general management group have done a phenomenal job in growing at 40% over the past year.

So I think the key test for us is how is the business bank performing? Are we delivering on what we said we were going to do? And it's great also to make an internal appointment with Keith Strachan now, who has been one of the lead GMs running the business bank over the last three years and driving the change strategy for Keith to join ExCo. And I'm really confident that he will continue to progress the strategy that we've got.

Okay. And then secondly, over the last decade, you've pushed $1.3 billion of charges below the line. I don't think there's a year that you've missed putting an item below the line. Given that you're sort of talking about nearly finishing the transformation, can we have a commitment from you that there will be no more charges below the line? And can you give us an update on the OMB dispute?

So I'll take the first question there. We did actually in the announcement that we made in August, we talked about an update to our accounting policy, which says that going forward, things like restructuring charges, we will take above the line. That has been a more common practice now with peers, and we will be taking them above the line and calling them out clearly, so you can still see an underlying cost number.

We've always maintained that putting things below the line provides transparency and comparability across the results. And I think we've never hidden the detail, but we've been very clear about it. We will, in the event of things like material acquisitions or divestments, we will continue to take those below the line for comparability purposes.

Thanks, Racheal. Look, before I get on to the OMB, the other thing I just wanted to call out is we did in 2023 when we called out the change in strategy with the four strategic pillars that we're focused on, but also the productivity initiative, we did call out that there would be a material restructure in the organization. We're fundamentally changing the way we operate. That's through our distribution channels. It's through how we operate our processes. It's through technology change. And that has resulted in some material change to the group.

I think what we've said is that the digital bank is now largely built. We've had a significant change in roles. And I think it's appropriate that, that core investment that we've made, which is delivering material benefit to shareholders through our productivity initiative with that fundamental shift that we had over the last three years, it's appropriate now to take it above the line.

From the owner manager perspective, we've paid all of their entitlements. We did say at the half that there are a number of owner managers still in dispute. There have been no legal claims. We are not aware of any legal claims. And we are now sort of over 12 months in from the initial -- the original announcement. So it's business as usual. And we're comfortable that the cost conversion cost that we called out is appropriate.

Our next question comes from Carlos Cacho from Macquarie.

I just wanted to ask about if you could give us some more detail about deposits within the retail bank. You've seen some pretty, I guess, been growing well below peers there. Deposits have shrunk half-on-half. It looks like it's mostly TDs. It would be interesting to understand what sort of customers are driving this. Is that the hot money investor looking for a good return? Or is this the fact the mortgage book is shrinking and so you're losing bank customers as a result of that?

Yes. So, I mean, there's been a couple of things that we've seen in the market shift is the first thing I'd say in terms of customer behaviors and then in terms of pricing dynamics, some of which I outlined a little bit earlier. If I -- we actually take a group approach to funding is probably the way that I would start the answer. And that is we have had a low funding ask given that we have been in aggregate, rolling off our assets. And so we will always look then to optimize where we roll off in terms of the highest cost, and that has been through term deposits in this period.

The real -- like sort of the longer-term approach to gathering deposits is going to be through the digital channels that Patrick has been talking about today. And we will -- we are an acquisition tool there really is savings, but we are seeing increasing engagement from our customers in terms of all those lower cost deposits. So their transaction accounts that typically come with them. So we have been very transparent. We think that, that will take some time to build up, but it's certainly a core part of our focus.

Maybe just then following up, I guess it would be good to understand a bit more on your strategy on deposits. You've got between the brands and particularly the legacy BOQ business, you've got a lot of different products. You've been growing well below system. Obviously, the funding has been low. But if you look forward, what -- it sounds like the digital bank is focus, but is there a risk that as you decommission the legacy BOQ b, there's a significant increase in costs if you have old legacy savings products with much lower rates. How are you thinking about balancing that decommissioning and actually growing deposits, particularly as you return to growth in the mortgage book?

Yes. So look, we've been balancing that as we've decommissioned -- as we've migrated new customers. The -- myBOQ brand, which is our digital banking app for BOQ, you should expect that, that will be the core deposit engine for the retail bank. We announced a really exciting partnership with Virgin Australia today as well, where through that partnership, we're looking for them to market transaction accounts into their 13.5 million members. We think that's a huge opportunity for us to drive growth through that brand. And then obviously, omnichannel will continue to also focus. But I think we are using the brands very differently, and you should expect myBOQ to be the core driver of deposit growth for the group, leveraging our Queensland strength.

Thank you very much. There are no further questions. I'll now hand back to Jessica.

Thank you, and thank you again for joining today's call. If you have any further questions, please reach out to the Investor Relations team, and we look forward to connecting with many of you over the next few days.