Commonwealth Bank of Australia Stock

Hello, and welcome to the results briefing for the Commonwealth Bank of Australia for the full year ended 30 June 2026. I'm Melanie Kirk, and I'm Head of Investor Relations. Thank you for joining us for this briefing. We will have presentations from our CEO, Matt Comyn, with an overview of the business and the financial results. Our CFO, Alan Docherty, will provide details of the financial results. Matt will then come back and provide a summary and outlook. The presentations will be followed by the opportunity for analysts and investors to ask questions.

I'll now hand over to Matt. Thank you, Matt.

Thank you very much, Mel, and good morning, everyone. This is a strong full year result, which has enabled us to continue to support customers, protect communities and invest in Australia. This year, we delivered disciplined growth across all domestic franchises while maintaining stable underlying margins and strong capital funding and liquidity.

Cash net profit after tax increased by 7%, and statutory profit increased by 8%. Cash earnings per share increased by $0.44. This allowed the Board to declare a fully franked dividend of $2.70, taking the full year dividend to $5.05 per share. Conditions became more challenging through the second half for our customers with higher rates affecting household spending and savings, housing activity moderating and arrears increasing from low levels.

In a demanding environment, we enter the 2027 financial year from a position of strength but with a clear focus on execution and continuing to support our customers. CBA grew at or above system in all 5 core product categories: home lending, business lending, consumer finance, household deposits and business deposits. This is the first time any major Australian bank has done this in the past 15 years.

Importantly, it was not achieved by sacrificing margin. Our underlying interest margin has remained stable, supporting consistent pre-provision profit growth and reinvestment. That performance was delivered in an intensely competitive market. We remain focused on continuing to convert our strong franchise position into sustainable risk-adjusted returns while preserving margin, credit and capital discipline.

Volume growth and stable underlying margins drove operating income growth of 6.2%. Operating expenses increased by 5.6%. This reflected inflationary pressures as well as deliberate investment in technology, resilience, customer protection and service capability. Our pre-provision profit increased by 6.5%. We were able to grow earnings while continuing to invest materially in the future capacity of the bank.

Our competitive advantage begins with trusted primary customer relationships. Each wave of technology has allowed us to better serve our customers. Digital increased the frequency and convenience of engagement. Data and analytics improved personalization, protection and risk decisions. And we believe AI could be the most significant technology shift we've seen.

As customers increasingly use AI to search, compare, decide and transact, we believe the value of a trusted primary relationship will increase. By using AI safely and at scale, we can provide more personalized trusted support, protect customers more effectively and help them make better financial decisions. Realizing that opportunity will also require regulation to keep pace.

Similar financial activities and risks should attract equivalent customer protections and obligations, whether they are delivered by a regulated bank or through an AI platform. Disciplined execution of our strategy over many years has delivered sustainable performance. Customer advocacy is an important measure. We also assess franchise strength through a broader set of measures, which includes the number of customers who choose us as their main bank, active transaction relationships, engagement and retention, deposits and risk-adjusted earnings generated by those relationships.

Over the past decade, household and business deposit balances have doubled. More than 97% of home lending customers and more than 90% of business lending customers also hold a Commonwealth Bank transaction account. Business lending balances have also more than doubled over the decade, while home loan balances have increased by approximately 2/3.

The growth in business lending is particularly important because it supports investment, employment and productive capacity across the economy. The result is a bank that is larger and stronger, but also more digitally capable and more deeply engaged with our customers. Customer focus, disciplined execution and investment in the franchise continues to deliver better outcomes. We've held the leading consumer Net Promoter Score for 44 consecutive months.

We also retain leading positions in institutional banking and for retail and business digital banking. More Australians choose us as their main bank during the year. We added 655,000 retail and 90,000 business transaction accounts. Proprietary channels represent 65% of home lending flows and 79% of business lending balances. We also improved lending turnaround times, automated more decisions, increased the speed at which we deliver technology change and reduced the incidence and duration of technology disruption.

The retail bank performed well with operating performance increasing by 6%. More than one in three Australians identify CBA as their main financial institution, with retail MFI share increasing to 34.2%. Retail transaction accounts increased by 6% and home lending balances by 7%. More than 9.6 million customers now use the CommBank app, generating more than 14 million log-ins each day.

That engagement creates an opportunity to make the bank more useful in customers' everyday financial lives. CommBank Companion is an early example. It is a secure AI-powered conversational experience designed to help customers better understand their finances and make better decisions about spending and saving. Our priorities are to deepen those main bank relationships, make the app the place customers manage more of their financial lives and keep improving our service offering.

The Business Bank delivered another strong year. Operating performance increased by 10%, and business banking now contributes over 40% of the group's cash profit. Over the past 12 months, we've reduced time to credit decision by 30% and increased funding per banker by 15%. We've extended CommBank Companion to more small business customers, and we've started using agentic capability across our lending process, including our first controlled end-to-end business loan pilot.

The opportunity here is to make better, faster decisions, reduce administrative work for our customers and our bankers and allow our people to spend more time helping businesses invest and grow.

Institutional Banking and Markets had another solid year with operating performance up 5%. We hold the leading institutional Net Promoter Score among the major banks, added 33 transaction banking mandates and grew operational deposits by 13%. The institutional franchise also contributes $70 billion of net deposit funding while supporting customers' financing and risk management needs.

CommBank iQ, our data and analytics venture, continues to deepen client insights with 5x more client engagement compared with 2022. Momentum moderated in the second half as markets income softened and competition and mix affected margins. Our focus is to convert client activity into deeper relationships, greater cross-sell and better capital efficiency.

ASB continued to grow its customer franchise with more lending and customer deposits, both increasing by approximately 6%. Full year operating performance was broadly stable, although earnings conversion weakened through the second half as margins declined and loan impairment expenses increased. ASB retains a strong customer franchise and a leading reputation in New Zealand.

Technology leadership is fundamental to how we serve and protect customers, how we operate efficiently and how quickly we can adapt. We've been investing heavily to better protect our customers, improve customer experiences and to modernize technology and automate processes. We've committed significant resources to cyber and security, including in safely deploying frontier cyber models and automated patching tools.

We're using AI to help customers take more control over their banking activity. We recently expanded access to a new agentic feature called Companion in the CommBank app and 1/3 of customers that have been given access have adopted it and half of their queries relate to managing their spending and saving. Our virtual messaging now handles 86% of conversations end-to-end. We've launched a range of tools to help our frontline teams better serve customers and have seen improvements in banker productivity.

New AI tools and greater investment have also accelerated our technology modernization agenda. This year, we moved our core banking system to the cloud, replatformed our data estate and built a range of new modern applications that support key customer systems. In financial year 2027, we're pursuing three outcomes: stronger protection for customers and the community, faster and more personalized service to deepen primary relationships and better performance through lower unit costs, greater capacity and faster change.

We will measure progress through customer engagement, service quality and resolution times, losses prevented, delivery speed, unit costs, realized financial benefits and risk-adjusted earnings. We're already seeing value from our AI agenda and expect gross benefits to exceed investment levels next financial year. We'll continue to calibrate our investment settings to the external context, overall capacity and to the financial and non-financial benefit realization.

Loan losses remain low, although leading indicators softened during the second half. Troublesome and non-performing exposures were 0.94% of total committed exposures, higher than December, but lower than a year ago. The number of home loan customers in hardship increased in the past 6 months, but remains 15% below its recent peak. We remain well provisioned for a range of economic scenarios. Total provisions are $6.5 billion, which is $2.7 billion above our central economic scenario.

Our balance sheet remains strong with 79% deposit funding. The weighted average maturity of long-term funding is 5.2 years, and we hold $191 billion of liquid assets. Our common equity Tier 1 capital ratio is 12%, comfortably above the regulatory minimum. This strong position allows us to continue to support our customers to fund growth and invest for the long term.

The effects of inflation and higher interest rates have been substantial, but they've not been evenly distributed. Global shocks and low productivity have led to persistent inflation. As a result, the cash rate has increased 425 basis points since May 2022. And the impact on households has been significant. Compared with 5 years ago, Australian banks pay an additional $164 billion in interest to depositors and wholesale funding providers, and receive approximately $139 billion more in interest on loans.

This represents a significant redistribution of interest income across the economy. The increase in mortgage repayments has been concentrated among households aged approximately 25 to 55. These households are consuming fewer goods and services than 5 years ago. Our retail offset balances also declined during the half as some customers drew on accumulated savings.

There's been a lot of interest in home loan application volumes. We've seen application levels decrease by 15% since May, but subsequently have stabilized. National dwelling prices have fallen by approximately 2.8% since their March 2026 peak, having increased nearly 70% in the past 7 years.

We've stayed focused on supporting customers, protecting communities and investing in Australia. We've helped our customers buy more than 150,000 homes and provided $17 billion in finance for new housing supply. For customers experiencing difficulty, we've established 147,000 payment arrangements during the year. We provided $50 billion of new lending to businesses, supporting investment, growth, productive capacity and employment across the economy.

We're also helping our employees build skills for the future. This year, we announced a 3-year $90 million program to help our teams build skills and capabilities as technology reshapes the way we work and the way we serve our customers.

And before I hand to Alan, I want to give some sense of the scale and complexity that our people support. Each day, we process approximately 25 million payments, analyze 38 billion signals for potential cyber threats, lend $135 million to businesses and help 600 customers settle a home purchase.

The other figures on the slide show the breadth of our responsibilities across customer support, financial crime, fraud, scams, cybersecurity and the operation of the payment system. That scale does not lower the standard expected of us. It illustrates both the responsibility we carry and the continuing investment required to meet it.

Australians should expect broad access to banking, safe and reliable service, prompt identification and resolution of issues and support when they need it most. Meeting those expectations requires sustainable returns, pricing that reflects cost and risk, the capacity to continue investing and the ability to evolve how we serve customers as their needs continue to change.

We aim for very high reliability. But when issues do arise, we focus on how quickly the issue is identified and how effectively it is resolved rather than an assumption that every risk can be eliminated or prevented. Equivalent obligations must be applied to all market participants. This balance is essential if we are to continue serving all Australians, investing at scale and financing productive growth.

And with that, I'll hand to Alan to go through the results in more detail.

Thank you, Matt, and good morning, everyone. Starting with the results overview. We've set out here the aspects of our current operating context that are front of mind, how we are responding to changes in our context and the long-term franchise implications of our actions. At a macro level, household disposable incomes are under increasing pressure, and we have seen a softening in housing credit applications.

Technological innovations are accelerating rapidly, creating both new risks and new opportunities and geopolitical developments remain a source of risk to the global and domestic economies. Against that backdrop, our response continues to be deliberate and disciplined. We have again carefully managed volume and margin trade-offs, and our operational and financial performance helps us create the capacity to invest in maintaining and extending our competitive advantage in technology and deepening customer relationships.

This approach has yielded consistently strong financial outcomes, and that has again been the case over this most recent financial year. We are acutely aware of the risks inherent in our current operating environment. For some time, we have been alert to the risk of an exogenous global event. And more recently, we have seen some risks emerge in the domestic macro outlook.

That's why we continue to strengthen our balance sheet in order to both support customers and protect shareholder returns under a broad range of economic scenarios. As set out in the bottom right chart, we are carrying historically low levels of refinancing risk in our funding stack. Our credit provisions have capacity to absorb losses. And through our interest rate hedging, we are balancing short-term consumption of capital against long-term earnings stability.

This slide sets out the usual reconciliation between statutory and cash profits for the year. There were modest movements in the usual non-cash items during the period, which resulted in statutory profits of $10.9 billion and a slightly higher cash profit of $11 billion.

Breaking down the components of cash profit, operating income grew 6.2% over the year, reflecting strong operational outcomes and lending and deposit growth. This allowed us to continue to invest in the franchise with underlying operating expenses increasing 5.6% over the year. Notable expense items of $170 million were recognized in the first 6 months of the financial year, largely due to the settlement of a long-standing legal proceeding in New Zealand during the September quarter.

Loan impairment expense increased 8.5% over the year with a larger increase in the second half, reflecting higher collective provisioning for forward-looking risks with incurred losses remaining low as our retail and business customers continue to demonstrate resilience despite softening economic conditions.

The effective tax rate for the year was 30%, and that is also our expectation for the 2027 financial year. This resulted in cash profit growth of 7.1% over the year. Looking firstly at operating income. We delivered growth of 6.2% over the year. Net interest income increased strongly, up approximately $1.6 billion, supported by strong and profitable growth in lending and deposits.

Other operating income also contributed, growing $196 million over that period. Revenue momentum was slightly weaker in the sequential half, growing 1.2% at the headline level or 2.9% after adjusting for a lower second half day count. Other operating income reduced slightly in the second half, largely due to weaker retail foreign exchange revenues and lower trading income.

Turning to the net interest margin and looking at the movement over the most recent 6-month period. Margins increased 2 basis points over the half, of which 1 basis point related to Treasury and Markets. Underlying margins were 1 point higher with the benefits from deposit hedging and portfolio mix more than offsetting lower lending margins.

The pressure on lending margins over the sequential half was a combination of cash rate lag, competition and the effect of new business mix. In home lending, we have written more fixed rate loans which are at tighter spreads to floating rate loans. And in the Institutional Bank, our loan origination was skewed to lower risk investment-grade borrowers with a commensurately lower margin.

Operating expenses increased 5.6% over the year. The drivers are largely unchanged over recent years. We are seeing inflationary impacts on wages, IT vendor cost inflation continues to run at mid-single digits and cloud computing volumes have increased. At the same time, we continue to invest in technology infrastructure and AI capabilities alongside enhanced frontline capacity and operational resilience.

We continue to self-fund much of that investment through productivity initiatives, realizing approximately $400 million in incremental cost savings over the past 12 months. As a management team, we have long been mindful of our responsibility to ensure not just that we grow the franchise, but that we grow in a sustainable and profitable manner.

Over the last 5 years, while we have seen a variety of operating conditions and changes in competitors' postures, we have sought to maintain discipline on volume and rate trade-offs and as a result, have grown our share of industry net interest income.

We have also built strong management accountabilities and rigor around the identification and delivery of productivity savings. These two elements combined have created the capacity for us to invest in the franchise. Annual investment spend has grown approximately 30% over the last 5 years, and this has made a demonstrable contribution to our strong growth in operating profitability.

It's important to stress that our appetite for discretionary spending is contingent upon the creation of that capacity. In the event of deterioration in operating conditions and weaker top line outcomes, we retain the flexibility to manage our cost envelope and pre-provision profit outcomes.

Turning to credit risk. Loan impairment expense was $788 million, representing a loan loss rate of 8 basis points. This compares with 7 basis points in the prior financial year. Home loan arrears have increased over the course of the last 6 months, up 10 points to 73 basis points. Some of that increase is seasonal. However, there are clearly pockets of customer stress given cost-of-living pressures and higher interest rates.

If we take a longer view, our current mortgage arrears are only 5 basis points higher than pre-COVID levels, at which time the cash rate was approximately 300 basis points lower. This is reflective of strong portfolio credit quality and customer resilience. As ever, the key variable for consumer credit quality is the overall health of the jobs market, which remains in robust condition.

Personal loan arrears increased noticeably, up 31 basis points in the last 6 months. This reflects pressure on household disposable incomes as well as our deliberate portfolio risk appetite settings and the risk-adjusted returns for this portfolio have increased strongly over the course of the year.

In the corporate portfolio, troublesome exposures increased by approximately $600 million over the last 6 months, while nonperforming exposures remained relatively stable. The increase in troublesome largely relates to downgrades to six single names across a variety of industry sectors. We do not expect to incur losses, given either our high level of security coverage or the strong equity position of the underlying counterparty.

Overall, corporate troublesome and non-performing exposures as a percentage of our portfolio remain modest at 95 basis points, still below the levels we have seen over each of the last 2 financial years.

Given the softening domestic macro environment and continued global geopolitical uncertainty, we've maintained strong loan loss provisions, increasing collective provisioning by $140 million over the last 6 months. Individually assessed provisions remain unchanged over the period. Total recognized provisions are now $6.5 billion, and we continue to hold a material buffer above our central economic scenario.

Our funding and liquidity profile has continued to strengthen. We continue to be predominantly deposit funded, supported by a strong deposit gathering franchise. Total customer deposits grew 8% over the year, taking our customer deposit ratio to 79%. We also maintained a historically low proportion of short-term wholesale funding and a conservative weighted average maturity of long-term funding.

This provides us with a relatively longer tenure and more stable base of liabilities, which provides additional protection should credit spreads widen from the benign levels that exist today. On capital, our common equity Tier 1 ratio reduced by 30 basis points to 12.0% with strong capital generation, net of dividends, offset by the high level of franchise lending growth.

IRRBB risk-weighted assets increased by $6.5 billion over the last 6 months, consuming 16 basis points of common equity Tier 1. Over the year, and adjusting for the impact of the new regulatory standard, the impact was 28 basis points. This was a result of our approach to structural hedging that aims to provide earnings stability through the cycle at the cost of short-term capital headwinds in periods of rising rates.

The final dividend increased $0.10 to $2.70, taking the full year dividend to $5.05. This represents a payout ratio of 77%. The dividend will be fully franked, and the dividend reinvestment plan will be offered with no discount and fully neutralized.

On the top right chart, you can see our headline payout ratio is moderating back towards the middle of our payout range. On the bottom right chart, you can see that periods of stronger credit growth have traditionally involved activation of share issuance under our dividend reinvestment plan. Given strong capital surpluses, that hasn't been the case in recent years, but it's a tool that remains available to us in the years ahead.

In closing, this slide sets out our long-term approach to support growth and returns. Our balance sheet strength lays the foundation to support franchise growth and investment. That investment and continued discipline in the management of our capital base positions us well to continue to deliver sustainable returns to our investors.

I'll now hand back to Matt for the economic outlook and closing remarks. Thank you.

Thank you, Alan. Let me close with a few words on the economy. Economic growth was strong in 2025, but inflation emerged due to productive capacity constraints across the economy. Global supply shocks drove inflation higher in early 2026. We saw the peak of house prices in March this year, coinciding with the second of 3 cash rate rises.

These higher rates had the intended effect of slowing household consumption and the economy more broadly. Higher interest rates and inflation are placing uneven pressure on household incomes and economic activity. Inflation remains too high, but should moderate as the economy slows.

There is understandably a lot of focus on short-term movements in house prices, given they represent a large share of household wealth. But Australia's deeper housing challenge is our inability to build enough homes quickly and affordably.

Residential construction productivity has declined materially. Construction times have increased and taxes, charges, regulation, infrastructure and labor constraints have raised the cost of new supply. Sustainable increases in living standards require stronger productivity and greater productive capacity.

Australia needs faster and more coherent execution across housing, energy, infrastructure, technology and skills. That means confronting trade-offs, measuring outcomes and ensuring that individual policies make sense collectively. The economy remains resilient, and we should be optimistic about Australia's long-term potential, but existing wealth does not guarantee future living standards. It depends on our ability to invest, adapt and build the capabilities required for the future.

Financial year 2026 demonstrated the value of sustained investment in our customer franchise. We grew across every major domestic product category, maintained stable underlying margins, strengthened primary customer relationships and continued investing in technology, resilience and customer protection. This translated into stronger earnings, a higher dividend and a strong starting position for this financial year. The external environment is now more demanding and less predictable. Growth has slowed and geopolitical risks remain elevated.

In financial year 2027, we will focus on deepening customer relationships, converting franchise growth into sustainable risk-adjusted earnings, maintaining discipline in volume, margin and capital choices and improving productivity. We remain focused on supporting customers, protecting communities and investing in Australia.

We will continue to take a long-term approach, make deliberate trade-offs and adapt as quickly as possible as conditions change. We'll continue working to earn the trust of our customers and the community. And none of this is possible without the commitment of our people.

I'll now hand to Mel, and we look forward to your questions.

Thank you, Matt. For this briefing, we will be taking questions from analysts and investors. [Operator Instructions] I'll now take the first question from Andrew Lyons. Andrew?

Can you hear me, Mel?

We can. Thank you.

Sorry about that. You've spoken to a 17% decline in mortgage applications on PCP. And despite this, your macro team still expects mortgage credit growth in the 4% to 6% range, which, at the top end, would appear optimistic. Just given the various moving parts in assessing how applications translate to credit growth, can you perhaps talk to how the management team expects credit growth to sort of play out over the next 12 to 24 months?

Yes, sure. Look, and I mean, as you can see, the applications did fall during that period, but you can see have stabilized. We think the weakest week was, I think, the last week of June, the spot even of the first week of August, slightly above that. I think Alan and our collective view would be we'd be in a tighter range, probably in the 4% to 5% over the course of the year. I think you're probably at the lower point before you start to adjust for offsets, which seem to be growing much less than in prior years.

And also the repayment profile, we think is going to change slightly. So I'm not exactly sure between a few of us who will be closest to pin, but I think we're probably in that 4% to 5% range over the course of the year, accepting that there, of course, will be some volatility around that, but at least things seem to have stabilized, and we expect an improvement into later stages of FY 2027.

That's great. And Alan, maybe a question for you. Your total provisions to credit risk-weighted assets fell slightly in the half. However, since December '25, we've obviously had a number of rate rises, tension accelerated in the Middle East, and policy-induced house price declines and, I guess, broader softening macro trends. And so the reduction in the CP perhaps appeared a little surprising. Can you maybe just talk to the various drivers that have seen you come to this outcome, please?

Yes. I mean there's always a number of moving parts within the provisioning estimate that we make in each period. You'll recall that in the March quarter, I think we moved ahead of some of the -- we've already seen two of the rate rises by the time our quarterly came out, it was -- the third rate rise was pretty much baked.

And we've seen the change in the geopolitical environment. So we've moved, I think, ahead of where maybe you've seen some of the June quarter provisioning changes across the industry. So over the 6-month period, as I mentioned, strong increase in collective provisioning over that time.

Obviously, it's a period of strong credit growth as well. So you've got the denominator effect of higher credit risk-weighted assets over both the March quarter and the June quarter. So overall, we've been, in terms of collective provisioning coverage to credit risk-weighted assets, at the top end of industry for many years.

We're comfortable with the level of provisions that we hold. We get very granular in terms of the different customer cohorts where we think there are forward-looking risks that we need to be alive to. And so we're very comfortable with the level of provisions that we currently hold well above the central economic scenarios.

The next question comes from Jon Mott.

Can I just ask a question on the mortgage pricing. So we've seen wholesale funding costs come in quite substantially to post-GFC lows. And this appears to have been used to cut mortgage pricing in June and opened a bit of a price war across the industry in recent weeks and months.

You've been adamant, Matt, over time that you need the industry to write mortgages above the cost of capital. If funding costs do start to normalize and we actually move out from post-GFC lows, what would the strategy be there? Is it possible for you to start moving your mortgage pricing back out? Or are we effectively just locking in low-returning mortgages if funding costs start to normalize somewhat?

Yes. No, thanks, Jon. Maybe I hope it's not the latter. So let me maybe go back a little bit because you're right. I mean, funding costs are origination margins improved over the course of the year, but it's a function of funding costs, as you touched on.

I think as we look at sort of flow origination RoTE end of the financial year, up on the start, sort of flat on December. There's probably some detail, I'm sure, Alan is looking forward to going through in the one-on-ones. There's a lot of pricing activity in the market.

We did increase in June, we would say, on the back of a number of other pricing changes, a little bit more of the reemergence of cashback. One institution didn't ever fully take it away. We've seen another -- we've seen some interesting tactics as well around just various pricing strategies and $500,000 and $1 to sort of drop out of quickly, which I think a lot of you are using to track.

So I mean, look, ultimately, we take a step back from that and say, yes, there's a risk around funding costs. We're watching the profitability very closely. When you've got the five largest players, one presumably wanting to continue to grow well above, all of the others wanting to probably be there or thereabouts on system and obviously noticed the comments from Westpac.

Underlying that, if the question is, is there a change in our strategy where we're going to be preferencing volume over margin and risk-adjusted returns? No. And we expect that with that market construct and dynamic, we need to manage that very carefully, including one of the risks that you mentioned.

I mean we certainly have reduced discounting at various points of time. But of course, it's a very competitive market. And I think we've all seen as volume slows, that typically, at least for a period of time, does see maybe more of a focus on volume. So look, we'll just continue to go to market as effectively as we can, balancing all of those areas, and we're acutely conscious of the return and the distribution of returns across both channel, borrower characteristics and LVR.

Can I ask a follow-up question on the brokers? Because the flow through the broker channel is up to a 10-year high at 49%. And when you actually break down, it's obviously a very rapidly changing environment. But over the half, what we saw was broker originations flow appears to be down 4% half-on-half, but proprietary is down 14%.

So you're seeing a bigger slowdown in prop versus broker. Is that behavioral where brokers just appear to be working harder in a slowing environment to -- they eat what they kill, to write more business and keep going? Or is there -- what's driven that change in the broker versus prop flow?

Yes. Look, I think, again, there's a combination of factors. I think that's broadly right in the context of the market and I guess, the structure of payments that are -- the way the broker channel is obviously very dependent on activity.

Look, and I'd say, I mean, obviously, over a long period of time, the broker channel has established itself in terms of growth of distribution. Look, I think the other factor for us as well during that period, we certainly made some tightening of a variety of things, including to some of our settings to restrict some flow in some areas where we were seeing higher indications of irregularities.

They're easier to sort of detect in the proprietary channel, even though they would be present across the market. We expect there will be a gradual improvement in that over time. And again, we will obviously support our customers through the broker channel. But if we have the opportunity to serve our customers directly, then of course, that will continue to be a priority for us.

The next question comes from Carlos.

Carlos Cacho from Macquarie. On Slide 68, you called out an expectation that you'll double your gross benefits from AI to sort of the $400 million in FY '27, and that will be greater than investment. Can you give any color in terms of how you expect to see that flowing through, if that's cost avoidance or revenue, or how we'll see those benefits in the income?

Yes. Thanks, Carlos. Look, we've got a number of use cases that some are mature, some are in flight and in pilot, and we're expecting to have a number that are coming to fruition over the course of the next 12 months and beyond. So I guess the summary answer would be it's going to be a number of things.

And so what we're talking about there is the gross benefits. And so for example, we've disclosed, over the last couple of years, some of the improvements we've made to engineering velocity, which we're really pleased with, and we're getting a lot more done with our investment envelope. That's one of the reasons why we feel comfortable maintaining the dollar amount.

Our target is to maintain the dollar amount of the investment envelope over the next 12 months because we think within that lower real-term spend, we're actually going to get a lot more done, given the velocity improvement. So that's one of the benefits that we measure.

Obviously, there are also revenue -- realized revenue and realized cost benefits that form part of that number. We've seen some of that in the current financial year. So you've seen that emerge. That's part of the reason why we've delivered record annual productivity saves in the current period. We're also seeing revenue benefits emerging in both the retail bank and the business bank in particular. And we're excited about a number of the pilot programs that we've got in place right now.

We talked about business Banker Workbench, which takes a lot of the pressure off the business bankers. They can spend more time with customers. We can continue to improve our fundings per banker that drives -- it's one of the reasons we've driven consistent above-system performance on business lending growth.

And so there's a number of things that we are investing in, and we're seeing bearing fruit, and we've got a reasonable degree of expectation that will continue to bear fruit over the years ahead.

Great. And then just my second question is about the economic forecast that drive your provisioning. I know that you did increase the weighting towards your downside in the period. But I also note that your forecast only incorporated a 1.3% fall in house prices this financial year, which 1 month in, we're halfway there. So it would seem there's probably risk. So I'm just wondering what's the sensitivity if we were to see a larger house -- fall in house prices like peers are starting to expect now for your provisioning?

Yes. So our central scenario, we changed a number of elements to the central base case. And that led to near enough a $300 million increase in the expected credit loss under the central scenario that's part of the overall loan loss provisioning increase that we've seen over the 6 months and over the 12 months.

And direct answer to your question, it's not particularly sensitive to the change in house prices. When you're talking low single-digit changes in house prices given the very strong security coverage and very low levels of actual losses that we've seen in that portfolio historically, it's not particularly sensitive to that. It's much more sensitive to things like the unemployment rate, as you can imagine, and the broader macro indicators.

We've increased the unemployment rate outlook in line with some of the Reserve Bank forecast that we've seen and other market observers. We've also, obviously, reflected the slow in real GDP growth. So those things have already led to a reasonable increase in the central scenario.

And as you observed, we increased the weighting to the downside scenario over the first quarter, which was a material driver of why overall provisioning levels were up. So direct answer to the question is the house price changes won't move the needle very much at all.

The next question comes from Andrew Triggs.

Perhaps for Alan, just interested in Slide 26 on the group margin walk. Alan didn't provide a lot in terms of the outlook there, and I appreciate there's a whole host of positives and negatives heading into next half. So perhaps could you elaborate on what you're seeing in both in terms of mortgage competition, deposit competition mix, basis risk and then some of the tailwinds that you also see, including some roll-off of rate lag headwinds?

Yes. I mean, I think from a competition perspective, that's something that everyone will have a view on in terms of the ongoing competition across home loans. We're seeing some price-based competition within business lending as well. That's been relatively persistent over the last sort of 3 halves. You haven't seen much of that emerge in terms of our divisional net interest margins or on our group margin walk, but that's an area we're continuing to focus on.

Within deposits, look, I think term deposit spreads, you've seen some compression in term deposit spreads with some of the good offers that are available to term deposit customers and there's the ongoing churn towards higher-yielding savings deposits within the deposit mix.

Against that, I'd say, wholesale funding spreads, look, they're very benign. They remain benign. Basis risk, bill-OIS spread has remained benign. We're also seeing very strong growth in business lending, and we get a positive mix effect with strong growth in business lending relative to lower-margin home lending. And given the changes in system outlook around housing credit versus business credit, I think that's a source of positive margin performance in the period ahead.

We're also going to enjoy, I think, another 12 months of tailwind from our replicating portfolio set. If you go back and look at 5-year swap and how that's moved over the last 4, 5 years, we've still got a significant tailwind to come in the year ahead.

So look, I know there's a number of estimates around how each of those factors are going to move. I'm not going to add to that here and provide specific guidance, but I think we're all very well aware of all the moving parts, how they apply across the industry and how they apply to CBA, but they're all the factors that we're watching.

Yes. And maybe just another one on costs. IT expense growth was 16% this year, and the 3-year CAGR looks to be around 11%. It's now 20% of total OpEx. You referenced some improved benefits from AI coming through. But just broadly speaking, how you sort of think about the annual pace of tech spend growth in the medium term?

Yes. I mean I sort of touched on it earlier. We've taken the posture to -- we've got productivity saves within the technology team, but we've decided to reinvest that and get more done. And so while we're seeing good gross productivity there, we've decided not to realize that. So that's one of the reasons why the technology, both the technology labor cost and also the IT cost, the functional IT cost that you see, is continuing to grow above inflation.

Vendor IT inflation is a factor we've talked about. I think that's going to continue to be a feature of this space. And as we migrate more of our platforms and processes on to a cloud environment, cloud compute volumes that's been a volume-related cost, which is one of the reasons why we're significantly above inflation in the technology line. So look, I think technology costs as an overall proportion of our cost base have been on an upward trend for a number of years. I think that trend is very likely to continue.

The next question comes from Richard.

It's Richard Wiles, Morgan Stanley. I've got a couple of questions. Firstly, Matt, Slide 74 shows that the 4-week rolling average for mortgage applications is sort of stabilizing as you've called out. What's interesting in that chart is the trends at the start of the year were pretty similar to last year, even though rates were rising this year. The divergence has actually occurred since May.

So can I ask you, do you think it's a budget rather than the rates that have caused this fundamental shift in the demand for mortgages? And can you highlight any sort of reasons why investors in established properties will come back into the market over the course of FY '27, unless we see some very significant house price falls?

Yes. No, thanks, Richard. I mean look, I mean, clearly, there's a number of factors contributing. I mean I think applications actually peaked in October. So house prices peaked in March and have reduced in the 4 months since then.

I think you can generally see applications that are falling, obviously, from October 2025 and, over time, increasingly both from affordability constraints, clearly, inflation expectations and the first rate hike in Feb and then two more subsequent, the last being on the -- I think it's the 5th of May to 4.35%.

Then you overlay that with economic uncertainty on a global basis, an oil shock and yes, taxation changes. I think we're also coming off a very high prior year because I think if we look at Q3, sequentially, it's weak. But actually, versus the prior corresponding period, it's actually sort of significantly above that.

So I mean, I think '26 was financial year, and particularly the first half, was a very strong year in terms of credit growth. I mean, if I think we would have exceeded our expectations and particularly, obviously, in the context of investor lending. So that overall mix, clearly, we're not going to see credit growth like that in '27. I think now, we've seen some stabilization, as we've called out this morning. Clearly, there's some likely to be some volatility.

And like many markets, it can be quite sentiment-driven. Like seasonally, we tend to see a bit more of a pickup. I guess part of our base case would be if you believe that rates are on hold for the rest of this year, which, obviously, opinions vary, and a couple of cuts into '27, we'd expect some demand to be going into the market in expectation of rate cuts. But I mean, we've tried to provide a useful sort of time series.

We can see -- obviously, we split out in terms of owner-occupier investor, we can see a reduction in terms of refi as well as subsequent purchases. I think it's just one of those things we're going to continue to keep an eye on. But as I said earlier, I guess our base case is probably a couple of percentage points lower credit growth in '27 and ballpark, that it's about $50 million NII for every percentage point.

A little bit of the offset, as I said earlier, was a lower growth in offsets. We're seeing that. We saw that dip retail offsets for the first time as we sort of cast that forward. We think that's lower. And obviously, the repayment profile is starting to slow down. So that probably just helps a little bit both of those factors to get closer to the 5% than the 4%.

Okay. And my second question relates to sort of mortgage pricing spreads and profitability. A few years ago, you pulled back from the mortgage market quite noticeably because you thought pricing was irrational. You had a quarter where your home loan balances actually fell. How far are mortgage margins above that level today? Or alternatively, how far would you need to see mortgage rates fall from current levels before you got back to that type of situation again where you thought that returns just didn't justify growth?

Yes. Look, we clearly were not at that stage from our perspective, as I said, I sort of touched on the RoTE and origination over the course of the year and relative to December. Now there's a lot of granularity within that, as I said, in terms of borrower characteristics and channel. So we're still seeing the vast majority above -- across the industry above hurdle rates.

But that's not signaling that we're hoping margins have got further to fall. I think for a variety of factors, we will continue to compete effectively. We're certainly not going to be preferencing volume over margin. As you mentioned, Richard, that period, we could see a rapid acceleration in discounting, I think, on the back of a rapid expansion on net interest margins from liabilities or deposits during the cash rate hikes.

We were probably surprised that there wasn't much of a reaction to our reduction in volume. So look, I think, as I said earlier to Jon, we're acutely conscious of both being able to support customers and to be able to focus on risk-adjusted returns, and margin is an incredibly important aspect of that, and we're going to need to operate definitely in the year ahead.

Our next question comes from Matt Wilson.

Matt Wilson at Jarden. Just looking at your rate of software capitalization, it's running at 2x at the rate of peers. Look over the last couple of years, you've capitalized $1.6 billion of costs. Peers are actually down $100 million. Your cap rate is 52%, your peer average is 25%. I know you'll tell me that you're investing in IT ahead of your customers, but IT has a shorter and shorter life. And the reality is your peers are also investing in technology. Can you walk us through the differences in policy?

I don't think there's any differences, particularly in policy, Matt. I think there's been a difference in investment appetite and capacity to invest. And I think the top line performance as well as the incremental productivity savings have enabled us to continue with the investment appetite that we've had.

So we keep a close eye on capitalized software, the gap between the annual amortization charge and the amount that we're capitalizing. You've obviously seen over each of the last 3 years, I think there was something like $130 million of additional annual amortization that's come through as we continue to sort of deploy some of that technology.

The point of amortization is that you're recognizing the expense at the same time that you're realizing the benefits. And that's why from a pre-provision profitability perspective, we've delivered strong financial outcomes as the combination of those two things. So we're investing. We're comfortable with the net present value that we're generating from those investments. But we understand that the cash spend is the drag on common equity Tier 1, and that's the drag on organic capital generation. And so that's the gross cash spend that we focus on.

Are we getting bang for buck on that spend? We're comfortable that we are. And as I mentioned in the talk track, we're adjusting our appetite depending on the productivity that we're generating within our own teams as well as the broader operating conditions. And so that's one of the reasons why despite you're going to see, obviously, inflationary impacts on wages and vendor IT cost inflation over the course of the next 12 months. We're going to hold that annual cash spend at the $2.4 billion level.

So that means a real-terms drop in the amount that we're investing, but we're comfortable we can actually get even more done in 2027 than we got done in 2026. And so we're pleased with that. We're pleased with the work that we're getting done, the processes that we're building. And we're keeping a close eye on managing the amortization headwind that we'll see over the next 2 or 3 years.

That's good clarity. And secondly, you actually touched on this slightly in response to your answer to Jon Mott on the sort of prop versus broker channel dynamics. But could you provide an update and some clarity on the issues of money laundering that appear to be affecting the home loan market? Is there something simmering away there? It's obviously been in the press over the last 6 months. You haven't made a comment yet you're the largest operator in the home loan market in Australia.

Yes. No, happy to do that, Matt. Look, I think, as you said, it has been covered in the press, we don't provide a running commentary, but I think it's well established that we -- as you would expect, monitoring the market very, very closely and potential cases of fraud have been a factor for as long as financial institutions have been around.

We saw some particular typologies that would, in our mind, fall into potential loan irregularities. We reported those to the relevant parties and stakeholders. We, along with many financial institutions, have been working with AUSTRAC and the Fintel Alliance, which I think have been extremely useful. I think it's a great asset for the nation to be able to pull together data from so many different sources to seek to understand that.

I mean, specifically to your question, based on our investigations to date, haven't identified evidence of professional money laundering or links to organized crime. As you would expect, at any point in time, we're looking at all sorts of different changes in the risk environment, some of those through lending and obviously, the Tranche 2 changes to the law, which bring in scope assets like home lending and real estate agents, I think, helped to even provide a fuller picture.

But it continues to be an area of focus for us narrowly in the areas that we've covered, but also more broadly, I'd say the risk landscape, obviously, in areas like cyber, but not limited to that, in economic crime, scams, fraud, financial crime, I think significant changes over the last 12 months.

And I think the reality is that is likely to continue both domestically and internationally. I think the environment which we're all operating in is more complex and more demanding, and that's one of the factors.

The next question comes from Brian.

Congratulations to everyone on a high-quality result. That said -- and I just want to go back to Matt Wilson's question, a slightly different interpretation of the capitalized software. So if we have a look on Page 17 of the results, we can see that just in the second half, you start up with $2.84 billion, you spent $634 million, amortized away $433 million.

If we annualize that $433 million second half charge, it suggests that you're amortizing this software over about a 3.5-year life, which actually seems really, really short. And I appreciate the fact that everything is accelerating quite quickly.

But if we have a look at some of the IT developments you're doing, potentially they've got a much longer life, I would have thought, than 3.5 years. Could you just give us an explanation what's driving that relatively short amortization life versus the narrative, which is that we're continuing to invest to actually create long-term competitive advantage?

Yes. I mean there's quite a spectrum of useful lives within the capitalized software. You can imagine we've talked about the multiyear tech modernization program that we're running, which is building a lot of the refresh in the entire technology estate. We've moved our main Omnia data platform onto the cloud, for example, during the course of the past 6 months, our core banking systems have been migrated onto that sort of next-generation platform.

When you make those sorts of infrastructure changes, they tend to have a longer useful life. You can go well north of 5 years. In fact, the core banking system, when we first built it, the amortization period was 10 years. We've got a similar program going on in the ASB in New Zealand at the moment where there's basically a core banking modernization as well as a number of other technology modernizations. They're in that infrastructure category. So they've got useful lives 5 years-plus.

Then on the other side of the coin, to the extent that you're improving your digital applications, your digital distribution channels, I think we've seen the pace of change there continue to increase. So we've shortened the useful lives if you look at some of those types of investments. So the weight average comes back to, I think, what was a relatively conservative useful life across the broader portfolio, given the mix of investments that we have.

But to Matt's point, it's an area we focus on. We obviously take the capital deduction the minute we spend the money. So in some ways, it doesn't matter from an accounting point of view, what the amortization looks like. What matters is what's the capital that you're generating on each of the investments that you're making and you're getting value for money. So that's very much a focus.

So that cloud infrastructure stuff is going through the capitalized software line?

The migration to cloud itself we expense, but to the extent that you're rebuilding technology platforms, a new cloud-based platform, which we have done for a lot of the AI foundations that we've built, for example, then they treated as infrastructure. Infrastructure is about, I think, $0.5 billion of gross spend in this period, and that attracts a longer useful life than the weight average.

Alan, the second question is a kind of obscure one. You've got a fantastic slide that talks about the interest rate risk in the banking book. What we can see is that it seems to be the embedded gain is probably more driven by 3-year bond rates. We can see 3-year bond rates going up over the period, but the embedded loss move was probably slightly positive from memory.

Just going back on that, the other obscure, which doesn't kind of -- I'd like to understand why, but also and above that, the high-quality liquid assets that all of the banks own probably will be much more state government debt than basically federal government debt. And while I appreciate that it doesn't necessarily flow through the P&L, it does flow into the reserves.

Could you talk to us about the practical impact because it's been speculated this week of what would happen if we saw a rating downgrade on New South Wales and Victorian state debt, earnings and capital?

So on the overall trend on IRRBB is very sensitive, as you say, to 3-year swap rates. And so we've seen those swap rates increase 30 basis points in the last 6 months. They peaked probably around March time and have come in a little bit from March. So you'd have seen in our quarterly Pillar 3 report that the interest rate risk in the banking book is down $2 billion or $3 billion over the June quarter. So the swap rate moves have been the key sensitivity there.

To the point on semi-government holdings, I mean, look, it's a large proportion, and it's -- the market is -- I think the major banks in Australia have got their fair share of semi-government bond holdings. We continue to support that bond issuance. The credit spreads on state governments -- all state governments has actually improved over both the 12-month period and the 6-month period, and you've seen that come through as a sort of positive mark-to-market on our investment securities revaluation reserve, which has been a sort of tailwind to capital over the last 6 and 12 months.

To the extent that you've seen -- you'd, first of all, see market weakening to the extent there was any issues around state government finances manifesting, you'd see that in a widening credit spread. That would translate through our mark-to-market on those assets, and you'd also see an impact on IRRBB through the credit spread risk element. So that's one of the things we take into account.

We stress-test our capital very regularly. One of the key elements of that and the key areas of volatility that we monitor is IRRBB. And we've seen volatility in that, which has been rate-driven, but there can also be credit spread-driven volatility there as well. But we continue to monitor that, stress-test it and then make sure that our weightings to the various asset classes on the HQLA stack are commensurate with the volatility that we've got risk appetite for within our capital stack.

So it's capital, not earnings, and we'll wait and see. But you guys are confident that you've got it covered. This is despite the fact you think residential stamp duty, which drives most state government revenue line is certainly set to decline. Is that a summary of it, Alan?

Yes. There's a number of -- we take a number of stresses on credit spreads across the state government exposures that we hold. We're comfortable with the level of exposure that we have, and we can manage the volatility within either rate moves or credit moves.

The next question comes from Brendan.

Brendan Sproules from Goldman Sachs. Alan, I just had a question around your dividend slide, Slide 33, where you show us that in the last 5 years, you've had significant levels of capital return, obviously, a high payout ratio, you've neutralized the DRP. I guess when I look across this slide, I see the dividend payout peaked.

Obviously, you said the buyback won't be extended. And we actually saw the core Tier 1 ratio fall, I think, around 30 basis points this half. Just given the very strong credit growth, are we moving back, say, over the next 5 years, in your mind, back to that funding growth that we saw sort of pre-COVID, where you will be using DRPs and other measures to try and to fund the growth of the balance sheet?

Thanks, Brendan. I mean, yes, we look at different scenarios. And certainly, one scenario would be that you continue to see a very strong level of overall credit growth across the economy. And in the event that you see that strong level of credit growth and we're getting our share of that credit growth, then you'd see capital consumption from growth in credit risk-weighted assets. And then we're managing the capital actions accordingly.

I mean one capital action you can take, if you thought that was going to unfold, is the dividend payout ratio and where it sits within the broader payout policy range. You can see we've paid at 77%. We've signaled that we're approaching the middle of that range. DRP, whether you activate or continue to neutralize is obviously another capital management lever. It's not a lever we've had to pull over recent years. We've had very strong capital surpluses. But it's a tool that remains available to us.

Now there are other scenarios that you could see unfold. I mean we've spent a bit of time on this call talking about a slowdown on housing credit growth relative to the very strong levels we've seen. Housing credit drove about 1/3 of our volume-related credit risk-weighted asset accretion during the course of the last 12 months. And so that element of credit risk-weighted asset capital consumption is likely to slow over the next financial year relative to the last -- certainly the last financial year where it's been incredibly strong.

So we're not signaling whether we will or we won't. That's a decision that the Board will make on each report period, depending on what we see and what we're forecasting, but all those levers are available to us -- remain available to us in the years ahead, and it's a capital management tool that we've certainly used in the past.

And my second question just relates to the performance of the New Zealand division, and I'm particularly looking at Page 76 of the profit release today. It seems to be quite a turn in the momentum of operating income growth in local currency terms. Obviously, you have still a bit of a hawkish central bank over there. Just wondering what has, I guess, changed in the operating environment in that market that has seen quite a turn from, I guess, the first half performance versus the second.

Yes. That's a fair question, Brendan, because I think it has very much been a tale of 2 halves in the ASB from a top line perspective. The big change that we've seen there was actually the increase in swap rates that you've seen in the New Zealand market. So swap rates there were up around 50 basis points from December through to June.

Obviously, it's a very heavily fixed rate home loan market. And the combination of that increase in fixed rates and I think some real intense competitive pricing pressure amongst the banks in New Zealand, seeing a compression of fixed rate home loan margins in the second half. So that's been the #1 reason for that performance.

Now we, over the year, we grew in line with system in New Zealand over that period in the second half, particularly the June quarter, we grew about 0.5x system. So what you're seeing on the operating income line is a combination of weaker margins and also weaker volumes through that period.

So that was the main driver, but we've -- there's a lot of focus on that from a management perspective within ASB. We feel that we've got the volume and the pricing across both sides of the balance sheet into a reasonable shape as we head into the new financial year. But yes, clearly, a tale of 2 halves in terms of the operating performance in ASB this year.

Our next question comes from John Storey. Perhaps we'll come back to John. Our next question comes from Matt Dunger.

If I could ask about the other operating income and the commissions, which haven't had a lot of airplay. You called out, Alan, it was predominantly due to FX that the commissions were 5% lower in the half. You're a clear leader on FX. Is there anything you're seeing here around lower activity in the FX space where household spending, you're suggesting, has been resilient? Are you facing mounting competition here? Has there been market share loss? Or just wondering if you could unpack that.

No. I mean it's not been market share loss. I think there's been -- I mean, one of the areas of consumer spending that's clearly had some impact from discretionary spending perspective since the rate hiking cycle has been on travel-related spend. And we've seen that come through in terms of our retail foreign exchange volumes. So that's one of the drivers there.

I mean there's also, you'll recall, we called out a one-off receipt on the sale of our general insurance business in the prior half. And so that's unwound. Obviously, there's been nonrecurrence of that sequentially. So that's probably as big a factor in terms of the sequential performance on commissions. So no, not so much a market share shift, more just a change in consumer behavior.

I mean we'll see in terms of overall consumer spending behavior and the level of rates in the economy over the next 6 and 12 months. We certainly expect that to continue to be a relatively softer part of consumer spending as we head into the remainder of calendar 2026, and then we'll see how the overall spending picks up in 2027.

If I could just follow up on the gross benefits from AI, you've talked about on Slide 68, you said $200 million in '26 to double in 2027. And does this imply that you're going to get net benefits in 2027 sort of implies what you've said that you were not breakeven in 2026 on the spend versus the benefits? And following from Andrew Triggs' question, Alan, why did you say that you held back realizing some of those gross productivity savings?

Yes. I mean we -- so the answer to the first question, yes, we expect the gross benefits to exceed the level of investment in the next financial year. So at the moment, we're still in -- I describe it as the investment phase. So we're investing a little more than the benefits that we're realizing through '25 and '26. We see that the inflection occurring during the next financial year and gross benefits exceeding the level of investment.

The second part of your question, it really goes to what's your appetite to harvest the gains that you can -- from getting more velocity in code deployment, which we've seen really impressive gains within our technology team around the quality of the code, the amount of code that we can deploy into production, the time that, that takes has continued to shorten.

So I guess with a given amount of resourcing, you can get more done within a 6- or a 12-month period. We've decided, frankly, to get more done. And so while we can measure those productivity gains, we've chosen to continue to reinvest them through the course of '25 and '26, and we're pleased with the output that we're seeing.

Our next question comes from Ed.

This is Ed from CLSA. Just one on costs. You talked about managing your cost envelope going forward and also you're talking about investing for the long term. Can you just talk about what do you think is discretionary within your cost base? Are you just talking about your investment spend and pulling back there? Or is it things like marketing? What is the actual discretionary spend that you can pull back on if you do need to?

Yes. I mean look, there's a number of elements to discretionary spend. I think -- I mean, obviously, something like inflation is not discretionary. There's also a number of commitments that we make from a regulatory perspective when new rules and regulations come in, we have to invest behind that. So there's even elements of the investment spend that you'd say are mandatory, not discretionary.

But within that, there's still obviously a lot of discretion in terms of, to the earlier conversation around the, what level of productivity do you continue to reinvest in the franchise. And the point that we were making through the course of the presentation was you need to create capacity to make the investment. And the sort of order of operations, as we think about it, is how is the operating environment, how is our revenue momentum, and are we creating the capacity through the generation of the productivity.

Because once you've got those pieces in place, then that gives you the flexibility to make an investment decision around the discretionary spend. What's important is to have that optionality because if you don't have the optionality, then it's very difficult to create the capacity to make the spending decisions or make the investments that you think are going to be in the long-term health of the franchise.

So we continue to look at that as many aspects of our spending, which is discretionary. We are comfortable with that spending, but we're prepared to be flexible and adapt as operating conditions change.

Okay. Great. And just a second one, a little bit more on capital. You've touched on a few things. Is there any other mechanical benefits or headwinds coming through from regulation changes that will see a change in your capital in the next half or year?

No. I mean the main thing that APRA have flagged to the market is their work on the changes to the standardized floor around specific asset classes, infrastructure, lending is one element to that. Because we're not bound by the standardized floor, practically, the only implication for CBA is it will probably, to the extent that there's any relief provided on standardized risk weights, increase the headroom that we have to the standardized floor.

But you're well aware of the RBNZ's finalization of their capital requirements, which were a moderation of the previous requirements in terms of the transition period over the next few years. And so I think at the margin, you'll have a slightly less capital-intense New Zealand operation and some changes to standardized floor, but nothing noteworthy, I think, in terms of the overall direction of the capital requirements in Australia.

Our next question comes from Tom Strong.

Tom Strong from Citi. Just wanted to follow up on Matt's question around the productivity and the gross benefits. I guess in the '26 results, you saw productivity constant at $400 million a year versus FY '25. Should we expect that bucket to increase, Alan, as you talk to this inflection point in the gross benefits from AI in '27?

I think what I'd say is within the productivity that we've generated, we'd hope that we can deliver more of that through some of the new investments that we're making. And so within the $400 million, maybe around 10% of that has been related to some of the AI investments that we've made over the past couple of years.

And so we -- I won't guide to the overall level of productivity benefits. We obviously start the year with good aspiration and budgeting and accountability around what we want to deliver, similar to our approach on other lines. I'm not going to give specific guidance on different lines within the P&L, but we always start the year with an aspiration to do more. That's one of the reasons why we make the investments that we make. So we look to achieve more proportionately of those productivity savings through some of the investments that we've made in recent years.

And just a second question on the Institutional Bank. I mean you continue to see very long -- very strong lending growth, but 9 bps of NIM contraction in the half. Is this a mix thing? Or are you seeing competition accelerate in that segment?

I don't think I would describe competition as accelerating. I think competition is always intense in institutional banking. Really, it's a function of the change in the new originations in terms of the mix. So if you look at the proportion of our corporate portfolio that's rated investment grade, that's increased nearly a full percentage point over the course of the last 12 months.

So you can see there's been a skew in our origination towards some of those higher investment grade, lower risk weight customers. So that obviously has a commensurately lower margin within the mix attached to it.

We focus in the institutional bank as we have for many years on the risk-adjusted return. I think we've disclosed the revenue as a proportion of risk-weighted assets that's improved over the 12 months. That's up 3%. And so we're pleased to see that. That continues to be a strong focus for us. So I think it's always been competitive in that part of the market.

We focus very much on total relationship return. And so we've seen strong growth in both lending, but also very strong growth in operational deposits. So the operational deposit growth in Institutional Banking this year was 13%. So very pleased with the nature and breadth of the growth that we've seen there and the strong improvement in risk-adjusted returns.

And we're going to go back to John Storey for our final question.

John Storey from UBS. I just wanted to kind of follow up a little bit, I guess, on what Tom was asking about. I mean it looks like [ Institutional Banking ] business lending, very, very strong, but it doesn't necessarily look like, particularly in the second half of the year, that it's translated into earnings growth, right? And there's definitely been a theme from the call that there's an expectation that retail potentially could weaken as we head into '27.

I'd be interested to get your views on how you think these parts of your portfolio could offset some of the expected weakness that you might see in retail, just given the trends that are outlined in Institutional Banking business.

Maybe I'll just -- a couple of things just to touch on to add to Alan's answer around IB. I mean, look, our focus there remains on sort of risk-adjusted returns. We saw a number of transactions that were originated really in the last 4 months of the year. That tends to -- and some of those are sort of undrawn limits. We tend to see the risk-weighted asset growth. We don't necessarily see the revenue from a timing perspective. So I think we certainly will continue to focus from a return perspective there.

I mean, to Alan's point, IB has been -- has always been competitive. There's not usually much of a surplus between sort of cost of capital. There were some good margins as well in areas like funds finance, particularly when the U.S. market was dislocated around Signature Bank. So some of those are basically refinanced just that, I guess, more normal levels of margin.

But I think look, it's fair to say that like right across the board, managing the individual businesses from a profit after capital charge is really important, and that focus has been in place for a long time within the institutional bank. I think within business, we've seen strong growth. We've gotten a real boost to profitability from the very strong deposit franchise that Mike and the team have built up.

We're getting a bit of a mix effect there because some of the investments in technology, we've been able to grow faster at the smaller end and some of the smaller business lending. We continue to see some real service and underwriting enhancements as well as productivity benefits for our bankers.

And then look, retail, clearly, home lending is going to be competitive. We've grown the consumer finance business over the course of the year. So I think across those three, and Alan has already touched on New Zealand, they tend to be pretty volatile. A lot of the market there is, obviously, priced off fixed rate. And so big movements in swaps, you can see some very significant reductions in the margins that are available.

Some of the New Zealand banks are happy to sort of originate at very low levels of margin because they turn over probably typically every 18 months, they get an opportunity to reprice them. We haven't done as much of that as peers. But I guess, in between across all of the businesses, we feel like there's opportunities to both strengthen the relationship we have with clients as well as manage the profitability, hopefully, to a very high level of discipline.

Thank you. That brings us to the end of the briefing. Thank you for joining us, and please reach out to the team with any follow-up questions. Thank you.

Hello, and welcome to the results briefing for the Commonwealth Bank of Australia for the half year ended 31 December 2025. I'm Melanie Kirk, and I'm Head of Investor Relations. Thank you for joining us.

For this briefing, we will have presentations from our CEO, Matt Comyn, with an overview of the results and an update on the business. Our CFO, Alan Docherty, will provide details of the results, and Matt will then provide an outlook and summary. The presentations will be followed by the opportunity for analysts and investors to ask questions.

I'll now hand over to Matt. Thank you, Matt.

Thanks very much, Mel, and good morning, everyone. It's great to be with you today to present the bank's half year results.

We recognize the cost of living pressures, global uncertainty and rapid change are weighing on many Australians. In this environment, we've remained focused on supporting and serving our customers. That focus has delivered disciplined growth across our core customer segments. Cash net profit increased by 6% on the prior comparative period and earnings per share increased by $0.19. We maintained strong liquidity, funding and capital positions. And our operating performance and capital position has allowed the Board to declare a fully franked dividend of $2.35, up $0.10 on the prior corresponding period. This marks the 11th consecutive period of DRP neutralization.

There are 2 features of this result to stand out. The first is the market context. We've seen high credit growth, low loan losses, supportive funding markets and intense competition. The second, which is a key strength, has been maintaining stable margins while growing volume at or above system across all major segments.

Over the past 12 months, mortgage balances grew by $45 billion or 7% and business lending grew by 12% at 1.3x system. Deposit balances increased by $44 billion in the half. This was our strongest domestic deposit and lending balance growth in a half year reporting period since 2008.

Australia is currently experiencing relatively strong nominal growth and private sector demand. In this environment, banks play a critical role in supporting credit growth for productive investment while maintaining unquestionably strong capital positions. Doing this sustainably requires profitable banks that can generate capital organically to support the economy. The last time credit growth was at this level, apart from a brief period during COVID, returns across the industry were materially higher. In normal conditions, such an environment would favor disciplined competition so that scarce capital is deployed where it earns an appropriate return. However, the competitive landscape is materially shifting due to differing business models, regulatory settings and architecture, customer offerings and return hurdles. Against this backdrop, we believe CBA is uniquely positioned to adapt and perform strongly.

Our deep customer relationships and franchise strength allows us to compete effectively and profitably. That profitability allows us to support higher growth across the economy, invest to improve the customer experience and deliver consistent returns for our shareholders.

Disciplined growth and margin management drove operating income growth of 6.6%. Operating expenses increased by 5.5%, excluding restructuring and notable items. This reflected inflationary pressures and higher investment in technology, resilience and our frontline teams to improve customer experience. Credit conditions remained very benign, contributing to 6.1% cash profit growth.

The performance and long-term health of our franchise is underpinned by a simple relationship-led model. Deep trusted customer relationships drive more frequent and meaningful engagement. That engagement provides deeper insights into customer needs, enabling us to deliver superior customer experiences. Over time, this creates enduring value for customers and sustainable returns for our shareholders. This model has long underpinned our leadership in retail banking and over the past year -- over the past several years, has accelerated growth in our business bank. Technology continues to amplify this advantage, enabling more personalized, timely and scalable customer engagement.

Our financial performance reflects customer focus, disciplined execution and investment in our franchise. We track the strength of our customer relationships through Net Promoter Score, and this remains an important indicator of trust and advocacy. We currently hold leading NPS positions among major banks in consumer and institutional banking. And following 15 months at #1, we dropped to the second position in business banking in the half.

Operationally, this is translating into scale and momentum across the group. On average, each week, we settle more than 3,000 home loan purchases, lend around $900 million to businesses and process almost 150 million payments, and alert customers around 280,000 times to suspicious card activity.

We continue to build scale and depth of primary customer relationships, which underpins long-term franchise health. We've consciously increased investment in data, technology and AI to improve customer experience, safety, security and operational resilience.

The retail bank has performed well with pre-provision profit growth of 5%. We've maintained the leading Net Promoter Score for 38 consecutive months. Retail MFI share has increased slightly to 33.5%, but remains below its 35% peak. Customer engagement remains a core strength with 9.4 million CommBank app users and 14 million daily log-ins. We now hold 12 million retail transaction accounts, a 35% increase since the start of COVID and an increase of 585,000 in the past year. As a result, our deposit growth has been strong.

Home loan balances increased by 7% in the past year to $622 billion. 97% of these customers hold a transaction account with us. Digitization and technology continue to drive performance in home lending. 70% of proprietary home loan applications are auto decisioned on the same day. We're focused on continuing to strengthen our MFI share and investing in AI-enabled digital experiences.

The Business Bank has had another period of strong performance. Pre-provision profit growth was 8% and cash profit growth was 14%. MFI share increased to 26.9%, which is a 310 basis point increase since the start of COVID. We added 85,000 transaction accounts in the past year, which is a 7% increase. And the business bank is now the Commonwealth Bank's largest source of transactional deposits.

We grew lending at 1.3x system, increasing balances by $18 billion in the year. Business Banking lending balances have increased by 87% or $78 billion in the past 6 years, supporting growth and jobs in our economy. Approximately 90% of business loans are linked to a CBA transaction account, reflecting the depth of our primary relationships. This supports credit quality with loan losses of 6 basis points in the half. It also allows us to use data and automation to substantially improve lending and servicing processes.

For small businesses, we've doubled the volume of loans auto approved through BizExpress over the past 2 years and have reduced annual loan maintenance activity by 85%. We also launched a national AI, cybersecurity and digital capability initiative, supporting up to 1 million small businesses to lift productivity and competitiveness. The combination of deep customer relationships and prudent lending growth is delivering sustained earnings performance.

Our institutional business is also performing well with pre-provision profit increasing by 13%. We've regained the #1 position in NPS, supported by improvements in client experience and execution. Our institutional bank plays an important role in providing $64 billion in net deposit balances and supporting markets activity. We've seen growth in new transaction banking mandates, enabling the institutional bank to further support the group in deposit funding.

The markets business has had a particularly strong half. We led the market in debt capital market performance and last year topped the Bloomberg combined lead table.

In New Zealand, ASB performed well with operating income growth of 8%. ASB is the highest reputation score of the major banks in New Zealand and has been a Digital Bank of the Year for the past 4 years. ASB saw 1.3x system growth in home lending and business and rural lending. Deposits grew at 1.2x system. Customer deposits and home lending balances have both increased by 41% in the last 6 years by $26 billion and $24 billion, respectively.

The credit environment remains benign. Troublesome and nonperforming exposures decreased following upgrades or external refinancing activity. The number of home loan customers in hardship declined by 28% since June 2024, and we remain well provisioned for a range of economic scenarios. We hold total provisions of $6.3 billion, which is $2.8 billion above our central economic scenario.

Our balance sheet remains strong with 79% deposit funding. Our weighted average maturity of long-term funding is 5.2 years and liquid assets are $199 billion. Our capital ratio of 12.3% is $10 billion above minimum regulatory requirements. A strong balance sheet allows us to invest for the long term and respond to any deterioration in market conditions.

We've seen record inflows of deposits in the half. We've also seen $15 billion increase in redraw balances and offset accounts. Customers having surplus funds available is a significant predictor of arrears performance, and so this behavior has a positive capital impact. 87% of home loan customers are now in advance of their scheduled repayments. On average, 35 payments in advance. When adjusted for redraw and offset savings, household debt has now returned to levels not seen since 2015.

The transmission of monetary policy in Australia means that our banks pay very competitive interest rates on at-call household deposits compared with other markets. On average, at-call deposits in Australia are attracting an interest rate, which is 5x higher than in the U.S. and 10x higher than in Europe.

We've seen a strengthening in the economy in the past 6 months, driven by consumer demand. Spend has been increasing across all customer age cohorts. Most age groups are broadly maintaining discretionary spending and increasing savings levels. GDP growth in mid-2026 was 2%, more than double the same period a year ago. Most noticeably, economic growth has shifted from being primarily driven by public demand to being driven by household consumption.

Last week, we saw the Reserve Bank raise interest rates to 3.85% in response to inflation, which is running higher than the target band. Almost 1/3 of the increase in the CPI basket is driven by housing with utilities a substantial contributor to that category.

Our purpose, building a brighter future for all guides how we allocate capital, manage risk and invest for the long term. It reflects our long-term commitment to Australia, our customers and our communities. Some of the ways we're delivering on our purpose include significantly increasing funding for new residential housing development, delivering $190 million in benefits to consumers through CommBank Yellow, migrating our core banking system to the cloud to improve resilience, delivering 30% more technology changes, reducing critical incidents and improving recovery times by 65%, rolling out new AI tools and training programs to our teams to build capability and deliver better customer experiences and maintaining our strong balance sheet settings, sending around 40,000 alerts a day to customers about suspicious activities and deploying more than 2,900 AI bots to engage and disrupt scammers.

Importantly, our strong performance enables us to continue supporting our 18 million customers, protect communities, support Australia's economy and invest for the long term. As cost of living pressures persist, we are providing targeted support to households under strain, including 63,000 tailored payment arrangements for customers most in need. We supported more than 79,000 households to buy a home, including through dedicated support for first home buyers. And we lent $25 billion to businesses supporting growth, jobs and economic activity.

We're investing $1 billion a year to help more people protect themselves from scams and fraud. Our strong balance sheet allows us to support customers and communities while delivering sustainable long-term returns for shareholders, including $4.4 billion in dividends this half, benefiting more than 14 million Australians. We will continue to support our customers, protect communities and invest for the long term to provide strength and stability to the Australian economy.

I'll now hand to Alan to take you through the result in more detail.

Thank you, Matt, and good morning, everyone. Starting with the results overview. We've set out the key aspects of our current operating context, how we are responding and how those actions are contributing to the long-term strengthening of our franchise. At a macro level, we are seeing strong system growth in both credit and money supply. Competitive intensity within the banking sector remains elevated. Technological innovations continue at pace and geopolitics remains a source of potential tail risks.

Against that backdrop, our response has been deliberate and disciplined. We have carefully managed volume and margin trade-offs, continue to invest and extend our leadership in both technology and proprietary distribution and maintained conservative balance sheet settings. This approach is yielding strong financial outcomes. Pre-provision profit growth is healthy. Our dividend per share continues to reflect the strong compositional quality of our earnings. And our balance sheet settings give us confidence in our ability to continue supporting customers, growing the franchise and delivering sustainable returns to shareholders over the long term.

This slide sets out the usual reconciliation between statutory and cash profits for the half. There were only modest movements in the usual noncash items during the period. As such, both statutory and cash profits on a continuing operations basis totaled around $5.4 billion.

Breaking down the components of that cash profit, Operating income grew 6.6% year-on-year as our investments in technology and proprietary distribution continue to yield strong operational outcomes. That top line performance allows us to continue to invest in the franchise with underlying operating expenses increasing 5.5% on the prior comparative period.

Notable expense items totaled $170 million over the last 6 months, largely due to the settlement of a long-standing legal proceeding in New Zealand during the September quarter.

Loan impairment expense was flat year-on-year and lower versus the second half, reflecting the benefits of our conservative settings and the resilience we continue to see in customer and portfolio credit quality. This resulted in growth in cash profits of a little over 6% on both the prior corresponding period and the second half of last year. It's worth noting that the effective tax rate for the half was 30.3%. Looking ahead, you can assume that will settle closer to 30% for the 2026 financial year.

On operating income, we delivered growth of 6.6% over the prior comparative period. Net interest income increased strongly, up $761 million, supported by profitable above-system growth in lending and deposits. Other operating income also contributed, growing $163 million over that period, assisted by one-off gains.

This slide sets out some of the drivers of long-term franchise strength that we have been targeting, deeper customer relationships, deposit-led growth in our core segments that underpins and proceeds lending growth and productivity improvements within our frontline teams.

Our retail bank continues to build foundational banking relationships, adding 3 million net new transaction account customers over the past 5 years. In home lending, we continue to prioritize and grow proprietary distribution with $55 billion of new fundings originated over the last 6 months through our own channels.

And our strategic focus on business banking continues to deliver strong outcomes with double-digit compound annual growth in both deposits and lending over recent years. Our investments in building a more digital, customer-focused and streamlined business bank for our people and our customers can be seen in the productivity improvements delivered over the last 5 years with fundings per banker up 65% over that period.

Turning to the net interest margin and looking at the movement over the most recent 6-month period. The main driver of the 4 basis point reduction over the half was the increased mix of low-margin liquid assets and institutional repos. Excluding those items, margins were 1 basis point lower with competitive pressures and the impact of a lower cash rate, largely offset by the replicating portfolio and the favorable portfolio mix effect of strong deposit growth.

Margins were a little stronger in the December quarter, largely due to the benefit of higher swap rates on our replicating portfolio.

You can see here that we're managing margin outcomes carefully, balancing competitiveness with returns and staying focused on building lasting primary relationships with our customers rather than chasing unprofitable volume growth.

On operating expenses, they increased 5.5% on the prior corresponding period. The drivers are largely unchanged over recent years. We are seeing inflationary impacts on wages and IT vendor cost inflation continues to run higher than CPI. At the same time, we continue to invest behind the franchise with higher cloud consumption and software licensing costs and our ongoing investment in technology infrastructure and AI capabilities alongside enhanced frontline capacity and operational resilience.

We are self-funding much of that investment through productivity initiatives, realizing approximately $222 million in incremental cost savings over the past 6 months.

Turning to credit risk. Loan impairment expense for the half was $319 million, broadly consistent with the prior comparative period and improving versus the second half. Across the portfolio, we continue to see broadly stable to improving conditions. Households have been supported by the strength of the labor market and rising disposable incomes. We have seen this reflected in higher prepayments and lower consumer arrears. In the corporate portfolio, troublesome assets and nonperforming exposures continue to trend lower as a proportion of the portfolio.

Given the uncertainty in global macro and geopolitics, we've maintained strong provisioning coverage. Total recognized provisions are approximately $6.3 billion. And importantly, we continue to hold a material buffer above the central scenario. This slide provides the usual additional detail on sectoral considerations. We marginally reduced base provisioning and forward-looking adjustments in areas where conditions have improved, including consumer, construction and retail trade. This was partly offset by an increased level of provisioning relating to our downside economic scenarios where we take into account the risk of exogenous shocks to the domestic economy. Overall, our approach to provisioning remains grounded, forward-looking and appropriately conservative.

Our funding and liquidity profile has continued to strengthen. We continue to be predominantly deposit funded, supported by a strong deposit gathering franchise. Total customer deposits grew at an annualized rate of 10% over the last 6 months, taking our customer deposit ratio to 79%. We also maintained a historically low proportion of short-term wholesale funding. This combination of deposit growth, consistent term issuance across diverse funding markets and strong liquidity buffers, we remain well positioned to support the current strong level of customer demand for lending growth.

On capital, our common equity Tier 1 ratio remained at 12.3% with organic capital generation continuing to support franchise growth and dividends. Growth in risk-weighted assets was largely a function of lending volume growth with credit risk weightings remaining broadly stable over the past 6 months.

The interim dividend increased $0.10 to $2.35, representing a headline payout ratio of 72% and a normalized payout of 74% after adjusting for the benign first half loan loss rate. The dividend will be fully franked and the dividend reinvestment plan will be offered with no discount and fully neutralized. Delivering franchise growth while maintaining returns above our shareholders' cost of capital allows sustainable and consistent accretion and dividend per share over the long term.

This slide sets out our long-term approach to capital management. We prioritize profitable franchise growth as the first and best use of organic capital generation. We invest in line with our strategic priorities aimed to pay sustainable dividends, and we carefully manage our share count and surplus capital in a disciplined way.

Over time, you can see we've balanced capital generation with capital distribution, supporting franchise growth when lending demand is elevated, while also returning excess capital to shareholders, primarily through dividends as well as through the selective utilization of buybacks. Ultimately, we remain focused on optimizing long-term shareholder outcomes while maintaining the balance sheet resilience that underpins our ability to support our customers and the broader economy through the cycle.

In closing, this long-term approach has again assisted in delivering consistent and superior shareholder returns. Our combination of a high return on equity and strong payout ratio continues to compare favorably with domestic and global banking peers. Our strategic investments are yielding measurable improvements in franchise growth and productivity, underpinning our continued outperformance in net tangible assets and dividends per share.

I'll now hand back to Matt for the economic outlook and closing remarks. Thank you.

Thanks very much, Alan. Australian economic growth has strengthened more quickly and proven more resilient than expected. This was driven by increases in consumer demand and rising investment in AI and energy infrastructure. Household consumption has risen, including across discretionary categories. Supply side constraints mean that the economy is struggling to meet this increased demand. And as a result, inflation is now expected to remain above the Reserve Bank's target band for some time, placing further upwards pressure on interest rates.

Australia has remained highly resilient despite a volatile global environment. To date, there has been limited economic impact from trade and tariff disruptions. A global AI investment cycle is supporting growth. Elevated geopolitical risks are likely to generate ongoing shocks, reinforcing the importance of economic and operational resilience. We will continue supporting our customers with their financial resilience during this period. We're optimistic about the prospects of the economy and we will play our part in building a brighter future for all.

So in summary, the market has seen a period of high growth, low loan losses and intense competition. The Commonwealth Bank is well placed to adapt and perform against this backdrop. We remain committed to supporting and protecting our customers, reimagining customer experiences by investing in technology and AI and providing strength and stability for the Australian economy and delivering sustainable returns. We will stay focused on consistent, disciplined execution and investment for the long term to deliver for our customers and build a brighter future for all.

I'll now hand to Mel to go through your questions.

Thank you, Matt. For this briefing, we will take questions from analysts and investors. When the line opens for you, please introduce the organization that you represent and limit your questions to 1 to 2 maximum questions. The briefing will then have the -- sorry, we'll then take the first question from Andrew Triggs.

Matt, in your prepared remarks for the first quarter trading update, you talked about the competitive concerns -- sorry, the competition concerns you had and potential responses and onsettings. Could you sort of elaborate on those? You seem to have sort of reiterated some of those comments this morning. And specifically, what size of the balance sheet are you referring to there? It does seem at odds with a stable underlying margin in the half and the slight improvement in NIM that you've seen in the December quarter.

Yes. No, thanks. Look, I guess I'd contrast between -- as I said in the opening remarks, I think the strength of this result has been our ability to maintain a very good and disciplined volume growth and a part of that is underlying stability in the margin performance across all of our customer-facing segments. I think when we look at, let's say, last calendar year, I think the market is and the competitive context is shifting. I think clearly, this demonstrates our ability to be able to perform well in that. But I mean, if you look at the period of the last 5 years, we've seen the most rapid growth by one competitor in household deposit share growth. In fact, I think it will be close to double the previous growth rate.

I think we've seen a pretty sharp reduction in household balances. I think the greatest over that 5-year period outside the major banks. I think even if you went back to 2008. And I think that's interesting in the context of the backdrop. We've got, as we talked about, higher system credit growth. We've seen that clearly in retail and also in non-retail. We expect that there's going to be a maintenance of higher credit growth on the back of higher nominal growth and of course, I hope a pickup in investment.

If you look at the organic capital generation across peers and really the sort of volume and NII returns that are being generated, I think that sort of marks quite a shift. Against that sort of credit environment, you'd actually expect there to be much greater pricing discipline.

And look, clearly, there are different choices that are being made around business model and customer proposition. Some part of that's being informed by the regulatory architecture and choices. I mean it's for us to understand and adapt to the environment to be able to execute as well as we can, both in the 6- or the 12-month period, but also most importantly, to position the organization for the future. And we think a lot about how do we build on the scale, durability, resilience, investment in the franchise while continuing to perform well in any given period and deliver sustainable, reliable returns to our shareholders.

And maybe perhaps for Alan. Just the pick apart maybe a little bit more of the slight improvement you referred to in NIM in the second quarter. You put that down to the replicating portfolio, but that tends to come through more slowly. What were the other drivers? And given we've had a rate hike in February, potentially another one in May, what does it mean for the outlook for the NIM into the second half?

Yes. Thank you, Andrew. Yes, between Q1 and Q2, I guess there was a couple of things that changed. I mean, importantly, the replicating is a major factor. The 5-year swap rate, I think, increased 30 basis points between Q1 and Q2. And as the tractors gone through over that period, we've seen the pickup there.

Also, there was a bit more of a cash rate headwind in Q1. So if you look at the weighted average overnight cash rate that was down, I think, 40 basis points Q1 to the second half of last year and only down a dozen basis points over the second quarter relative to the first. So you had that cash rate headwind in Q1 sort of be much more neutral, I guess, in Q2. And the other aspect was very strong growth as we've reported in particularly business transaction accounts in that December quarter. So that was pleasing. And so we picked up a bit of a mix benefit on BTA growth through Q2. Now an element of that is seasonal, we get seasonally stronger growth in the December quarter. But you can see what the changes we've seen in swap rates. So that will continue to feed through in our tractors in the period ahead.

The next question comes from Jon Mott.

Jon Mott here from Barrenjoey. I've got a question on Slide 96. I know it's a long way in, but if we can just click over there. Just looking at the deposit side and well done, just really shows the strength of the franchise with the great growth of the deposits coming through. But I wanted to drill down into it. So if you look at the growth in retail transaction accounts, pretty steady, good numbers growing 3% in the half, 5% year-on-year. It's been growing pretty steadily.

But then when we look over at the retail deposit mix, a big jump, and I think this is the biggest jump you've ever had in transaction deposits in the retail bank. And if you go on the average balance sheet, you can also see they're coming in noninterest-bearing deposits, so excluding offset accounts. You're seeing huge growth. And given the comments from the first quarter, it didn't appear to be there. So it really looks like it's come through in the December quarter. To put it into perspective, I just backs that the average transaction account in Australia jumped by $700 from just over $10,000 to $10,700. So what happened in that December quarter to see such massive growth, not in the number of transaction accounts, but in the balance?

And when you think about how it's going to go going forward, is this just a seasonal and then get drained into savings or higher interest rate accounts over this next half? Or are you going to see really strong growth in noninterest-bearing deposits really support the NIM through the second half of '26 and into '27? So can you just explain what happened?

Yes. I mean one element of that transaction account growth is growth in the offset accounts. We've seen very strong consistent growth in offset through both Q1 and Q2. I mean that's, I think, a healthy sign of continued growth in excess savings across the economy, and we called out in the -- in one of the macro slides, the improvement that you can see in the savings rate that we continue to see through the course of that half. Yes. And in terms of the performance of the underlying ex offset growth in the retail bank, that's continued to improve. I mean we've seen relatively consistent growth in average balances per retail customer account. So that's continued to grow in the period.

And of course, we've continued to attract more customers. And so very strong growth, another, I think, year-on-year, 600,000 growth in customer transaction accounts in the retail bank. Retail customer numbers are up 3 million over the 5-year period. So again, that's been relatively steady. But I think it's a function of just that continued growth in savings across the broader economy, and we've seen a large share of that come through the retail bank.

Okay. Just digging into that a bit more. I just going over to the retail bank in the actual result. And if you look at the noninterest-bearing transaction accounts in the -- you can see there, this obviously excludes offset accounts. Big jump again there by $4 billion. So is there anything in particular that happened in that fourth quarter that just drove this much higher because this isn't you're seeing steady customer account growth, it's unusual. And then obviously, this implies what happens into the next half.

Yes. No, I mean it's very pleasing. I think a more like-for-like comparison is going to be December to December growth in noninterest-bearing trend in the retail bank. We do get a fair amount of seasonality into that June period. So going into June, as you come out of the March quarter into June, you tend to have a higher level of spot non-retail transaction account deposits, which then dip quite significantly into the 30 June period. We see a lot of switching, particularly small business owners injecting cash in other businesses as they get to the 30 June financial year-end. So we've been pleased with the growth, probably the better underlying measure of that growth, I think, is the year-on-year 6% growth between the $47.5 billion we had this time last year and the $50 billion that we landed at 31 December. So yes, strong growth, but I wouldn't annualize the 6-month growth.

Yes. I think there's a bit of seasonality for sure. And Jon, I think Alan touched on it all. I mean, obviously, we'd like to think with all the work that we're doing around the engagement of main bank proposition that's attracting higher balances. We did see obviously a run-up in incomes across the economy. But I think it's hard to then just extrapolate the fourth quarter was strong for us in a number of areas, including both in business and retail deposit growth at an account and average balance number.

The next question comes from Richard.

I've got a couple of questions. The first relates to the mortgage market and the second relates to the benefits of scale. So on the mortgage market, your major bank competitors have been pretty clear in communicating their desire to invest in and grow their proprietary distribution. So that leads me to ask whether your expectation that you can grow at or above system in the mortgage market is premised on a belief that you won't lose any share of proprietary distribution or that third-party broker share of the industry's mortgage origination will fall from its current levels?

Yes. Look, Richard, I mean, we don't, as you know, sort of -- we, at any period, seek to grow sort of at or around system. We're going to make lots of different choices. I think there's a couple of different sides to it. Clearly, the proprietary distribution has been a strength for some time, and the team have executed really well. I think we're now, we think, 54% of proprietary mortgage origination.

On one side, the other banks joining and having a greater focus on that, maybe that helps a little bit to change the perception or customer preference more broadly in the market. I mean, secondly, the broker channel is a really important distribution for us and it will be going into the future. So I mean, it's predicated really on the continuation of what we have been doing. And I think we'll be able to maintain between both our CBA Yello brand, BankWest, which is obviously heavily concentrated in broker and our digital proposition, a balanced portfolio in terms of distribution. And then, of course, while serving our customers, we've sought to optimize for cohorts and individual segments where there's structurally higher margins like there are in investor.

Okay. And my second question really relates to some of the slides and your comments pointing to very strong growth in the franchise since 2019, whether it be deposit balances or number of customers or number of accounts, you called that out in your opening remarks. That should suggest that you'll get increasing benefits from scale. But if we look at the cost-to-income ratio, in rough terms, it's somewhere in the mid-40s. That's where it is today. That's where it was back in 2019. Do you think it's fair to view the cost-to-income ratio as a measure of whether you're delivering benefits from scale? And can investors expect or cost-to-income ratio at CommBank over the coming years?

Yes. Look, I mean, it's -- and look, I'm certainly a believer in increasing returns to scale and how they might compound over a long period of time. I think the drivers, particularly on the cost side for us, I guess, as we reflect over the last, whatever, 5 or 8 years have been deliberately targeted in a couple of areas.

First and foremost, we've significantly increased the investment, and we think that's really important to both underpin the durable competitive advantages. But I think that's one of the major sources of scale. And we've substantially increased sort of operational and regulatory risk management. Of course, without giving any sort of clear guidance, you might recall early on in our collective tenure, we gave some cost-to-income ratio guidance and then the cash rate promptly fell several times after that. So we're not likely to repeat with that.

That was early 2019.

It was. It was, Richard. We remember it well, I'm sure you do. So look, I think we definitely have aspirations to perhaps over the medium term, definitely shift the trajectory of that cost. But we also, I guess, in any period, we're prepared to sacrifice near-term returns if we believe that we can deliver the best long-term outcome. And I do think the next 5 years will be quite different in terms of where the investments will come from. I do think there's a lot of consistency around technology.

Probably the other area that I think occurs to Alan and I in this result is in terms of where the increased investment over and above the areas that we're used to calling out is there's just a lot more going into resilience more broadly. And I mean cyber has been a theme. So we do think the importance of being able to continue to invest in differentiated experiences but also just core resilience and protection of our customers. You need to be able to generate a strong organic return profile to be able to fund that investment to be able to simultaneously provide lending to the economy and distribute dividends.

So it's probably a long-winded way of saying no change to guidance, believe in returns to scale strongly. I think there will be opportunities for us to improve our cost trajectory and ratios over time.

The next question comes from Andrew Lyons.

Andrew Lyons from Jefferies. Alan, just a question on costs. Firstly, the first quarter, you spoke to seasonally low IT vendor costs, but the first half cost performance was a particularly good one, and it wasn't particularly apparent that, that came through in the second quarter. How should we sort of think about that seasonality comment from the first quarter? Should we be seeing a bit of a step-up in those costs being expensed through the P&L in the second half just as you continue to invest in the business?

Yes. You'll notice in the detail of the investment spend disclosures we have. We have dropped the capitalization rate in the current period. We're capitalizing less, more of that's flowing through into the P&L. That goes with the change -- slight change in mix that we've seen from a strategic investment perspective. So more weighting towards productivity and growth initiatives, a little bit less proportionately on some of the infrastructure spending. The infrastructure spending by nature is more capitalization heavy than other forms of spend.

There is a little bit of seasonality in Q1. We've seen some of that reverse in Q2. It's fair to say that we've called out IT vendor cost inflation pretty consistently over the past 12, 18 months. It's an area that we continue to be very cognizant of, very focused on. We see that as over the medium- to long-term potential source of above CPI, above domestic inflation source of cost growth. So it's something that we're managing carefully, but something we keep an eye on, and that's why we made the comment in the first quarter because you didn't really see it as a source of cost inflation there. But again, that was a quarterly timing issue.

Yes. Okay. And perhaps a question for Matt. It was a particularly strong result in business banking. Your loans are up 9% on PCP NIMs up 3 bps over the same period and 5 bps in the half. That does somewhat fly in the face of the view that the market is facing elevated competition driven by both the big 4 and also other players in the space. So can you perhaps just talk about the competitive environment in business banking? How do you see it playing out? And what is CBA basically doing to sort of try and insulate the margin as much as possible as you do grow?

Yes. Look, I mean, I think the competitive context is intense. And against that, I think the team have executed extremely well. I mean some of the things I think that stand out to us is a continuation of what we've now seen for many years in terms of transaction liability-led strategy, strong growth in account numbers, strong growth in balances, as Alan touched on, particularly in the fourth quarter. I think a very good track record over the last 5 or 6 years of high-quality risk identification in terms of lending, really leveraging the main bank relationship and having a much broader relationship with our customers.

We've seen also capabilities that the team have developed. It is probably one of the things that stood out to us as well as like a very good performance in small business. I touched on some of the growth in products like BizExpress, which is largely unsecured, and we've gone from sort of $30 million to $130 million. Now at some level, they're still relatively small numbers, but it's been a diversification of the lending growth that's been good. Small business would probably be roughly twice the margin of some of the other segments. They've been very disciplined up and down throughout all of the segments. We monitor closely in terms of the value of deals that we won't originate due to pricing, the value of deals we won't originate due to credit conditions. And I think leveraging some of the technology both in the decisioning -- speed of decision as well through to funding but also in terms of giving us the confidence to be able to originate across broader cohorts of customers where we've got that main bank relationship. We've also been able to again, leveraging some of the technology to automate some of the account management processes, substantially free up banker time. And so we're seeing much improved productivity in terms of facilities per banker. So I think in aggregate, the team have executed extremely well. I think the result is another very strong one.

The next question comes from Carlos.

I'm Carlos Cacho from Macquarie. You spoke to in the retail section lower deposit margins due to competition and shifting into high-yielding savings deposits. Can you give us any color on the mix shift you're seeing there from lower rate products like NetBank Saver into the higher gold saver or potentially higher rates on some of the NetBank Saver accounts that's driving that.

Yes. I mean, I guess that's been a consistent trend. I mean, I talked earlier about the things that had changed between the first quarter and the second quarter, but one 1 thing that didn't change was the very strong level of growth that we continue to see into the GoalSaver product. So that's running multiples of the growth rate. And we're still growing in NetBank Saver, but the key driver of savings account growth in the retail bank has continued to be GoalSaver. And so the sort of mix effect and we've called out previously the very strong level of balances that are attracting that high the bonus rate on GoalSaver. So that's now up to 87% of balance is attracting that high rate. We can see then on the quarterly trends on margin, it's a consistent headwind. So very consistent over Q1 and Q2, it was about a basis point headwind in each of those periods due to the mix effect of that the growth in that higher rate product.

Yes, I think specifically -- sorry, I was say we're using the GoalSaver product, particularly, we've got some targeted offers in market. I think we see a little bit more switching into the saving, but there's probably less churn than we would have seen in other periods from savings into TD. And I think, again, the team have done a good job of optimizing across the various customer segments and trying to make sure we're getting the right overall margin outcomes whilst growing a bit above system as well.

Great. The other question I want to ask you is more around the thinking longer-term asset investments you make. You're clearly investing a lot of money into technology and AI. And I spoke to those vendor inflation headwinds, which appear to be as the tech companies wanting to return on their investment, how do you think about return on those investments you're making? And I guess, particularly how you think about that flowing through higher revenues versus potentially more productivity or lower cost in time?

Yes. I mean we've been very pleased with the yield from the investment. And I think it's particularly there's a number of proof points in this result that we've called out. I think sure that we are getting a measurable return on those investments. We called out the productivity that we've seen as we've continued to digitize, importantly, the work of a business banker. We've got much better mobile and digital platforms for our business banking customers, getting them to the sort of levels that we achieved in previous years for retail. Customers, and you see that coming through. I mean that's a big driver of the MFI growth that we've continued to see within the business bank continue to underpin the transaction account growth. And then we've got sort of 97% conversion of those transaction accounts into lending relationships, which has seen us continue to grow well above system in the business bank over the last 12 months.

So yes, the yield from the technology investments we're seeing measurable returns, both on the revenue side and in the cost side. So we've been pleased with that. To your point, and again, that's why we call out the IT vendor cost inflation, there is over the next few years, we're going to continue to see where the returns emerge from newer technologies between the technology companies themselves and the corporates who have deployed those tools. Certainly, over the past period of time, we've been pleased with the return that we're generating through our franchise, but that's something that we'll continue to manage, ensure we've got compatibility with lots of different vendors. We're able to switch providers in various areas, maintain that flexibility to ensure we maintain competitive -- have a competitive tension with some of our key technology providers, which I think is going to be important for every corporate over the next 5, 10 years.

The next question comes from Matt Wilson.

Matt Wilson, Jarden.Two questions, if I may. If you look through the long term, CBA's key point of differentiation has been your largest ticker low, no cost deposit base, and you're very effective at growing it as we can see today, and your major bank peers have failed to close that gap through the decades for various reasons. But today, we have sort of 2 new challenges out there. Macquarie who's the fourth peer and perhaps should appear in every slide where there's a peer comparison now going forward to put a line in the sand and then you've got AI. If we embrace your enthusiasm for AI, then does it follow that we'll all have a personal AI bot that will automatically direct our savings and transaction accounts into the highest-yielding accounts and a machine will do that for us. And on that basis today, they move to Macquarie. I've got a second question.

Yes. Look, Matt, I think on your first question. I mean, look, I think what the result demonstrates is our ability to perform in the current context. We think we've got to see good strategic assets and sources and the team have executed really well.

We're, of course, alert to lots of different shifts in the competitive context. I mean, specifically, maybe it's a little bit of a flow on to car losses. Question, in terms of AI and technology, we've got a bit of balance between sort of flexibility and scale. I think in the near term for heavily regulated institutions, I think it adds both complexity and governance.

I do think one of the important things that we're certainly spending time on is where do we think AI has the potential to change the economics of the industry, what might the impact be around sort of competitive moats or enduring sources of advantage, how might that show up. I think there's lots of different ways that we envisage that we can compete extremely effectively in that environment.

So I think we are both planning for the long term, lots of different sort of scenarios. We think we've got the scale to invest. We think we're uniquely placed. And I think the team are highly motivated and very focused on execution. At least in this period, I think it's a good example of it, and we certainly intend to maintain that focus, discipline and execution ability.

And then a second question, probably linked to Richard's second question as well. If we look back over the last 5 years or so, headcount at the enterprise is up nearly 20% despite investments in AI and technology that should be driving efficiencies. But at some stage in the future, there's obviously a big dividend to be reaped by taking people out of the organization. Could you comment on that opportunity?

Yes. Look, I mean, I think that's right. In banking in Australia, there's been a significant increase in headcount. At least in some of our areas, though, as well. I mean it's our approach to the management of important risk types like financial crime has strengthened considerably. There's large operational and FTE requirements with that today. When we think about that more broadly, economic crime, across scams, fraud, cyber. Clearly, the vector of threats that we need to be able to deal with is increasing on a daily basis. And absolutely, some of the technology that we're deploying at the moment in time, I think we'll be able to make a meaningful improvement to the level of automation and efficiency with which we're allowed to deliver those services. A lot of the other increases have been in and around technology. Obviously, that's supported much higher levels of investment, also into key frontline roles, notwithstanding the fact that we've been able to improve productivity on a per role basis, but I think that's enabled us to grow at a faster revenue rate than peers, which we think is important.

So I guess to Alan's answer earlier, I think there's both revenue and cost benefits that are being delivered in this period. We obviously and Alan is tracking those benefits very carefully and clearly, we think it's really important to continue to sort of push for further sources of competitive advantage. I think that takes time. But clearly, we think there's some opportunities to manage the cost base over the medium term.

I'd just add one point, Matt, around the 5-year growth in the FTE, of course, about half of that growth just related to the in-sourcing that we had within our technology teams. So we've moved away from third-party suppliers in many respects, brought our own engineers in-house. We're seeing a much more -- much greater velocity, much greater quality, much greater productivity over that 4, 5-year period, as we've conducted that in-sourcing. So that's been a big part of the overall FTE growth. Actually, we're seeing again -- we've called out some of the benefits we're seeing in terms of the engineering capability. Change deployments is up 30%. Over the past 12 months, we're seeing that deployment at greater pace, greater speed and greater quality. And so the work that we've done to in-source into our FTE base the engineering capability, we think is paying dividends.

Our next question comes from Brian.

Thank you. And first of all, congratulations on the stonking result. But more to the point, since you've been speaking, you put on a lazy $3 or $4 a share. So I had two questions. The first one is that if we have a look at CommBank, we can see that you've got excess liquidity, long-term funding. You look at your software. You're increasing the expensing profile. You've got incredibly strong provisioning. We're not a look at the profit after capital charge. It's up -- you're saying that you normalize the dividend payout ratio for the current low loan losses. I just would be interested to hear what is the scenario where we'd start to see your harvesting the latency. And does that basically mean that we see a continued dividend growth even when system becomes more averse? And then I have another question as well, please.

Yes. Maybe I'll start, and then Alan can add to it specifically. I mean, Vijay, as I know, we've had this conversation before. I mean a lot of that the way we think about things is sort of maximizing value over the long term. We're consistently trying to find ways to invest in the earnings potential. We're prepared to not seek to sort of maximize our performance in a particular period because we want to have the flexibility over a long period of time to both deliver very strong earnings growth and momentum but also to have substantial flexibility to be able to deal with a range of different scenarios. And so look, I think this is clearly above the central scenario. I think the largest excess we've had at $2.8 billion. This is clearly still tail risks, particularly on a global basis and some of those are hard to accurately predict and price. But I mean, I think, there's a number of different areas where we've got a lot of flexibility in the organization. But most importantly, we want to translate a lot of the investments into long-term earnings potential going well beyond 2030.

Yes. I mean the balance sheet settings, we continue to take us sort of through the cycle view. As Matt says, I mean, the provisioning, we're pleased to hold the provisioning at the broadly around stable levels, albeit we're growing the lending side of the balance sheet very quickly. We've seen record levels of lending growth. So the coverage ratio, the provisions as a proportion of the risk-weighted assets has drifted a little lower. And so you've seen some unwind of the provisioning that we held maybe 12, 18 months ago. But yes, we take it through-the-cycle view. We like having that latency, and I think that gives us a more stable through-the-cycle performance, which our shareholders really value.

Just a second question, if I may. Once again, I really want to congratulate the entire management team on the results. If we have a look at some of the global in financial services, in particular, as they seem to hit a kind of more adverse environment, they basically seem to be pulling the pin quite aggressively to shared labor. I'm just wondering, when we have a look at CommBank, is there a point at which you -- how close are we at the point to which technology replaces people? And I'm not saying you necessarily have to go to retrench people, but natural nutrition probably gets you. But do we actually get to the point where we actually see basically the headcount element of the total operating cost fall. And in that context, can you see a point, Matt, and I never thought I'd ask this question where it's difficult to find more incremental to spend on technology?

I think in terms of tech spend and investment and software, I think demand across the economy still sort of outstrip supply. But I mean, clearly, the potential to be able to deliver a lot more change, I mean, significantly more than we're currently doing in year is clearly there. And I think some of the leading firms globally, outside of banking are already seeing some of that automation.

Look, I think there's going to be multiple sort of speeds for how AI is adopted across the organization, how it's able to improve and automate some of the processes. I do think also it's important and certainly the approach that we're taking is thinking through that very carefully and thinking about the individual tasks and skills. I think it's really important to build the capability across the organization. I think anything that is disruptive like this technology is, it's really important to engage inside the organization, maintain the very high levels of engagement and motivation.

I don't think some of the more pessimistic scenarios around labor force disruption will materialize. I think it does take quite a bit of time. I think the sort of the performance of the models is quite jagged. There's also a number of different things that you can do really well. There's others that candidly, you can't. But I think the potential over time to improve certainly the performance of every individual to provide greater output and then in time through more automation.

And there's also just a number of customer processes, we think we can manage on an automated basis. I mean we believe in having to be able to service our customers in real time dealing with scams and disputes and fraud and to be able to perform and close those tasks out through an agentic framework to be able to serve many of our customers more directly and comprehensively. We've already got the capability to be able to monitor the environment and an automated basis, deploy new rules in to pick up and detect fraud.

I think we're just scratching the surface of the potential here. And I don't think we're going to be talking about it in very significantly different ways at our full year results in August, but I think in a sort of 3- and a 5-year time frame, I think there certainly is some significant potential. And there's a lot of things that need to be managed as a highly regulated industry. I mean I do think sort of governance and transparency and explainability and most importantly, trust with customers and with employees. I think that will be a very important part of what we need to do well.

We've obviously started communicating externally with some of the work that we're doing. And yes, I think we're trying to think about this comprehensively and over a long period of time, and we believe it's going to be a source of competitive advantage for CBA.

Our next question comes from Brendan.

Brendan Sproules from Goldman Sachs. I just have a couple of questions. Just in terms of the impact of higher interest rates as we look forward into the second half. Obviously, in this looking backwards this half had record lending growth, particularly strong deposit growth in business banking as touched on earlier on the call. But when you look back to when the cash rate was last, 4.35, you showed us a number of slides similar to Slide 18, which showed negative spending and cost of living pressures in the household sector and you also saw quite a slowdown in business credit. Just want to get your view on how sensitive you think the current system growth rate in both lending and deposits will be to these higher rates over the next 6 to 12 months?

Yes. I mean, it's going to be -- to your point, I mean one of the things I called out in my opening was very strong level of credit, growth leads to very strong growth in broad money and money supply. And that's a factor that we look closely at in terms of, I mean, we see a lot of that money supply growth come through our deposit accounts. That puts more money in people's hands ultimately across the economy, and there's an inflationary element, obviously, to that mechanism. So of course, the reason that rates are being hiked as in order to maybe slow down some of that demand more broadly across the economy slowdown in that spending. And so we would expect to see some impact to that. We've had a very strong period for system growth across both home lending and non-retail lending across the system. We've got -- our economics team has got a range of between 6% and 8% across the total system credit over the next couple of years. Obviously, we're running at the top end of that as we sit here today.

So I think there's maybe some -- you would expect some impact on system levels of credit growth and a higher rate environment. I guess the big question will be how many rate rises do we see from here because that will determine the sort of size of the slowdown you see from a credit perspective.

Yes. I think, I mean, if you assume there's a couple of rate hikes. I think it have a modest impact maybe even if it took a percentage point of housing credit growth. I think the non-retail credit growth has been very strong. Certainly, everything that we see is there, we think sort of higher nominal growth is going to support that. I think boosting investment is going to be an important driver of productivity.

I think there's certainly investments in technology across the economy that are going to support that. And I think that's the importance of having the right sort of capital settings and deploying that lending growth into the right risk-adjusted returns, and certainly, we've kind of extended out the sort of credit growth that we've seen over the last couple of years. And I guess that's sort of our base case to make sure we're going to perform optimally in that environment.

That's great. And the second question, just on NIMs on Slide 27, obviously one of the better parts of today's result is the lack of compression on your funding cost. To what extent is this a timing issue in terms of the switch in the rate cycle that sort of happened towards the end of the fourth quarter? Obviously, with the RBA pushing rates higher earlier this month. We have seen some deposit product pricing move higher with that. To what extent is that going to play out in the second half, a bit of catch-up in terms of deposit pricing for these higher rates?

Yes. I mean I think that as we've long said, I think the -- I mean, deposits are very competitive, and we're going to continue to see the mix, unfavorable mix impact of that growth in our high rate products. So I think that's likely to continue. The other element that we watch closely is wholesale funding spreads. I mean, I guess you've seen a very benign period. I mean, in the last 6 months, the 5-year funding cost and the wholesale funding markets fallen another 10 basis points. You tend to find there's a real correlation between what happens in wholesale funding markets and the level of deposit competitive intensity and deposit pricing. And so one of the forward indicators or lead indicators that we'll be looking carefully at around the likely outlook for deposit pricing and competition as that level of wholesale funding spread. We've had a benign period. We're below historic averages in a number of those long-term funding products. So we'll keep a close eye on that in terms of how that -- there's a potential for that to revert and that to lead to more deposit competition in the second half, but we don't know that today. We'll keep a close watch on that.

Our next question comes from John Storey.

Good set of results. I just wanted to touch quickly just on the business model and potential construction to business model. You've seen it in the last few days. Insurance broking firms have obviously been impacted by the threat of AI, right, in terms of distribution. Just thinking about it in terms of the mortgage market share in Australia, how prevalent brokers have become -- I mean, what are your views on the likelihood of AI disrupting mortgage brokers. So the disintermediators are becoming intermediated. And around that, how well or how prepared is CBA in terms of its own business model for something like that, that could potentially eventuate?

Yes. No. I mean, look, we've tried to think through all the various sort of potential sources of disruption not limited to mortgages and how to most effectively prepare for that. I think we feel we've got the right combination of distribution assets to perform well in that particular environment.

I mean I know from speaking to a number of mortgage brokers and some of the leaders of those mortgage brokers firms, that's definitely on their mind. I think like a lot of businesses, perhaps the sort of speed and rate of disruption is also a question of debate. I think one of the things that has been important in terms of why our customers will still preference a face-to-face experience with either a mortgage broker or a proprietary lender is it's a significant decision I think people still value that. I would have incorrectly forecast the proportion of mortgages that would have gone to digital when we started sort of thinking about this 15 years ago, and it's been a lot slower. So -- but look, I think it's important to think things through and assume they're going to happen more rapidly. I think in our case, we think we're well prepared and I think there's very few sectors of the economy that aren't thinking about some of the disruptive potential and obviously, the rate and pace of change, particularly some of the genetic services that are out even in the last month. Certainly, there's been some pretty significant share price reactions to a number of global industry and software providers.

One, just quickly on a second question. Obviously, a lot of talk, I guess, is on certainly over the last few weeks, months, around increased levels of competition put in the market. And obviously, you've got a very interesting slide, Slide 73, 74, just around new business volumes that are significantly 24% half-on-half, right? I wanted to just get your views on to what extent this growth that you've often seen reflects some of the competitors actually stepping back from the market, right? So I'm thinking specifically around some of the regional banks. And then obviously, ANZ going to a period of restructuring. How sustainable is this level of new business growth that CBA is showing?

Well, I mean -- we'll see, it remains to be seen. But I mean, I think, we executed well in the period. We certainly planning to continue to do that. I mean, look, I do think it's quite interesting in terms of some of the share shift on the deposit side. And then on the asset side. I think where your returns are under pressure and you're not able to generate returns above the cost of capital, it's pretty hard to grow it system.

Yes, there's disruption. I guess the other point is it occurs to us as we look at both capital ratios across the industry and where we would anticipate the DPS profile might be at some of those institutions, it would probably start -- it would tend to support pretty disciplined pricing. And so I think clearly, where there's volume share shifts between institutions, that tends to at times lead to not particularly disciplined pricing. I think it's been a really good period for the half. I think it's quite a -- I think it's an interesting equation, at least as we look forward and think about, well, if it's higher credit growth and the RWA the consumption that comes with that, shouldn't plan as a base case that record low loan losses are going to continue investment, certainly, for us, we're increasing. And we think that's important from a competitive perspective as well as to be able to support broader resilience objectives.

I think -- but maybe that financial equation looks a little challenged, perhaps for some. And so I mean, look, I think we're thinking about how best to compete in that environment. And I think, hopefully, at least this 6-month period has been probably one of our better periods of execution in market.

Our next question comes from Matt Dunger.

Yes. Could I ask a deposit question in a different way? The 79% deposit funding stands out versus the peers. You flagged you're expecting higher growth in higher rate deposits and we noticed that NetBank Saver didn't reprice as much as some of your peers through 2025. So why compete on price when you're already leading deposit growth? Is there a target at CBA to continue to strengthen the deposit funding mix?

Yes. I mean we're always -- we're predominantly deposit-funded and we want to keep it that way. We've been impressed with the execution on the deposit gathering and it's a foundational relationship. It drives MFI drives, as you can see in the numbers we've disclosed, relationship between retail transaction account and home lending, propensity to have your home loan with CBA higher in the business bank. So we -- it's an important part of the franchise. We want to continue to gather deposits. Now we're in a competitive market for deposits. And hence, we've got a very attractive offer on not only GoalSaver, very, very attractive rate. On GoalSaver, we've a very high proportion of balances that achieve that rate. We also got very competitive term deposit offer. So the 12-month term deposit especially that you've seen across the industry, I mean, they're up 45 basis points in the last 6 months. So it's an important part of the franchise. We'll compete effectively in there. We've got -- we've been happy with the improvement in the deposit ratio.

I think as a game of inches, though on the deposit ratio. It's a large balance sheet. We're continuing to compete well for deposits. We don't have particular targets that we set around that particular ratio. We want to keep funding as much of our lending growth as possible through deposits. And pleasingly, in the 6-month period deposit growth outpaced lending growth even though we had a very high level of lender growth relative to a very high system. So we were able to retire a couple of billion dollars of long-term wholesale funding, which again helps in terms of the overall earnings profile and net interest margins. So we don't have particular targets that we set around that. We just try and keep things in balance and make sure we've got a strong deposit gathering franchise.

And if I could just follow up on the credit quality side, you're talking about bad debt charges being low. You just referenced some of the peer selling capital returns policies based on that. You've seen the external refinancing of corporate exposures, bringing down the arrears. Just wondering if this reflects your conservative lending settings. Or are you seeing competition after this corporate business as it refis out?

Yes. We've continued to see -- I mean there's always going to be an element of external refinancing across each of the bank's portfolio. So we've seen some of that over the last sort of 6 and 12 months in particular, within our business bank, in particular. It's a competitive market. There's -- we've seen some continued aggressive pricing offers in market, particularly at that top end of the business bank. I think we called that out 6 and 12 months ago, that's continued in over the last couple of quarters. We are seeing some banks compete more on credit risk appetite, and we've seen some external refinancing. from our portfolio. So I think that's a function of the competitive market for business bank and that we're in at the moment.

The next question comes from Ed Henning. We might just move to the next question, and perhaps we can come back to Ed if the line comes back. The next question will take is from Tom Strong.

Tom Strong from Citi. Just a couple of questions. The first on the replicating portfolio, it contributed basis points in the half, and the commentary suggested that much of that came in the December quarter. How should we think about the replicating portfolio over the next couple of halves just given the material step-up in swaps that sits sort of 50 to 100 basis points above the tractor rates now?

Yes. Yes, there will be -- the tractors will perform well at current swap rates. Now the swap rates have proven to be, obviously, fairly volatile over the past 12, 18 months. But current levels of swap rate, I mean there'll be a pickup in each of the tractors. So if you think about the size of our replicate portfolio, it's something like $2 billion that we'll reinvest at current swap rates each month. And so yes, that will be a function of the where swap rates move expectations for interest rates more broadly and the level of the deposits that we choose to hedge at any point in time. So yes, that will be a supportive element. I mean the equity tractor we called out last time around, if you go back 3 years, where swap rate was then, it's pretty similar to where swap rate today in the 3-year part of the curve and so we're not going to see much tailwind on equity tractor but replicating portfolio, given it's a 5-year tractor.

We've probably got another 2, 3 halves of positive earnings momentum as those if you go back sort of for years, we were still in some pretty low in a pretty low rate environment. Some of the tractors that we put on there are coming up for reinvestment at much higher current rates. So yes, 2 or 3 halves of earnings momentum from replicating remain.

Great. And just a second question around business deposits. I mean we look at the strong growth in the business bank, but net of offset accounts, a lot of this growth has come from more expensive TDs and the business MFI did sort of slipped slightly half-on-half. I mean how are you seeing competition for business deposits more broadly given a number of your peers spending pretty considerably to emulate your success here?

Yes, I mean, it's a competitive market for deposits both for REIT on the retail side and the business bank side. We've been pleased with the deposits that we've gathered. I mean, the new business transaction account openings have continued at pace. I think we're up 7% in net BTA accounts opened over the past 12 months. So we're pleased with that.

Yes, we did -- I think there's a little bit of volatility. It's a 6-month moving average on MFI. I think we're up 40 basis points year-on-year in the longer-term trend I think we're up 300 basis points over the last 5 years. So you'll see some oscillation one half to the next. But the overall momentum within MFI, I think, goes to the good execution within that franchise over multiple years. And yes, there's been, I think, some as I mentioned earlier, we've got some attractive rates on the term deposit product as well, and that did particularly well in the 6-month period within the business bank, which we're pleased with. It's a good stable source of funding for the strong lending growth that we're doing in that division.

Thank you. That brings us to the end of the briefing. Thank you for joining us, and please reach out if you have any follow-up questions. Thank you.