Australia and New Zealand Banking Group Ltd
ASX:ANZ
Earnings Call Analysis
Q4-2023 Analysis
Australia and New Zealand Banking Group Ltd
The year 2023 marked a historic achievement for the company, outperforming the prior year's already impressive results. With a concerted effort on executing the strategic priorities set a year ago, the company experienced a robust growth in commercial, institutional, and the New Zealand division, particularly emphasizing sustainability and payments. The Australian home loan processing capacity was optimized, enabling a consistent and efficient service despite high volumes. The innovation-led ANZ Plus business line has successfully attracted over 500,000 new customers and accumulated $10 billion in deposits. Remarkably, in the institutional sector, the company witnessed standout performance, doubling return on equity (ROE) since 2016, by harnessing diversified and recurring revenue while maintaining a disciplined capital allocation.
Reflecting the company's success, the approved final dividend of $0.94 per share serves as a testament to the sustainable growth and financial prudence the company has demonstrated. This is underpinned by a diversified portfolio that has consistently performed well. Powered by a variety of revenue streams and strategic capital management that has reduced the share count by 120 million shares, the company has delivered a superior total shareholder return of 16% over six months and 20% over the last year.
The financial foundation of the company is solid, with a substantial increase in home loan balances, commercial income growth by 11%, and a proliferating institutional division with income growth of 26% year-on-year. This financial strength enables the company to make strategic investments and offer a favorable dividend payout to shareholders, but also to maintain resilience against potential economic challenges.
Despite a competitive landscape and inflationary pressures, the business remains optimistic, anticipating increased revenue through diversified and capital-light business models. With a margin improvement in the commercial business and technology investments yielding significant revenue growth in transaction banking, the company looks toward future resilience and sustained profitability.
As upper-level economic indicators signal potential headwinds, the company's diversified business mix and disciplined risk management enable it to navigate such uncertainties confidently. Continued investments in technology and customer relationship result in revenue enhancement and operational efficiency, establishing a footprint for future growth in a rapidly evolving economic environment.
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Good morning, everyone. Thanks for joining us. I'm Jill Campbell, ANZ's Head of Investor Relations. You're joining us for the presentation of our full year 2023 results being presented from ANZ's offices in Melbourne on the lands of the Wurundjeri people. On behalf of the ANZ team speaking today, I pay my respects to elders past and present. And I extend those respects to any aboriginal and Torres Strait Islander people joining us for today's presentation.
Our results materials were lodged this morning with the ASX, and they're also available on the ANZ website in the shareholder center. A replay of this presentation, including the Q&A, will be available on our website from around midafternoon. The results presentation materials and the presentation itself being broadcast may contain forward-looking statements or opinions. And in that regard, I draw your attention to the disclaimer, which is on Page 2 of the slide deck.
Our CEO, Shayne Elliott; and CFO, Farhan Faruqui, will present for around 35 minutes or so, after which I'll go over the procedure for Q&A before moving to questions themselves. But ahead of that, a reminder that if you do want to ask a question, you need to do that by the phone. And with that, I'll hand to Shayne.
Thanks, Jill. Today, our focus is on financial results, and we'll be discussing assets, liabilities and economic data. But behind those are people, families and businesses, and I want to acknowledge those in the community struggling with inflation and higher interest rates, particularly those with less secure employment, lower incomes and renters many of whom are disproportionately younger.
Our savings tools and ANZ and our SAVE program, plus our support for build to rent and other entry-level housing programs are helping, but more needs to be done. Thankfully, for those with existing loans, even first home buyers, the number of customers experiencing financial stress remains modest by historic standards, but for each one, this will be highly distressing. Now it's highly likely we'll be called on to provide more support in the coming year, and we're really unable to do so.
On the global stage, we remain deeply troubled by the ongoing conflict in Ukraine and now the tragedy unfolding in the Middle East. These events are profoundly distressing for many in our community, including our own people, and we're doing what we can to support them.
Now last year, we described our '22 result as one of the best, and 2023 is undoubtedly our best ever. On a cash basis, revenue increased 13% and profit 14% versus last year, both to all-time highs. Given the seasonality in our business mix and the impact of rate rises, the first half was stronger. However, on its own, the second half was an outstanding result, demonstrating the underlying strength of our franchise.
Importantly, we continued to invest, building a better bank to deliver long-term growth with sustainable returns. And 83% of that investment was expensed during the year, exhibiting discipline and accountability. Our balance sheet is strong, provisions for potential credit losses remain high and common equity Tier 1 sits at 13.3%.
Net tangible assets per share is the highest on record at $1.78, and return on equity increased 54 basis points to 10.9% for the year. Now setting aside the capital retained to purchase Suncorp Bank, underlying return on equity was 11.7%. Each division contributed with good quality volume growth, managing both risk-adjusted margins and expenses well, demonstrating the benefits of a simpler, better balanced portfolio and an experienced team. Now it's pleasing to see that all divisions delivered a return on equity sustainably above cost of capital. And reflecting that strength, the Board announced a dividend of $0.81 and an additional one-off dividend of $0.13 per share. The proposed total final dividend is therefore $0.94 and will be partially franked at 56%, and Farhan will walk through the details.
Now we entered the new financial year well positioned for the environment, a strong balance sheet, targeted momentum, diversified growth options benefiting from consistent and deliberate investment. In our home markets, customers are finding conditions more difficult, and last week's rate hike by the RBA will be difficult for many. Customers are being forced to make tough choices, but overwhelmingly, they remain financially robust. As of today, hardship levels remain low, but that is not to diminish the stress felt by those increasingly on the edge.
As I said, it's likely that more will need our help, and we have the capacity to assist those in need without impacting our ability to support growth, business investment and job creation through prudent lending. That's the benefit of a stronger and simpler bank.
Now a year ago, I shared priorities for 2023, and we did what we said we would do. We grew commercial New Zealand and institutional, particularly around sustainability and payments, underpinning long-term competitive advantage for Anite. We delivered on productivity despite higher inflation. At the same time, we continue to invest in our ANZ Plus business, which delivered above expectations.
Shareholders overwhelmingly supported our nonoperating holding company structure, which will provide greater flexibility to better service customers. And finally, we remain confident that we will receive approval for the acquisition of Suncorp Bank and are well prepared for integration to deliver benefits to customers and shareholders.
Now in Australian retail, we increased home loan processing capacity, which enabled consistent turnaround times despite higher volumes. Coupled with ongoing digitization for deposit account opening, we generated high-quality retail balance sheet growth. The Builder ANZ Plus continue to pace, now a fully fledged business line within Australian retail. Since launching a little over 18 months ago, Plus has welcomed over 500,000 customers and $10 billion in deposits more than we had targeted. And a little less than half of those currently joining are new to and higher than last year with average balances increasing.
Importantly, Plus operates at a marginal acquisition cost 40% lower than our classic business with variable servicing costs 20% lower and falling further as we grow. Plus is the fastest-growing, most contemporary major bank offering for retail savers. And last week, we quietly launched the Plus home loan, dramatically reducing the time and cost of assessment, approval and settlement. Last year, we created a standalone commercial business, and it has solidified its position as our highest returning division. We focused on the basics, exiting noncore high-risk propositions like margin lending and broker-originated asset finance. The reduction in revenue was more than offset by growing our core business, which improved risk-adjusted margins and returns.
Commercial lending grew strongly. And deposits, which are nearly twice as large, also grew, showing the underlying resilience of our SME customer base. It was pleasing to see strong momentum in our digital platform, GoBiz, where drawn lending consistently grew 10% to 20% month-on-month. Like Plus, GoBiz operates at a much lower cost while delivering greater responsiveness and speed to decision for customers.
New Zealand is a story of quality and resilience after years of consistent investment, starting with the merger of our brands and systems in 2012, which is still delivering benefits through to the completion of the BS II regulatory program further increasing resilience. ANZ New Zealand is well diversified and well managed. And despite the tougher economic and regulatory environment continues to deliver better outcomes for customers while generating decent consistent returns to shareholders.
Economically, many consider New Zealand to be a leading indicator for Australia, given it's further ahead in the tightening cycle, and we agree. As the largest bank in New Zealand and with the most balanced portfolio of businesses, we get better data and insight than most. I get to interrogate that as a member of the New Zealand Board, and we agree that while delinquencies have slowly risen overall, customers continue to manage the cost of living and challenges of higher rates well. And this reinforces the benefits of strong employment conditions, high savings buffers built during COVID and prudent bank lending in recent years.
We're optimistic that the new government will focus on much needed reform and help rebuild consumer and business confidence. Institutional had an outstanding year. After years of disciplined execution, strengthening the balance sheet, improving productivity and rebalancing the business, institutional generated the highest ever returns for shareholders while supporting customers through the cycle.
Revenue grew 26% year-on-year; profit before provisions, 45%; and cash profit, 53%. These are impressive results. For the first time, each of its business lines, Transaction Banking, Markets and Corporate Finance, generated revenues above $2 billion with Transaction Banking growing 47% to an all-time high of $2.3 billion.
Institutional is a diverse, well-balanced business delivering decent consistent returns. And that transformation has largely been driven by our payments and currency processing businesses which are low capital, high return with high barriers to entry. While built for institutional, these platforms are increasingly servicing other ANZ customers leveraging scale and bringing top end capability to a broader audience.
For example, Transactive Global, which is used by the world's leading multinationals and financial institutions and rated #1 by users, is now available to our medium-sized businesses within the commercial bank. Over 60% of Transactive Global's users are commercial bank customers. And the scale of these platforms is impressive, processing 13 billion data points a day. We process around 60% of Australia and New Zealand correspondent clearing payments and provide services to more than 90% of the world's globally systemic banks, facilitating $164 trillion in payments in out and around the markets in which we operate.
And over the long run, underlying transactional growth should outpace nominal GDP. Now on a PCP basis, payments initiated in customer systems were up 16%, real-time payments 31% and third-party deposit accounts opened by our customers for their customers grew 25%. Collectively, these services drive revenue and positive deposit feeder, helping institutional deliver an ROE of 13%, double that reported in 2016.
And even more pleasing is the transformation of international, which in 7 years has come from a drag on the group with low single-digit ROE to an accretive 15% return. Now I've spoken today about the benefits of diversification. But hopefully, you'll notice consistent themes across our businesses focusing on products and customers where we can add value and a skew towards processing-related revenues because they're lower capital with high operating leverage, and they reward sector-leading investment in technology and security.
With regards to security, we continue to invest, keeping customers safer from criminals. Each month, we block up to 3 million malicious e-mails and 12 million attacks against our public-facing Web services. Recently, we ran a pilot using AI to identify and close suspected mule accounts linked to fraud, scams, money laundering and other financial crimes. We introduced biometrics to identify payment anomalies and removed about 1,600 phishing or fraudulent websites impersonating ANZ and put in place measures to stop scammers impersonating ANZ in text messages.
We regularly deliver education campaigns through our bank channels, and I recently wrote to all customers in Australia to warn them of the dangers of scams and how to avoid them, but we recognize there's always more to do. ANZ Plus will soon roll out cutting-edge features branded ScanSafe to provide even greater security for customers. Now looking ahead, our job is to ensure that we have the strength and agility to manage any environment. The outlook is certainly tougher. Geopolitical risks are rising with trading capital flows changing faster than we've seen in some time. We are well positioned for these changes. Australians came into the cycle with virtually every mortgage having been assessed with a 300 basis point interest rate buffer, and New Zealand was similar.
Now most of that has been absorbed. But coupled with strong savings levels, which at ANZ still rising; higher income growth, particularly for those with home loans, who are generally better off than average; and house prices stabilizing, household balance sheets remain in good shape. And the same can be said for most of our small business customers.
However, housing affordability has increased as a policy focus with most Australian states announcing housing targets. New housing requires significant material and labor, which are in short supply and competing with climate transition. So the cost of construction will likely rise as these targets and higher immigration force more demand into the sector. Now this should underpin house prices, which coupled with strong employment conditions, mean we're confident that we can cautiously grow home lending in a low-risk way while maintaining decent returns.
Globally, office property remains a sector at risk, challenged by higher interest rates, working from home and a preference for greener buildings. At ANZ, we have the smallest commercial property exposure of our peers and a focus on highly rated diversified portfolios managed by people we know well with proven track records and financial flexibility. It remains a watch point for the sector, but we are alert and well positioned.
More broadly, the demand for resources globally is substantial across defense, infrastructure, housing and climate. In addition, there are shifts in global flows, which are likely to have some permanence. The U.S. economy has become an importer of foreign direct investment, possibly due to the Inflation Reduction Act and efforts at reshoring. China has seen a slowdown in FDI. Debt and demographics are changing China's growth dynamics. It's still an $18 trillion giant, but growing more slowly and absorbing different resources.
These changes, plus global and stabilities, have forced a search for alternative manufacturing bases and areas to invest. India dominates given its enviable geopolitical position and economic reforms, but others are also benefiting such as Singapore and Vietnam.
Given these trends, our leading institutional franchise built on long-term relationships, specialist skills and a unique regional network means we're at the heart of the resulting shift in trade and capital flows and are well placed to assist global customers who are leading transformation and grow with them.
Now in more challenging times, delivery excellence, strategic consistency and the ability to flex resources is critical. And today's results are evidence of that, be it strategy, capital risk, productivity or our experienced team. We've held a steady hand over 7 years. And structurally, we find ourselves in the right place at the right time off the back of years of investment and diligent execution. Our priorities for the coming year build on that. We'll continue to run the group prudently using our strength to support customers through challenging times and seek opportunity from our regional network. We'll further improve productivity using tools like generative AI and process simplification to build further capacity for investment. We'll grow the number of customers using ANZs, particularly those new to ANZ, and deepen their engagement while starting to migrate existing customers from Angie Classic.
We'll invest more in commercial, driving growth in chosen segments and further enhance our sustainability, currency and payment platforms and finally, complete the acquisition of Suncorp Bank delivering the benefits of superior technology and customer propositions to their 1.2 million customers.
Now none of this is possible without the right people and culture. We've worked hard to develop teams with the right behaviors and skills needed to continue our transformation. We actively invest in employee engagement. And with our most recent score of 87%, we are best-in-class for any industry anywhere in the world.
Now this may not sit on our balance sheet, but it's a real asset. And part of the reason we secured over 90% support for our recent enterprise bargaining agreement and won the award as best finance graduate program in Australia 2 years running. Now standing back, the difference between Australian banks has never been more pronounced. ANZ lead the way on simplification, but has retained the most diversified and balanced set of divisions. Each of them has a strong sense of purpose, a clear strategy built on unique strengths and generates returns sustainably above cost of capital. Our commercial bank is deposit rich with significant growth opportunities.
While institutional is more international and increasingly driven by payments and currency processing, Australian retail is the smallest of our peers, but rapidly transforming to a digital-first financial well-being proposition by growing our newest business ANZ. New Zealand led our simplification, allowing us to invest in better outcomes for the almost 1 and 2 Kiwis that we serve while generating reliable returns to shareholders.
On its own, New Zealand is arguably the most valuable banking franchise in Australasia. So today, I'm confident our diversity is a strength with more fleet of foot and are putting that flexibility and diversification to good use. Revenue growth will be harder to come by. So while investing to deliver better customer outcomes, we'll increase focus on capital efficiency, risk management and productivity. I'm confident we have a fortress balance sheet the right portfolio and a proven team capable of managing through challenging times and making the tough calls.
And with that, I'll hand over to Farhan to talk through the result in more detail.
Thank you, Shayne. As Shayne said, this was a record year and is a testament to our multiyear effort to simplify and invest in our core businesses to deliver strong shareholder outcomes. For the year, we delivered revenue growth of 13%. In a high inflation world, we limited expense growth to 5% on a constant currency basis while continuing to invest.
Profit before provisions expanded by 20%, and we grew cash profit by 14%. Our provisioning remained appropriate. Portfolio trends were stable and we ended the year with a strong capital and liquidity position. In the second half, we continued our strong expense management focus, delivering a flat half-on-half cost outcome on an ex L&I and constant currency basis. We continued our strong markets performance with the second half delivering an on-target outcome of about $1 billion, following from a strong first half.
On an ex-market spaces, our second half revenues grew slightly, and we exited the second half with improving momentum. In short, we delivered what we had promised. Importantly, we delivered for our shareholders with a total shareholder return of 16% over the last 6 months and 20% over the last 12 months.
Our return on equity improved to 11.7% or over 100 basis points higher year-on-year when adjusted for the capital set aside for the Suncorp acquisition. As a result, the Board approved a final dividend of $0.94 per share, comprised of $0.81 per share on a 65% franked basis and an additional one-off dividend of $0.13 per share on an unfranked basis. I will discuss this in more detail later in my remarks. Now we've often referred to the benefits of a diversified and well-performing portfolio of businesses. That has actually never been more evident as this particular year and especially in this half. This diversification allows us to capture opportunities when operating conditions in parts of our portfolio are favorable. Likewise, it reduces earnings volatility when any of the markets or sectors in which we operate experienced more challenging conditions.
Importantly, though, having a set of healthy businesses is crucial to leveraging diversification benefits. In our case, all 4 divisions and each region are meaningful contributors to the group performance, are each profitable with above cost of capital outcomes and have good prospects for growth. And while each business over the last 5 years has experienced different trends, the mix of our portfolio today provides impetus for growth.
Before I speak briefly to each business, I will note that the capital allocated to the businesses on this slide does not include group held capital such as the capital set aside for the Suncorp Bank acquisition. So starting with Australia Retail, which represents approximately 1/4 of cash profits in group capital.
Our home loan balances grew $22 billion in FY '23. While the Australian mortgage market remains highly competitive, our focus over this period has been on significantly improving our processing capacity and consistency and enhancing our broker proposition. This gives us the ability to grow our mortgage book via nonprice levers. Australia Retail also grew other operating income by 5% year-on-year, in part reflecting higher cards revenue.
Shayne outlined the success thus far of the ANZ Plus business, which has been a key contributor to new-to-bank customer acquisition and deposit growth this year. Consequently, Australia retail revenue grew 4% this year, and profit before provisions expanded by 3%. Our Australia Commercial business consumes less than 10% of group capital, while contributing around 20% of group profit.
Our commercial customers account for 1/4 of group revenue, including their contribution to retail and to institutional. It is a net funded to the group with approximately 2x deposit to assets. The Commercial division grew income 11% this year and had a 12% expansion in profit before provision. We continue to invest in this business, positioning it for growth, and with a view to becoming the bank of choice for Australia's small and medium businesses.
The institutional business has had an exceptional year with 26% growth in income, adding $1.2 billion or 45% year-on-year increase in profit before provisions. This was also the first year where each major business line in Institutional delivered over $2 billion in revenue. Institutional is a far less capital-intensive business today, courtesy of 7 years of investment to build out capability and capacity in capital-light, high-returning products and platforms. As a result, it delivered over 40% of group profit, while utilizing 1/3 of group capital and has doubled its ROE since 2016.
The value of the Institutional division now lies in its ability to grow diversified and recurring revenue powered by our differentiated regional network. Last but certainly not the least is our New Zealand division, which represents 14% of our group capital and 21% of group profits. It continues to deliver strong returns and growth year after year. And in FY '23, it had 7% income growth and expanded profit before provisions by 10%. As Shayne mentioned, this business has continued to improve its efficiency and leverage its scale to deliver a cost-to-income ratio of 36% in FY '23.
Moving to shareholder outcomes. We have delivered strong results and have done this while balancing short- and long-term outcomes, investing for our future and being disciplined on cost, risk and capital management. This has contributed to our strongest ever EPS outcome this year at $0.270 per share adjusting for capital set aside for the Suncorp Bank acquisition. This would not have been possible had we not undertaken strategic and capital management actions over the last 7 years, which reduced our share count by 120 million shares prior to the Suncorp Bank-related equity raise.
I talk to operating income performance now. A strong outcome, 13% increase in revenue year-on-year with ANZ's business mix allowing us to deal effectively into a rapidly changing environment. This increase was driven by strong markets performance, higher volume across all 4 major businesses and margin expansion.
As I mentioned earlier, half-on-half revenue was slightly up on an ex market basis, reflecting the diversified benefits of our portfolio. Other operating income ex-markets was up 30% in the half. While that outcome did contain some one-off items, we saw an underlying 7% uplift. On volume, I have already spoken to the strong growth in Australia home lending, but I would also like to highlight that Australia Commercial experienced growth of 5% for the year and the second half for this business represented the strongest half of lending growth in 7 years.
Our Institutional and New Zealand business had more stable lending outcomes this year, reflecting softer credit demand. Importantly, we saw good balance sheet momentum in the latter part of the second half, which positions us well going into FY '24.
Overall, customer deposits grew $27 billion over the year, with increases across all divisions, while continuing to target deposit cost optimization opportunities. In the retail and business portfolios, we continue to see a shift towards higher yielding lower margin term deposits and saving accounts with the deposit mix now approaching pre-COVID levels. Offset accounts, while up by $2 billion in the year, remained stable year-on-year at 15% of home loan balances.
Payments and cash management deposits account for approximately 60% of institutional deposits, and average PCM deposit balances grew 5% year-on-year, and this reflects the quality of our institutional customer franchise and contribution from our platform strategy. As Shayne mentioned, our cash management and platform volumes have continued to increase, resulting in the doubling of revenue over 2 years.
While higher interest rates were supportive, it was largely the payoff from years of investment in technology that enables this outcome. In my experience with institutional customers, they trust a bank with their payments and cash management after a rigorous selection process and thereafter, our load to move their provider. We don't take our customers trust lightly and continue to execute well and invest in technology to enable stability and enhanced functionality of the platforms.
Moving on to margins. Underlying group NIM declined 7 basis points in the second half following a strong first half. Lending margins in Australia and New Zealand Retail contributed 7 basis points decline half-on-half and reflects the competitive pressures across the sector. As I mentioned, while competitive pressure was intense in the Australian mortgage space. We have continued to dynamically manage our settings for the business, factoring in capital requirements, in costs, cost to serve and credit quality. The geographic shape and nature of our deposit relationships, coupled with the strategies we've deployed, ensure deposit pricing remained a net tailwind in the second half. This was offset by the continued mix shift to lower-margin deposit products.
The markets NIM compression was largely driven by business opportunities that lend themselves to accounting asymmetry. Any NIM dilution in these businesses is more than offset in other operating income producing return-accretive outcomes. While the movement in asset and deposit margins are important, looking at margin outcomes regionally and divisionally really highlight the benefits of diversification. As you can see, the New Zealand geography and the rest of the world partially offset the margin impacts of Australia geography.
While Australia retail margins declined, there are 2 businesses that I would like to highlight in particular. Our institutional business' second half margin ex-markets was 2.3%, the highest margin outcome since 2016 and is reflected [indiscernible] disciplined capital allocation choices. This is evidenced by the fact that lending and deposit margins in institutional were both up half-on-half 2 basis points and 5 basis points, respectively.
Our Australian commercial business, where margins increased by an exceptional 60 basis points year-on-year and remain reasonable and reasonably stable in the second half following from a strong first half. I'm also pleased with our ongoing improvement in risk-adjusted margin trends. While the NIM decline does affect this trajectory, we have continued to demonstrate risk discipline and have maintained a substantial risk-adjusted return benefit.
As I have said before, this measure is very meaningful for us as it allows us to calibrate the return we generate for the risk that we take. While we are well positioned with our business mix, the environment ahead remains challenging, and the factors affecting NIM remained similar to last half. forecasting the exact timing and impact of this remains difficult, but we are confident that the composition of our business continues to provide us with some resilience.
As with our PCM business, we have focused on strategic capability build in our market franchise business to grow recurring income and to increase income diversification. This is a differentiated markets business from our domestic competitors across product offering, client mix and geographic footprint. Our investment in building capability and deepening client relationships has helped grow markets income to $2.1 billion in FY '23, while customer franchise income has increased on average 16% over the last 2 years.
Moving to costs. We have delivered to our guidance of 5% FY '23 cost growth, excluding L&I on a constant currency basis. Our second half '23 cost performance was strong with cost growth flat, excluding L&I on a constant currency basis. The growth in large and notable items in the second half was attributable to increased restructuring costs and a new government impost of compensation scheme of last resort. The restructuring costs are largely related to our productivity agenda for FY '24. Productivity is an ongoing discipline for us. not a one-off program of work. And our continued focus allows us to invest in our businesses growth and momentum.
Moving on to the key drivers of our cost movements. Like all businesses, we've had to navigate the heightened inflationary environment, affecting, in particular, our salary and third-party vendor costs. We have been considered in our approach to FTE management and made choices that balance our cost objectives and our workforce capability. For example, in the context of rising third-party vendor costs, we have made decisions to in-source certain activities and ultimately reduced costs.
Our FTE increases in international locations have been partly in support of our growth in our international business, but also for building bench strength and intellectual property in critical skill sets for the future, such as digital and technology. We have also continued to prioritize growth and productivity initiatives, which now represent 62% of our investment slate, the highest level in recent years.
Importantly, we pay for our investment now. With an investment OpEx rate of 83%, we retain the lowest capitalized software balance of all domestic peers. Turning to productivity. We have continued to realize benefits from automation and digital channels, simplifying our technology infrastructure, middle office efficiencies and property rationalization.
Looking ahead, we expect headwinds arising from inflation to remain but perhaps slightly lower than in FY '23. We are well positioned with our productivity agenda to face into these while continuing to invest in the business. Turning to risk. We've spoken previously about the work undertaken over a number of years to improve the quality of ANZ's lending book. The outcomes have both balance sheet and P&L benefits, including improving the return on risk-weighted assets. Portfolio quality improvement has been driven by a combination of more disciplined customer selection and strategic focus, in particular in institutional, a reduction in the proportion of unsecured business and increasing collateral in commercial, along with rebalancing exposures away from risk care sectors and disposals, including Asia retail, Asia commercial and Esanda.
Our portfolio mix is now weighted towards lower-risk categories such as sovereigns and financial institutions. The outcome of the portfolio improvement that I just outlined deliver a lower actual loss with our IP loss rate reducing from 34 basis points in 2016 to 1 basis point in the last 2 years. This means as the chart shows, we have gone from being the bank with the highest credit losses to being the lowest of our peers.
While the IP charge is up half-on-half, this is due to lower [indiscernible] backs and recoveries rather than an exact trend of new and increased individual provisions. Moving on to collective provisions, we took a prudent approach to provision, reflecting ongoing uncertainties in the macro environment. While there are some signs of increased customer stress in Australia with mortgages 90 days past due, increasing 4 basis points to 64 basis points during the half, the ratio remains well below pre-COVID levels of 112 basis points.
In New Zealand, we've seen a slightly faster increase during the half, although the 90 days past due number remains lower than the Australian portfolio. Impaired assets for the year was steady at 21 basis points, and impairment levels remain near historic lows. We look closely at emerging trends, including any change in the quantum or composition of customers requesting hardship support.
In our Australian mortgage business, 0.2% of our customers are currently hardship, which while slightly up half-on-half, remains below pre-COVID levels of 0.3%. Our scenario rates continue to recognize risks to the outlook, although we did make a small reduction to the waiting to our most severe scenario. Our collective provision balance of just over $4 billion is $2.2 billion over our base case modeled outcome and over $900 million above our downside scenario.
Moving on to capital. Our Level 2 capital position remains strong at 13.3% CET1 ratio, which is 16 points higher for the half. The capital impact from the proposed Suncorp Bank acquisition is 128 basis points. So on a pro forma basis, which also includes a small amount of surplus capital in the NOK, our CET1 ratio is 12.1%.
In terms of key drivers for the half, outside of the normal cash and dividend impact, we have experienced modest RWA usage for the second half due mainly to solid mortgage growth, as I previously outlined. With regards to future capital management opportunities, these are under constant consideration. However, the most important and material capital requirement in the near term is the proposed Suncorp Bank acquisition. The tribunal is scheduled to provide their outcome in February. It is not that far away.
In addition to capital, our funding and liquidity position also remains strong and well above regulatory minimums. As Shayne mentioned, the final dividend is $0.94 per share, comprised of an $0.81 per share, partially franked dividend and an additional one-off unfranked dividend of $0.13 per share. The level of franking reflects the geographically diverse nature of our business as well as the timing of the proposed Suncorp Bank transaction.
Our business mix, including the strong performance of International and New Zealand, delivers a higher absolute dividend per share than would be the case if ANZ only operated in the Australian market. As you know, we pay Australian tax and generate Australian franking credits only on our Australian sourced income. Therefore, this mix will continue to impact franking in the future. The Board understands that lower franking may not have been anticipated by some shareholders. And in recognition of this and given our strong performance, the Board agreed that the one-off unfranked dividend was appropriate.
In conclusion, we will continue to have a sharp focus on shareholder value while delivering strong customer experience through our highly engaged workforce. We have made the conscious choice of investing in our future, but we are also clear that we need to deliver efficiencies today to afford us that investment. So my focus as CFO will remain on productivity and driving value from our investments. I will also ensure prudent capital and liquidity settings and manage growth in risk-adjusted return for our shareholders. I feel confident that we have the strategy, a high-performing mix of businesses and an experienced team to sustainably deliver value to our shareholders in a safe and responsible way and aligned with our purpose of shaping a world where people and communities thrive.
Thank you very much, and I'll hand back to Jill now.
Thanks, Farhan. And I know you've all done this a million times. But anyway, if you can try and keep it to 2 questions each, the operator will walk you through the procedure and then she'll hand over to Andrew Lyons is our first question. Rachel?
[Operator Instructions] Your first question comes from Andrew Lyons with Goldman Sachs.
Just a question on your NIM. Your 2023 year-over-year metrics look strong across the group. But I just wanted to focus on the second half momentum. Over the last 6 months, you've grown your domestic mortgages at nearly 1.8x system, which has seen your retail banks average loans grow at 3% half-over-half. But this has clearly contributed to the 33 basis point decline in the retail banking NIM there for an 11% half-over-half decline in net interest income. And I'd also note the quarterly NIM trends suggest the NIM exit at a somewhat lower level into FY '24. So Shayne, can you please just talk to how the growth strategy in mortgages will be in the best interest of shareholders. And then I've got a second question.
Yes, sure. Thanks, Andy. I mean, first of all, let's just sort of repeating some of the stuff I've already said the fact that ANZ operates a more diversified portfolio than our peers. So we're not just an Australian retail business. But having said that, clearly, each of our 4 divisions has to stand on its own 2 feet, and they do in terms of their results and their responsibility to deliver good customer outcomes, but also deliver long shareholder -- decent shareholder returns in the long term.
So we believe we have our settings appropriate for the times where our customers out there are increasingly price-sensitive given their challenges, but we need to be able to offer that while generating fair and decent returns related to our cost of capital.
Now obviously, there's a lot of moving parts in there in terms of NIM, but also the cost base at which we operate. And over the long term, that's why we are investing heavily moving, and you saw that we've just launched quietly and it will be a slow start, our digital home own on the ANZ Plus platform, which radically reduces the cost point. But to answer your question, we will generate sustainable returns through customer relationships, not just in terms of single product offering for people. And we do monitor the return on equity for the division over time. Did you want to add anything about the margins?
Well, I think it's important. And Andrew, you know this, but we -- because of the diversification, while we certainly saw pressure in the Australia retail market continuing in the second half, we also saw offsetting outcomes in the institutional business, where we expanded margins. So I think it goes to Shayne's point that it is a very different portfolio to some of our peers. And therefore, our ability to manage the margin pressures in 1 part of our business with potential opportunities in other parts of our business is far more significant.
I think the other point, I think, is also important when we look at half-on-half, Andrew, is that it's probably good to compare not just half and half, but also on a full year basis because the timing of certain actions that we took versus maybe some of our peers was different. So we had more focus on deposit pricing in the second half than we had in the first half. And therefore, there was a bit more of a pronounced impact from a deposit standpoint in the second half. So I think it's just to kind of think about looking through the year rather than looking at the half because timing actions does impact the outcomes on a half-on-half basis.
And the only thing I'd add, just to round it out, I mean, in terms of an incentive setting in terms of the way that we run the business, we do focus our executives, including myself, but all the people who run the divisions on a balanced scorecard picture. So they're not incentivized around revenue or purely on market share or volume. They have a balanced set of metrics. And one of those clearly is around economic profit, which is highly correlated to their ability to generate sustainable returns above cost of capital. Did you have a second question, Andrew?
Yes, I do. You've paid a one-off DPS this half just reflecting the low franking levels and of the core dividend. Now part of this is clearly the geographical mix, but also the timing of transactions. One for Farhan. Can you perhaps just talk about how you think about the sustainable franking levels of the business, I guess, assuming the scenario where the deal is approved and perhaps the scenario where the deal isn't approved. Any details on that would be appreciated.
Well, I might start, actually. Thanks, Andrew. I mean I think at the risk of stating the obvious, but I'll do it anyway. Look, the Board is very conscious of the fact that those franking credits are more valuable to our -- in our customers' hands than in ours. And so that will always be a really important part of the decision around the level of franking.
Secondly, the Board is also very conscious of the fact that predictability and certainty is also very much valued by shareholders, whether that's the amount of dividend or the level, frankly. So that also goes into the mix. I think the important thing here, as you refer to, our business is inherently more diversified. That's a good thing. And actually, we see that as a real positive, particularly at this kind of this point in the global economic cycle, we have more levers and more ability to maximize our earnings capacity globally, but that does have consequences around franking.
So the Board [indiscernible] of that mix and making the decisions. But Farhan can talk through a little bit more about your question about how do I understand the question about how do you predict from here?
So I think, Andrew, the -- obviously, the decision around Suncorp Bank in February will then be -- we will then decide or the Board will then decide at that point as to any further capital management actions as required. So that does impact, obviously, the total share count, which, of course, impacts our ability to frank as well as generate more Australian sourced earnings if we are successful with Suncorp Bank. So all of those things are in the mix and it's uncertainty at this point as to where that goes.
The level of franking, though, away from the Suncorp Bank acquisition, is actually driven, as I said, by the fact -- by the mix of the businesses. And of course, that is hard to predict in terms of what that future mix is. It is possible that as Australian businesses grow, particularly in our commercial business, et cetera, we might see that mix turning back towards a more positive ranking outcome, but it's hard to predict that. And we'll, of course, have to manage that on an ongoing basis.
But I think the point I would make, though, is that the franking level for the $0.81 per share that we gave, the Board did consider the level of consistency, both of franking as well as of the dividend level as we made that decision.
The next question comes from Ed Henning with CLSA.
Just the first one on margin, the second one on costs. Just the first one on margin. Can you just go back to on Slide 27 and just talk about the mix change on the TD and the transaction accounts also you're growing ANZ Plus. I'm just interested, is this starting to slow at all? I know you talked about different changes that you've made in the second half. Just thinking about that impact going forward.
And then secondly, on the lending side. You've got, obviously, the back book repricing, which you showed and the lending margin coming off from the housing side. I'm just interested how far you're through that if you obviously, current rates hold and how long you think that will continue to play out in the margin is the first question?
Yes. I'll get Farhan to talk through that. Thanks. Just a couple of comments at a high level. I mean it's worth, I think, reflecting on the fact that our retail business obviously looks very different than our peers. And in fact, the demographic is really interesting. Our demographic skews slightly older and quite a bit more affluent. And that means that when you look at -- there's a high propensity to be interested in savings products because it tends to be older people thinking about savings. Therefore, a little bit more rate sensitive and that's why you see a little bit more sensitivity around the differential between transactional accounts and savings. That's one.
And the second point, I would say, while ANZ Plus is in the -- we're really pleased with -- we've generated far more deposits than we had hoped for at this time. Obviously, it's still relatively small in the stack, as you can see on that page. What's interesting about that is, I say, about a little less than half of that is coming from new to bank customers. And so we're really pretty excited about, and that's precisely what it's designed to do. It's designed to actually broaden the pipe, if you will, of transactional accounts and new customer acquisition. But you can talk a little bit more about the trends we're seeing because there hasn't been some changes.
No. So I think just speaking to the deposits first, it is a function of the shift from, as Shayne said, from ad coal to TDs. That has been, as you can see, pretty pronounced. And we've seen over the -- so if I look at second half last year versus first -- versus the end of this year, there's been about a 9% shift from ad quality to TDs. And that, of course, means that, that has an impact and a drag on margins.
But then having said that, and it's too early to call it, obviously, Ed. But we started to see a slowing in that shift towards the end of the second half. But of course, we'll have to see how the rate outlook potentially may impact that going forward. So I think that's the first thing. The second is that on the lending side, as you mentioned yourself, the back book repricing was particularly elevated in the first half. That has started to slow and has actually slowed even further as we exited the second half.
So we expect that again, depending on the rate outlook and the environment and the competition, we expect that to be a lesser headwind going into next year. But having -- but there continues to be competition on the front book. And of course, you'll have to watch that, and we'll have to see where the rate outlook and the macro environment shifts. So that's what makes hard to actually give you a sense of the margin trajectory is. But some of the trends, which were headwinds, such as the shift to TDs, which is, as I said, getting closer to pre-COVID levels now, as well as the back book repricing impact, has slowed down, particularly with most of the back book now pretty much at contemporary pricing, almost 70% of our home loans right now are on contemporary pricing. So I think that's something we will continue to monitor as we go forward. But a lot of unknowns in terms of rate changes as well as competitive intensity going forward.
The other thing I would just add to it, and I know you want to ask a question on costs. If you go to the next slide on Page 28, actually, is that bottom right chart about client monies, the platform cash management accounts. And this really plays to a strength that ANZ has, and it goes to what I talked about the ability for us to sort of democratize these really high-level platforms that were built in institutional.
Essentially what this is, is where our customers, meaning whom a financial institutions, brokers, et cetera, offering accounts to their customers. What's great about this? It's leveraging the scale and the technology we bought an institutional, but we get retail credit treatment for those in terms of those deposits. So while that's -- that is becoming a very significant driver of liquidity and retail valued liquidity for ANZ over time building on our strengths. You want to ask that?
Yes, I do. I appreciate the detail. On Slide 34, you obviously gave us the walk-through on the expenses. And you talked about hopefully a little bit less inflation pressure next year. Can you just touch on some of the other components, the strategic investment? Are you going to be able to hold that flat? Or is there an increasing head in there? Also, you had more restructuring in the period and you had some transaction costs. How should we think about restructuring and transaction costs as well?
Yes. So [indiscernible] goes to, hey, we have done a good job on productivity. I'm not embarrassed to say that. And that's been the case for a number of years. We've been able to -- let's remember that when we -- I understand the tendency to relate everything back to a CPI base. But remember, we operate in 29 markets. Most of our people who we pay a wage who don't live in Australia. They live somewhere else. And so the -- our CPI is very much a global blended inflation number that we manage to. And so while it's interesting to think about the Australian CPI, and it clearly is relevant, it's not actually the only driver.
So what you've seen over time is our ability to continue to keep our cost growth, including investments lower than what we would see our basket of traditional inflation. And that means we've been able to deliver productivity over a period of time. Now some of that moves around because of our need or desire to invest in various opportunities. And so that is a little bit of a moving target.
Certainly, from an investment perspective, who can say about the future. But from where we sit today, we sort of feel we've -- we're sort of somewhere at that sort of peak investment cycle. We've had a couple of the big ones like [indiscernible] roll off. That's not to say there won't be new things. But we're not seeing -- we're not expecting a material shift in the total amount of cash that we have to invest, whether that's in regulatory requirements and compliance or whether that's building new propositions, whether that's feeding and rolling out things like ANZ Plus or GoBiz or the cloud transformation or the work we're doing in institutional payments, that should be relatively stable, if not come down a little bit over the next year. But Farhan, you've got more detail on those sort of.
Yes. Look, I think Shayne has actually covered it. There's nothing at this point that we can see which suggests that there is going to be anything but a stable to slightly down outcome in terms of our investment spend, if you like, going into next year. There's nothing on the horizon.
But as I always say, you can never say never because something might show up in the middle of the year, where at this point, knowing what we know, we are pretty confident that it will be stable to slightly down from an inflationary standpoint and some of the other boxes on that Page 34. Obviously, wage levels are going up and that starts to come through now from the month of October. So that's already baked into our numbers for '24.
Vendor inflation is continuing. As Shayne says, we pay for our people and we pay for other people's people, and those people are getting wage levels increases as well, and they're operating on a global basis. So there are different CPI outcomes for them. So vendor inflation will continue to remain a pressure. Strategic initiatives, as we said, largely stable year-on-year. And the good news is that because we pay for our investment now and we have been extremely disciplined around making sure that we continue to OpEx as much of our investment spend, the DNA is actually a small tailwind for us in this year, in this half. So that hopefully will continue to help us.
And -- but clearly, given the level of inflationary pressures, we will have to outperform on productivity, and that's what we're setting ourselves to do, which is why our restructuring costs were higher towards the end of the year. We'll expect them to stay similar levels next year in order to continue to make sure we're delivering outcomes not just for '24 from a cost standpoint, but also building an exit rate into '25.
The next question comes from John Storey with UBS.
First question I had was just on asset quality. The charge that you took in the second half of the year seems to some extent, inconsistent with some of the underlying trends that you're seeing just with regards to the portfolio. NPLs are up quite a lot and your ECL allowance, particularly for net loans and advances has gone down 3% half-on-half. Maybe just if you could just give a little bit and unpack a little bit more detail around what is actually driving that? And maybe, Shayne, if you could just conceptually just provide your view on what you think the quality of the book actually looks like at this point in the cycle with a few more interest rate hikes on the horizon?
So I'll do that first. Thanks for the question. I mean again, without stating the obvious. The results of our charges, particularly on a collective basis, are the result of the models that we have and the underlying assumptions we make around our base economic forecast in our downside scenario. So I'm not suggesting that it's a black box entirely, and we just -- computer sees and therefore, we adopt that number. It requires, obviously, a lot of testing and judgment. But the reality is that when you think about the scenarios you're in today and the level of provision, it's extraordinarily strong. I mean we're sitting here with $4 billion worth of collective, which is our base case. Well, let's talk about the downside it's almost $900 million higher than the downside. And when you go through the downside, it's pretty grim. The downside needs to see unemployment essentially double over the next year. House prices to fall materially and quite significant slowdown in the economy. So I'm not suggesting that it's got 0 probability. I mean, always really bad things can happen, but it's pretty unlikely. And so you sit there and go, anyway, we go through this pretty robustly. So I think it sets up pretty well when you look at actually what the underlying assumptions are. But then I stand back and I'll get Kevin, our Chief Risk Officer, to talk a little bit more eloquently about that. But if I stand back to your question, and the quality of our balance sheet. We have spent 7 years derisking our business and ensuring that we are banking the right people in the right industry is at the right time. I accept it's hard for you to see, and then I accept that you rely on a lot of sort of statistical analysis to show that. But when you look at the quality of our large exposures, the quality of even within our home loan business and you look at the average credit score of the customers that we're writing home loans for today versus where we were in the past and really importantly, versus our peers, you can see that we are writing very high quality and higher quality business than we've had for some time. I look at our small business cohort. Our small business cohort is, again, very different to what our peers. For every dollar we lend, $1.8 in deposits for every dollar we lend significantly well secured in general, either through premises and property or other assets. So I actually -- I don't take it for granted. We spend huge amounts of time ensuring that we derisk and get our business focus right, but the quality of the book is strong.
And I'll just have 1 more sort of anecdote on that. When you look at things like noninvestment-grade names of any meaningful exposure, so anything sort of more than $50 million. I mean Mark Whelan, who looks after institutional, Kevin, our Chief Risk Officer and I, are literally familiar with every single 1 of those names. I mean the benefits of simplifying our business and being able to see those names and those exposures on a spreadsheet and be able to not just rely on models, I think, has given us a really, really strong book and our ability to manage it as [indiscernible] great benefit.
But Kevin, did you want to talk through the specific question?
Shayne, I think that's a pretty comprehensive answer. But John, a couple of things I'd add. First of all, there's a very rigorous process that we go through to determine our provision outcomes. So if I look initially at the individual provision level, you're right to say that something like mortgages are 90 days past due are up on the half, they're up 4 basis points. still substantially below where we were pre-COVID and also still well below a number of our peers who have reported recently. I would be the first thing I'd say.
Secondly, you actually look at credit cards, personal loans and small business, which historically have been a big contribution to an individual provision outcome. Those delinquency levels are actually still falling. And if you look at our mortgaging and possession numbers, we're down 80% of mortgaging and possession from where we were pre-COVID. So the actual results, therefore, that's why they're as low as they are on the IP side. And in addition, what I'd say to what Shayne said on the institutional business, institutional and corporate more broadly. We have 90% of that corporate book is either investment grade or it's fully secured. So a very different profile from what we had before in the book. And then the other point I'd make on that is that sovereigns, financial institutions and mortgages. If you go back to GFC days, they made up 52% of our book. Today, that's 72%. So quite a big shift in the nature of the book and they're very low default levels.
The final thing I'd say is that under Australian accounting standards, we need to set aside from a collective provision perspective essentially enough to hold 12 months of coverage from a collective provisioning viewpoint. On that 12 months of coverage, we're essentially seeing, if you look at our CP balance of $4.03 billion, that's $2.2 billion above of best case. It's over $900 as Shayne said about the downside. A downside that says effectively in the next 12 months that unemployment will almost double from where it is today to 6.9%. The property prices will fall by 14%, and that Australia will be in a recession.
Given all of that, we think that the provisioning level that we've got is a prudent one, but it's also an appropriate level when you reflect the quality of the book together with the broader macroeconomic environment.
Can I just maybe help round that off a little bit, John, because I think both Shayne and Kevin have covered it in detail. But I think it's important just to step back and just to make sure we understand, while there has been a small step-up in impairment half-on-half. Overall, for the full year, we've remained pretty steady. The fact that there's been a slight increase in the half on impairment has not been reflected in provisions, which talks to the quality of collateral and security coverage we have on those names. And if you look at our IP, those people are getting wage levels increases that ignore the write-backs that we've had in the last half and the half before that. There is no new IP or no increased IP in the half as well. So the quality of our portfolio is best reflected in the fact that our individual provisions remain fairly stable and remain even on an impaired basis remain at historic lows.
Your next question comes from Andrew Triggs with JPMorgan.
Shayne, can I just ask, you made a comment a few times about the diversity of your portfolio leading to that NIM outcomes. Just noting that we didn't really see that this half. So the underlying NIM was down 7 basis points, that's roughly the same as what we saw from Navin Westpac. So in that context, I'm interested to know whether you're sort of disappointed with that outcome? And from where you would say, what would you put that down to?
Yes. I mean it's a fair question, Andrew. Just because I don't know that I did say that our diversification led to better NIM outcomes. I mean to get better outcomes overall, right? And when I think about the returns more broadly, and the strength of our business in terms of revenue growth and the opportunities. So I'm not -- I understand the question.
I don't think I'm disappointed. I'm not disappointed with where we are. I mean I think it's very easy, and I understand the need to compare and contrast to others. But our business is different. And our -- when we think about the Australia Retail business, which is, I guess, where most people are focused today when they're talking about NIM, they wanting to compare us versus our friends. Let's not forget our business is a lot smaller and different than them. And even simple things like the way that some of our peers report their retail and commercial businesses is different than ours. So for example, when we have our -- all of our home loans sitting in retail, whether they're for retail customers or small business customers, some of our peers have those home loans sitting in their commercial banks. So it's not necessarily a like-for-like comparison. But I'm not disappointed with where we are. We have a different starting point. We have a different strategy. We have a long-term view on how we're going to create that competitive sort of advantage over the time. Look, I'm the first to accept, we start in a more difficult and more challenging position than many of our peers. And that's why we're investing in our new platforms like ANZ Plus. So that's where we are in terms of diversification.
What's really positive here though is the fact that our international businesses at a time when Australian retail is under enormous competitive pressure, not just our business, the entire sector, which is driving great outcomes for customers, more difficult to operate. We have more levers to pull. And that's what's great about this business at ANZ, we're able to see and allocate more capital to our institutional bank or into New Zealand and really drive returns because that's what we need to do at ANZ, we want to maximize our earning capacity for shareholders by doing the right thing by being purpose-driven and by driving good customer outcomes, but it's nice to have 4 businesses of meaningful scale to be able to flex and resource as opposed to be committed to essentially just 1 like many of our peers.
Yes. And I think just to that point of diversification, Andrew, I mean, the fact that we were able to grow institutional margins ex markets half-on-half. The fact that we were able to preserve a very, very strong half in the commercial NIM expansion from the first half into the second half. The fact that we have been able to manage our New Zealand business quite well in the context of the pressures and the macro environment in New Zealand allows us the ability to create some offsets to the pressures that we faced here. I think it's also important to note that given -- despite the fact that we've had the mortgage growth we've had, our structural funding gap at Australia still is the lowest amongst our peers. So the pressure from a going forward perspective, in terms of our funding relative to our peers is still lower. So we have -- and we have flexibility around the Australian the growth in institutional Australian PCM deposits, our commercial business, which is 2:1 deposit loans here in Australia and the fact that we have varying sources in Australia retail, plus is obviously the new source for growth in deposits, but also the fact that we use third-party deposits gives us flexibility. So we have a lot of levers that we can continue to use in order to manage margins as we go forward. And that's where the diversification, I think, is really powerful.
And look, could I just ask I mean directly asked a direct question, should we expect ANZ to grow above home loan system in the next half? And could you maybe defend offering $3,000 cashback for first home buyers in the context of your comments that it's a really difficult and competitive home loan environment at the moment?
Yes, I can answer that. I don't know. I don't know that we don't target necessary market share growth is the right thing to do. What we try to do is get the balance right between attracting the right kind of customers as I mentioned, we're very conscious of -- we look at the credit scores of the customers that we are onboarding in our home loan business versus everybody else, and we're pretty confident that we're attracting high-quality customers because we need to be lending responsibly. So that's the first thing.
Secondly, we need to be able to do so at a return that is there and decent for our shareholders. Now there's lots of moving parts that go into that calculation in terms of the cost of funds, et cetera, but really importantly, the operational cost of supporting that and that's why we've advised really heavily in our processing capacity to ensure that the marginal cost of new loans is as low as it possibly can be. And that's why we're excited about things like ANZ Plus, which will take that to a whole new level. So -- and the cashback -- look, I know there's been lots of focus, and I know it's fun to write about. But the reality is the cashback on offer at ANZ at the moment is pretty tight in terms of eligibility. It's not a broad brush offering. There's a part of the market. Understandably, that really value that, particularly around first home buyers. And we see it as part of our marketing suite of options to be out there. But going to -- your simple question was, are we sitting here target growing above the system just for the sake of it? No. Yes. Will there be times where we grow a little bit more than system Absolutely. Now as you know, part of it depends on what the system is. And we don't have full insight into that. The pricing that we have out in the market today, whether it's in our branches or whether it's through brokers, as of right now, we don't have perfect insight to where all of our competition is. We don't know precisely what discounts you're offering. We don't know precisely what other specials they have on today. We put our best foot forward, which is based on generating a fair and decent return. And the system will be what it will be and the times we're above and there will be times where below. And just to correct something you said just to make sure we're on the -- our cashback, it's not $3,000, it's $2,000. And as I said, the eligibility for that is quite tight, actually.
The next question comes from Jonathan Mott Barrenjoey.
I have a question on the institutional business. It's now the biggest division, and we saw in the fourth quarter, the margin and the whole half and also the fourth quarter. The margins continue to expand. Shayne, in the past, we've talked a lot about this and the rate benefit in that business. And you highlighted it wasn't the absolute level of rates. It was more of the shape of the yield curve. And in recent times, it looks like we're hopefully getting towards top of the global interest rate cycle, the U.S. tenure or U.S. yield curves, inverted Australia is pretty flat. So do you think the impact from here of rates and the outlook for the institutional margin is probably peaking at current levels?
I think -- so first of all, I stand by those comments. I think that's true. I mean, obviously, there's lots of factors near it. What's driving this is also some mix issues. I'll come to that in a second. So -- but broadly, you're right. I mean, I would think it's -- I think it's a fair assumption to say who knows precisely when we're somewhere near the top of the rate cycle. And I don't know when the turning point will be and so yield curve shapes are more likely to flatten. And therefore, that will be a bit of a headwind on institution on the payments and cash management margin.
Having said that, on the other side of it is that what you're seeing in institutional is there quite a significant shift towards more sort of operational balances through the more -- when we talk about things like Transactive Global, when customers are signing up to use Transactive Global, that's really generating operating balances, which are have much lower yield on them and therefore a lower cost for us. And so there's a mix issue here, which should continue to be pretty supportive for institutional. So look, you can't -- if you go to Page 30 and you look at the great progress that institutional have had, clearly, I'm not suggesting a notice for [indiscernible], that you should extrapolate that line. No. But neither we see that as sort of retracing back to where it used to be. We think there is a fund -- there is an underlying strength now in that business given the scope of the transactional deposits et cetera, that should see institutional margins hold up pretty well.
The other thing I would say is, actually, it's lending margins that have also been really supportive and institutional. That's probably surprising like to many and we've spent a lot of today talking about our lending margins in home loans in Australia, which clearly are really competitive. Institutional lending is always competitive. But in the sector that we focus on in our customer base, the world's very best companies, we've actually been able to see those lending margins maintained and actually increase in the fourth quarter. So I'd say overall margin should be more stable than not, Jonathan. But your broader point, you are correct that the shape of the curve is 1 of the drivers.
And I think just to add to that, because I totally agree, Shayne, that the lending margins have been exceptionally robust over the last 12 to 18 months actually, reflecting the customer base. But I think the other thing from a deposit standpoint, Jonathan, which is -- which talked to the benefits that are coming through the in-store numbers in volume and processing are actually quite substantial because if you think about the institutional deposit base, the actual deposit beta is very high in institutional because a lot of the deposits are actually contracted and are linked to the base rate. So you don't actually get as much pickup from rates, as you would get, say, in a retail business or in the commercial business because of the nature of the institutional deposits. So when I say that rates are supportive, they surely are, but that's not where the big increase is coming from, it's coming from the fact that we're growing volumes. We're preserving margins -- sorry, we're preserving customers and growing our share with the customers is really what's driving that outcome. So as long as we can continue to do that, which is our focus, while there will be some moderation, et cetera, with rates changing, the bulk of the rate benefit actually just passes through to the customers and institutions.
Can I just ask another quick one. You said that trials for ANZ Plus mortgages are just going through now. When do you expect that to be rolled out more generally? And when you do the rollout, is it effectively going to be all new mortgages are written on the new platform, which is a lot cheaper to operate for a marginal mortgage going forward?
Great question. So the product is available today, but only for eligible customers. So what does that mean? So let me stand back. So over time, yes, over time, and that won't be in the next year or two, ANZ will become the predominant channel for our home loans, yes. The reason it takes a few years is what we've started with and the way we've built it in it is truly digital. So there's a lot of stuff being written out there or people pretending to be digital. But what you'll find is there's still significant human intervention somewhere along the way, mostly in the assessment or settlement process. So we've built it in a truly digital way. What that means is the customer if you're eligible and what does eligible mean today? As of today, it's pretty basic, single borrower, no offset, PAYG, sort of less than 80% LVR and an ANZ Plus customer. So you're already with ANZ Plus, and as you can imagine, that's pretty narrow today. That person, what we're seeing is we like -- we're doing that now. We're offering that to customers. We can get you through from starting that application through to settlement because it's refi only at this point, within 45 minutes, the entire process, right? And so we're there. What we've got to do is we've got to just expand the pipe slowly. Our plan is to get over the next 12 months where that the eligibility for that will be somewhere around 10% of the addressable market. So we're going to have joint accounts soon. We'll offer something to do with offsets early in the new -- in 2024, et cetera, et cetera. So we've got to build it out, Jonathan. And the way, as I say, at the moment, it's offered, it's only on Android, we'll add iOS in a couple of weeks' time, and it's offered through the Plus platform itself. And then understandably, we need to have a broker offering for that, and that is being built as we speak. I'm not going to give you a timetable on that. But as you can imagine, that's a pretty important part of the offering as well. But 1 day, not next year and it won't be the year after, it will be the predominant channel, but certainly over the next couple of years, we're going to expand that out as broadly as we can for obvious reasons. We think it's better for many customers, not all. Not everybody wants to be able to do the home loan on their phone. But we want to expand it out as quickly as we can for the obvious reasons, better for customers, far, far lower cost for us. And actually, we think better outcomes from a risk and responsible banking point of view as well.
The next question comes from Brendan Sproules with Citi.
I just have a couple of questions on the demand for debt. I was wondering if you can give some comments around the demand for debt in the institutional bank? Obviously, Shayne, you mentioned that the margins on the lending side are actually reasonably strong. I'm just wondering why you're not seeing faster growth there?
And also secondly, in the commercial business, obviously, you're putting some more investment there. You had some growth after a long period of flat lending in that -- in the second half. I was just wondering what the outlook and the pipeline is in the SME is?
Sure. Well, we'll go straight to the experts on this. I'll get Mark Whelan to talk about institutional and then I've got Claire to give you a bit of color on commercial -- the demand for debt and institutional what we're seeing.
Yes. Look, thanks, Brendan. The -- it slowed in the second half, I think you've seen that across most of the numbers that have come out, both here and also globally. There's definitely been a slowdown in appetite for new lending. What we have seen is customers more paying down some of their debt and rather than rolling it over.
Having said that, I don't -- it's not a significant shift. What we're seeing is customers just being a little bit more cautious, and they are ready to invest, but I think that's likely to come once we've seen clarity around terminal rates globally. And I think some of the geopolitical issues that we've seen have meant that customers are just being cautious. So I don't think it's a significant trend that we'll see longer term, but I do think that you'll see customers remain cautious. The upside is that we are starting to see a bit of M&A activity here. You're also seeing that a little bit in the international markets and obviously in climate and sustainable type projects, that's still growing. So it's a bit of a mixed bag, but I think you'll see there's still a little bit of pressure for the next 6 months or so, I do think it will pick up later next year would be our full expectation.
And 1 of the things I'd point to here, if you look at the Asian market and particularly in the last 12 months, we've seen loan syndication is down about 30%. So people have just taken a step back here. But as I said, I would expect that will start to turn around maybe in 6 months' time.
And while Claire coming up to the podium, I would just also add, and again, I don't want to overstate it, Brendan, but it goes also to the quality of our customer base. I mean the reality is at the top end of our customer base, a lot of them are just sitting on huge wads of cash still. So they don't have the same need for funding as they have in the past. And that will change as they start to be more assertive about investing. And I want to go back to what I said in my commentary, this is where I think ANZ sits in a really, really strong position. What we are seeing from our largest institutional customers, they're rethinking the world, they're rethinking supply chain, they're rethinking where they want to invest. And that was already happening, the China Plus One and all that sort of stuff, but that's accelerating with more risk geopolitically. And guess what, we're exactly where they want to be. And yes, we have operations in places like India, and we took our Board there earlier this year. Our India business is going extraordinarily well. In a few weeks' time, Mark and I are off to Vietnam, we'll be celebrating 30 years in Vietnam, again, a little bit under the radar there probably doesn't get the same profile of other places, but ANZ has got a terrific franchise in Vietnam and more multinationals building, growing, investing in places like Vietnam and of course, Singapore, as I mentioned, which is 1 of our largest regional operations goes from strength to strength. So we're seeing really good opportunity as those customers move capital and supply chain trade flows around the region where everywhere they need to be.
But Claire, maybe a little bit of insight on the commercial changes that we're seeing?
Yes. What we're seeing with Australian small to medium businesses is certainly some softness in certain sectors. And we're certainly seeing smaller businesses impacted by things like higher inflation shortage of labor and lower consumer confidence. And that's playing out in some of the sectors that you'd expect, such as consumer discretionary and retail, some hospitality and the like. That said, we're actually really positive on demand for lending across the economy because we obviously are very focused on a much more diversified set of customers. And we are growing well in the industries where we think there's favorable outlook. So things like agriculture, things like manufacturing, exporters and importers in target industries. So that's probably the real focus for us is targeted growth in favorable industries that we think are going to have positive long-term outlook. And so that's certainly where we're seeing the growth. I think the other thing that's worth mentioning is that we're very focused on not just a lending conversation with Australian businesses. We really want to have a conversation with Australian businesses about whole of customer outcomes, and that includes things such as cash flow, but can be as broad as and hopefully, as you've seen through the results, customers that might have relevance from an institutional product perspective or a retail product perspective, and so we're really interested in having that whole of customer relationship going forward. In the results, the lending numbers are probably a little bit understated as a result of some of the exits that we've made over the last year as well, where we sold the investment lending to Bendigo Bank as an example. So some of that is taken out from the growth rates that you've seen there. So positively, we're seeing very strong work in the pipeline and very strong customer engagement and conversations with our bankers who are very active in the market.
Thanks, Claire. Did you have a second question?
I could ask -- yes, if I do, please just on the mortgage market, I noticed in New Zealand that you've had picked up growth in the second half. Could you maybe contrast the pricing dynamic in the New Zealand mortgage market versus what we see here in Australia?
So yes, so thanks for that, Brendan. We saw a small increase. We had -- if you recall, we had lost share in the market in the first half. So we recovered a little bit of that share in the second half. But I think there is a more moderation of competition in the New Zealand market. In fact, we saw front book NIM actually improving during the second half from a very low base to be fair, but we saw it improving in the second half. So New Zealand market dynamics are just because of the fact that they've been ahead on the tightening cycle are probably returning more to normal now than our Australian retail business.
The next question comes from Victor German with Macquarie.
Firstly, I just wanted to follow up on John's question, maybe a slightly different angle. Given Institutional Bank has a smaller proportion of its deposits that are hedged, presumably, it means that the benefit of higher rates come through quicker for those business? And given where rates are at the moment, it looks like replication portfolio and capital should continue to provide 7, 8 basis point tailwind to your margin in 2024? And as a result, particularly in the context of what you said earlier about diminished front to back book gap on mortgages. Do you continue to expect institutional margins to outperform your other portfolios again in 2024?
Do you want to?
So I'll take the first one. So I didn't get the second one.
Did we expect institutional margins to outperform the risk of the portfolio?
Right. So I think on the -- thanks, Victor. So the institutional deposits actually don't have -- we don't look at institutional deposits as part of the replicating volumes. But if you look at the replicating portfolio in general, what I would say is that we've had, obviously, continued benefit of the higher rates. But the volume and the -- sorry, the shift to higher margin deposits has actually meant that the volume of replicating portfolio has actually come down, which is why we haven't seen as much benefit of replicating portfolio tailwinds in the second half as you saw in the first half.
Having said that, if you look at our total replicating portfolio, the blended rate today because of the long-term hedges that we have is in the mid-2s. So to think about the next 2 years, you would imagine that as those tranches that we had invested, let's say, 3 or 5 years ago, are going to start coming back into reinvestment mode. We expect that our portfolio -- replicating portfolio blended rate would move towards 4% over the next 12 to 24 months, and that benefit will start to come through in '24 and '25 numbers. And we expect that, that should approach 4%, all things being held equal. I think the real variable here is the mix of deposits in terms of how much moves more towards CDs away from that call. And at this point, the only thing I can say to you is that it has slowed, but it's still uncertain in terms of how that travels in the course of the next 6 to 12 months.
But given -- I appreciate that. But given those benefits are still coming through and as you said, they predominantly benefit your retail bank and commercial bank, that's the tailwind that those businesses have with institutional doesn't have?
Yes.
I'm just kind of putting that into context kind of how to -- what does that mean for 2024 margins across different divisions?
So yes, yes. So I think what I would say is that from an institution and you asked a specific question around how we expect institutional deposits margins to behave next year. Look, as I mentioned earlier as well, Victor, the institutional deposits because of the fact that they have had high deposit beaters, as long as the rates stay up at the current levels, and we expect them to stay up at these levels for a longer period of time, we don't expect anything materially to change in terms of the institutional deposits. It's more driven by how much volume we have. And that's the key focus from a customer standpoint in terms of growing the institutional deposit revenues. The lending margins looking, as I said, look pretty stable. In fact, we've seen an expansion in lending margins this half. We don't expect that to reverse in the course of the next half. I think the point that you were making and that Shayne was making earlier and Mark was making earlier, is that because we hadn't seen the institutional lending book grow in the second half you didn't see the benefit of that coming through into the margins. But as that starts to turn around, we will start to see those benefits coming through as they continue to be at reasonably high margins.
So it's a mixed story later in the sense that we expect lending margins outlook reasonably stable to up, and we expect that the institutional deposit margins won't have any significant impact in the second -- in the next 12 months. But it's a function, of course, of what happens to the rate outlook and the macro outlook. Is that helpful, Victor?
Yes. No, thank you. I might follow up with you later on that. And my second question also on costs. And thank you very much for providing additional color on your cost considerations for next year. But I think in the presentation, you suggested that you're expecting to see better -- or slight improvement on cost performance of 5% that you've seen in 2023. What's the base that we should be looking at? Because obviously, this year, you had $170 million of restructuring charges, about $250 million of transaction radiation costs. When we're thinking about your growth in your costs going into next year. Are we thinking about $10.1 billion being your base? Or should we be thinking of $9.7 million and growing from that number?
So I think we expect that -- as I said, the investment spend is going to be reasonably stable, as we mentioned earlier as well as the OpEx rate, Victor, so call it stable to slightly down perhaps on the investment side. As I said, wages and vendor costs remain -- wages, obviously, we know they've sort of gone through now, but vendor costs remain uncertain, and we'll have to continue to manage that as we go forward.
On restructuring, as I said, largely, we think more flattish to where we ended this year. So that's not going to be a big up or down outcome because we want to continue our focus on productivity and make sure that we manage our costs from that perspective. And remediation, again, is a smaller number now. So it probably doesn't make a huge difference year-on-year anyway.
So overall, I would say that there aren't the big items that are changing year-on-year, but the challenge, of course, continues to be managing inflation and finding productivity offsets to that, and that's where our focus is right now. By the way, we didn't say that we expect the number to be lower than 5%. We just said that the inflationary pressures might be a bit lower next year versus this year. Our focus is going to be to make sure that we try and improve on that as much as we can.
The next question comes from Matthew Wilson with Jefferies.
Hopefully, you hear me okay?
Yes.
I mean it [indiscernible] we are early on in the credit cycle. And given what you learned through COVID with respect to offering hardship, I wonder if you could disclose what percentage of your home loan book has been restructured but is currently performing?
So the -- we actually have very low levels of restructuring. If we can get Maile to come and talk to this or Kevin. But we would say that the restructuring that was done over the last 12 months, 55% of those restructured loans are now fully performing and current.
I don't have the numbers but I'm seeing him -- I don't think we have it. We might have to get back to you on that one, Matthew, but it's like...
It is very low.
As I said, I mean, I know it's not the same. I know it's not the same, but the number of people on our books today in hardship, and again, I said it's not the same, it's 2,000 out of the 1 million. So it's 0.2%.
It's 2,000. Yes, exactly. So the hard ship numbers are very low. And as I said, 55% are current on repayments after coming out of hardship. Yes.
That makes sense. And then just secondly, with the special dividend, given there's no franking what was the decision tree with respect to not having a buyback albeit it would have been a small buyback, but it's better to reduce share count than [indiscernible] dividend when you got the franking?
Yes, better for people. Yes. Look, I understand that and better is a value judgment. And I think I understand the corporate finance theory. So 2 things. One, it would have been small. But two, I think, really, we were conscious of our retail shareholders. And while lots of retail shareholders theoretically benefit from a buyback. I think it's hard to -- it doesn't really put any money in their pocket. So we were very mindful of that and mindful of the fact that for some, maybe it was wasn't something they had expected. So that was the view. We absolutely -- the Board had exactly that debate about weighing up the different values of the buyback versus that and came down on the side that, hey, cash in the hand is better here all factors considered, and given the size that was relatively modest. And you shouldn't read anything into that -- I certainly wouldn't want anybody to read anything into that as -- is there any sort of indication of the Board having changed its view around capital management and the importance of that, it was a one-off.
Particularly given the fact that we have a potential further consideration event once Suncorp transaction is finalized.
The next question comes from Matt Dunger with Bank of America.
Yes. Just a question on the net interest margin and the funding. You did $3 billion of prefunding, which based on my estimates, appears to be about a 2 basis point net interest margin drag. Can you confirm that? And also why did you feel the need to prefund so heavily given relatively low level of maturities in FY '24?
Well, we -- so -- I'm not sure, Matt, how you got to the 2 basis points. Are you saying 2 basis point NIM drag in this half? The $3 billion?
Yes, that it appears to be based on the front book pricing of the debt issuance.
Okay. No, it's definitely not that much, but I'll check and come back to you. Look, I think our view was -- on the overall funding, our view was that, look, it's an uncertain market ahead. And we were getting strong access to liquidity and funding at this point. And we wanted to make sure that we were prudent and we basically prefunded some of the '24 funding needs. Now remember, there's a bunch of geopolitical events that are out there and obviously, given all of the uncertainties and the fact that we were going a bit later from a results point of view this half. We want to make sure that we would be able to take advantage of the good investor support that we had in September. So I think it was just more prudent action rather than anything particularly different to what our approach has been in the past.
Do you have a second question, Matt?
No, that's all for me.
The next question comes from Richard Wiles with Morgan Stanley.
My first question relates to your FY '24 priorities, 1 of them is to further improve productivity. What does that actually mean? Are there any financial targets linked to that priority? Does it mean you're lower the cost-to-income ratio? Does it mean you'll achieve a higher dollar value of cost savings? Could you give us a bit more clarity on that priority, please, Shayne?
Sure. It means that we except like always that we have to deliver more with less. We understand the owners just that in a more inflationary environment, the focus on that only goes up. I mean, since I've been CEO, we have focused really hard on productivity, and productivity means -- it doesn't just mean cost out. I mean anybody can take costs out. It's not that difficult to take cost out. You got to do it well, and sure you don't break the bank or hurt customers in doing so. So that's what -- so what are we going to do? We've got to be as ruthless as we can around making sure all of the $10-odd billion that we spend is allocated to generate the very, very best returns it can. So it means we'll be looking at things like how do we simplify our processes to make things faster and cheaper and better for customers. It will mean we'll consider about where we allocate. We have 40-odd thousand FTE, those people doing the absolute best that they can in the right places at the right time. So we think about the shape of our workforce, it means that we'll be looking at things like our property strategy. We've been consolidating property for a number of years. So you kind of get the job. Is it about CTI? Not really. I mean I think CTI is sort of interesting, and obviously, it's an outcome as opposed to a target. I mean, we'd all love CTI to be lower. And New Zealand is a great example, right? Operating in a CTI of 36%. We'd all like it if we could continue to improve that, and we do, but I don't know that it's a very useful target in and of itself for an executive to drive towards because it will tend to mean that people do silly things potentially to get there. So it's about just a total focus on costs and getting value from every dollar that we spend.
I'm sorry, I can't give you a more target. It's not about an absolute cost reduction either. Those have a place in time where they're useful. We don't think that's the right thing to do. What I can tell you, and then we spent time with the Board last week going through it. We have a big program of work around productivity, sits at my executive table, 1 of our executives is leading that in particular along with Farhan, and we are doing it in a progressive way to make sure that, as I said, we get value from every dollar that we spend.
And I think, Richard, just to add to what Shayne has said and he's sort of covered the full breadth of the work that we're doing. But I think the important thing to think about this, Richard, is that this is not, hey, let's get these 5 things done to deliver an outcome for '24. We're looking at much bigger initiatives, enterprise-wide initiatives across the world to find optimization opportunities, whether it's through technology or whether it's through property or whether it's through middle office or whether it's through other workforce-related activities, we want to make sure that we're building not for next year, but we're building for the next 3 years and longer. So it's also creating that continuous momentum around ensuring that we will manage the productivity outcomes, not just for this year, but for the year after that and the year after that. And I think that just makes it not a program of work, but it just makes it part of our ongoing focus from cost.
And without belaboring the point, which is it's a good question. You might ask, why is that on your priority, let's assure it's just BAU, and that's what you guys do every day. And to some intent, that's true. But the reality is we need to sit and kind of all the things we're doing, what's the most important things we have to do over the next year, and that's what we try to capture in that slide. And I think productivity has to be 1 of those things. We are dealing with a more inflationary environment. We're really in the middle of that, right? So we have to be able to focus on this. So it has gone up our priority list for all of my team.
And the second thing is we're feeling much more capable of delivering on productivity because we have 4 businesses in good shape and we are getting the benefits increasingly of sharing more infrastructure, whether that's technology infrastructure or the ways of doing things. And so we want to double down on that and take that to a whole different level.
Okay. And my second question relates to ANZ Plus. On Slide 10, you highlight that the cost to serve for ANZ Plus is 20% less than your legacy ANZ Retail business. Does that mean you're driving the cost to serve in retail banking down? Or does the duplication of platforms at the moment means the retail bank cost to serve is still going up?
Not sure if I understand the question. Let me -- I think -- so what we're trying to do there is that compare and contrast, we've got what we what we're colocally calling ANZ Classic, our main business today, the business that you're familiar with versus ANZ Plus, and we said, hey, on a like-for-like basis. And again, that 1 the cost of service talking about the variable costs associated with distribution and et cetera. If you just look at that cost, so it doesn't allocate things like a branch network, yes, because I don't know that, that is a variable cost. A little bit of variable because it says, hey, same product, same onboarding, getting a customer, it is 20% cheaper today to serve a customer on the Plus platform, whether that's helping them when something goes wrong, et cetera. versus what it is on the classic platform. And what we're suggesting is that, that will continue, that gap will continue to grow as we get more and more scale. So I don't know if that answered your question, but that's what I mean. I mean the cost in classic, if I will, so the main business, the cost to serve, they are not going up, not at all. We -- Maile and the team have a pretty strong productivity focus there to ensure that because that's still where most of our customers have an ANZ experience. We want that to be a good experience but we believe we continue to do that productively without necessarily increasing the variable or the marginal cost of service within the traditional business. It's just the fact that if you're a customer and your channel is digital and you use ANZ Plus, there's many more self-service features in here than we have in classic and many more than in our competitors. And that means that people look after themselves. They like it better, and therefore, the cost of servicing them from our perspective is far, far lower and really importantly, it generates a better NPS score in doing so because customers have got more control.
So Shayne, maybe just to clarify. If you didn't have ANZ Plus the cost wouldn't be lower at the moment in the retail bank?
Correct. I think that's broadly choose to say, Richard, it's a really good question. So Look, it's a fair question. I'd say broadly no. I mean there might be other things that are happening in the world that will move costs around an ANZ classic. Because for a for example, the fact that people are using branches less and less, it's got nothing to do with ANZ Plus. It's just the reality. And even without Plus, customers today are increasingly moving their transactions on to our ANZ app, our traditional, ANZ app, right? And you can see the data in there, for example, 68% of deposit accounts now and retail are opened digitally. And so that's already happening. So there is -- even within Classic there is a productivity agenda that's happening because customers are behaving and choosing to behave differently, plus just takes it to a whole new level.
Or put it another way, just to finish the round this out. I don't know what the message, but the cost of operating Plus is even lower than the cost of operating -- so the app on Plus the digital engagement is lower than the digital-only engagement on ANZ Classic. Hopefully, that makes sense?
The next question comes from Azib Khan with E&P.
Shayne, you've expressed satisfaction with the diversification that you now have in the business. Can I take that to mean that you're not looking to change the current capital allocation in any meaningful way?
That's a really interesting question. It depends on your time frame. So not necessarily in the short term, but over the long term, who can say. I mean, I think the point is that we have options. What we've really tried to create here is optionality, yes. I sort of -- and again, maybe this is helpful. Maybe it's not. To some degree, we're like a fund manager, and we've got $70 billion of our shareholders' capital, and we've got these 4 stocks in our portfolio. First thing is we needed -- we're an active investor, so we needed to make sure that the 4 stocks are high quality, and we've got that, and there's still more to do, but we've got 4 high-quality stocks. How we choose to allocate capital between and will depend on the circumstances that they find themselves in the economic environment, where the opportunity is, where we have the best opportunities for today and what we spend a lot of time telling about today, and this result is hey, if we look back over the last 12 months, actually and prior, where a lot of that opportunity has been, has been in our institutional international network because of our competitive advantage and payments process and currency. So we've put more capital work there. Now good news from your perspective, is it doesn't need a lot of capital in order to generate benefits there. But anyway, the question is we have optionality. If I sit here today over the next year, it's unlikely to change very much. Over the next 3 years, it's probably unlikely to change very much unless something in the environment changes a lot. But we feel pretty good about the balance that we have. But as I said, it gives us optionality.
And then the last point about it is, of course, not structure we put in place is the next stage of that optionality. Now at the moment, almost nothing sits outside the bank. So in the nonbank, there's almost nothing there, but that's another option for us in the future. And our strategy has been to build flexibility and optionality into our business so that we have the ability to flex. Look, I'll tell you what we do feel good about today is the absolute right time to have that optionality to have choices to be able to invest in payment processing or international institutional or New Zealand or our commercial bank and not be a 1 trick pony stuck on 1 business ever seeing any 1 customer segment. So we feel good about the optionality. It's our job to use that optionality wisely over time.
Shayne, looking beyond the near term and thinking about your strategic capital allocation, where would you say your overweight or underweight today from a strategic point of view?
That's a good -- I think it's another way of asking your first question, but fair enough. Look, if you could wave a magic on today and you'd love to be able to put even more -- and it's that, first of all, the capital demands of the business are low, but you'd love to put more into our processing businesses. I mean these businesses are amazing. I mean, we tried to give you a flavor of that today. And let's not forget, those businesses are dealing with the world's best financial institutions and corporates. Our ability to service and provide cash management platforms, payment platforms, currency platforms. And to them, it's just -- it's a terrific business, high barriers to entry. Yes, you have to spend a lot on technology. You have to be really, really good at what you're doing. So you'd love to -- we want to continue to grow those. And we've given you a lot of the data in here. I mean these things are growing really, really fast, right? High return, and we want to put more into that and we will.
Secondary, I'd love to put more capital into and we are as our commercial bank in Australia. I mean our commercial bank looks very different, as I mentioned to our peers, it's a deposit-led strategy as opposed to a lending-led. And our sector, if you look at within the segments within commercial, it looks again very differently to our peers. We'd love to put more capital into that, and we are doing those. Those are the areas you want to put more into. And then finally, in retail, it's not so much about putting more capital in. It's about really reallocating the capital that we have within that business. And clearly, that's really the design around ANZ Plus to move away from more commoditized product lead strategy to a more financial well-being strategy on this sort of more ecosystem platform. By the way, that is what we're doing. There's always a question of timing of how quickly you can make those adjustments. We're getting better at it, but there's -- it's going to take a long time to reshape ANZ. And I'm sitting here today feeling pretty good about how we've reshaped the business over the last 7 years to be where it is today. And we've still got a long way to go.
And I think the only other thing I would add to that is, capital allocation is really important, but it's not like we -- what's 1 of the challenges at the moment, and it's a good challenge to have, by the way, as all 4 businesses are good. Yes, retail has more challenges than some of the others today. But it wasn't that long ago that institutional was the 1 that had challenges or New Zealand. And so the point about the flexibility is we have now 4 really good businesses and we're not capital constrained. And we showed that when we did our capital raising for the Suncorp Bank acquisition that our shareholders are supportive. And if we want to be able to invest organic capital or go to the market for capital growth. We know that that's an option. So we're not holding anybody back. My job is to make sure that all 4 were decent high-quality businesses.
We can see that the ECL provisioning to the base case is 45.9%. The downside is 41.2% and the severe downside is 12.9%. Just intuitively, that looks like an incredible level of precision relative to your peers. Can we get a feeling how you set those weightings? And then as a subset of that, if I have a look on Page 9, I can see that ANZ is the only bank where APRA are actually taking an expected loss deduction over and above the eligible provisions of $272 million. So can we just get a feeling on the waiting? And how we should be thinking about the fact that absolute is saying you don't seem to be as provisioned as well?
So Brian, I'll take the first question and ask Kevin to add to the second 1 and also great to hear from you again, Brian. I think just on the collective provisions, it does sound very, very specific. But what we've tried to do is actually think across our geographies and our businesses to try and understand how we should consider the severe case scenario because the severe case scenario is not just applicable to Australia. It's also applicable to our international geographies and to our New Zealand geography. And as we thought about the environment globally today, we felt that the international waiting towards a severe scenario shouldn't really change from what we had in the last half given everything that's happening from a geopolitical perspective globally, but we did reduce the waiting of New Zealand and Australia to just over 12.5%. So that the mix then created the outcome, which was the 12.9%. So it wasn't designed to create a specific outcome. It was just the mix shift between international, New Zealand and Australia that arrived at that outcome.
Yes. So it's an outcome of our diversification again.
Yes. Yes.
So -- and Kevin do you want to talk about the CPE?
Yes, I will come back to you on that. But what I would say is ARPA actually set the CPE level, that's accounting standards and us, but I will come back to you on the reconciliation.
Okay. So looking forward to the answer on that one. Just the other one, Shayne, is if I had to look on Slide 34 in the slide deck, you say that you've reallocated or reprioritize some of the investment spend. We got to feel exactly what you've done there?
So you're looking at Slide 34 or?
Slide 34.
Oh yes. Okay. No, so that reprioritization largely refers to, Brian, the fact that we've had a reduction in some of our regulatory programs that sort of came off in '23. So notably things like 11, which I know Brian, you've followed for a long, long time. And as some of those have come to a conclusion or some of the fact that some of the incremental progress that we've had on things like capital reforms, et cetera, is part of that reprioritization. So they're actually -- we've been able to take our investment spend slightly down but then we prioritized it to growth and productivity, which is now sitting at 62%. So it's just more balancing those things. But I think the other thing that we've done far more and continue to do better every year, is that we're being also very thoughtful around what we prioritize in terms of investment spending and very much aligned to some of the; 24 priorities that you've seen with Shayne. We want to make sure that everything that we are doing is creating value and is aligned to our most important strategic priorities. So it is a -- the bulk of it is the shift away from reg and compliance as programs have come off, Brian.
So it's more that you've got some flex to correct on productivity as opposed to spending on reg?
Exactly.
There are no further questions at this time. I'll now hand back to Jill.
Thanks. Thanks, Rachel, and thanks, everyone. Obviously, the Investor Relations team and others are around all afternoon if there was anything you suddenly think about. But thank you so much for joining us today.