ANZ Half Year 2020 Result CEO and CFO Speaking Notes

Australia and New Zealand Banking Group Limited
9/833 Collins Street Docklands Victoria 3008 Australia
ABN 11 005 357 522
ANZ Half Year 2020 Result
For Release: 30 April 2020

Chief Executive Officer Shayne Elliott Speaking Notes

Good morning.

This is a challenging time for everyone, and I would like to acknowledge those who have
been directly affected by COVID19 and the millions who now face financial uncertainty.

I want to assure customers, employees and shareholders that while the social and economic
impacts of this crisis are likely to be the most profound in our lifetime and with high degrees
of uncertainty, our strategy to simplify and strengthen ANZ means we are in the best
possible shape to provide support through this crisis and enable a strong recovery.

The three lines of defence in the economy- balance sheets of customers, banks and the
government, including central banks, have served the community well to date, and will
continue to do so.

We are fortunate to operate primarily in markets where capacity for support is relatively
strong at all three levels.

Today I will focus on how we are responding, building resilience and preparing for the
future.

We entered the crisis in good shape with a significantly great capacity to withstand losses
than when we entered the GFC for example.

Tier 1 capital is $56bn is three times larger than entering the GFC and supports lending
assets only two times larger.

The business was performing well pre-crisis, and our conservative approach over the past 4
years meant the cost for credit provisions in the half up to February was at historical lows.

But the crisis has already impacted results, after taking a prudent approach to bolster credit
reserves by a further $1.4bn and recognising the impact on two associate investments.

As a result, statutory profit is down 44%, while Cash profit excluding large and notable
items is down 26%.

Base case assumptions will change, particularly as Governments adjust public health
policies, and those changes will likely drive further adjustment to reserves, up or down,
particularly over the balance of this financial year.

Fulfilling our responsibilities, while ensuring ANZ emerges ready and able to thrive post
COVID, will require sacrifice from all stakeholders.

Given the significant uncertainty regarding the impact of COVID19 on the economy, the
Board has decided that making a decision on the 2020 interim dividend at this time would
not be prudent or appropriate and has deferred that decision until later in the year.

I know that many will be disappointed by this decision but we did not make it lightly. After
much debate and analysis of alternatives, we firmly believe this is the right thing to do to
protect and enhance the long term interests of shareholders.

The Board and I acknowledge that this will have a short-term financial impact on some
investors and I appreciate their understanding.

I would stress that we are not cancelling the dividend - the board has determined that this
is not the right time to be making such a significant decision, and believe we will be better
informed to enable a decision later in the year.

Given uncertainties, we have agreed to provide a trading update in August which will be an
opportunity to update shareholders as to the dividend decision.

While we did not predict the crisis, our strategy to simplify and strengthen the bank has
materially lowered exposure to potential credit and operational risks.

It’s worth remembering how we have de-risked the bank over 4 years, including:
1. exiting Asia retail and commercial;
2. selling Esanda motor dealer finance;
3. prioritising owner occupied home loans over investor;
4. not providing a retail home-loan offering to self-managed super funds;
5. maintaining the lowest exposure to commercial property of the major banks; and
6. exiting life insurance, superannuation and financial planning.

Our strategy remains intact, but given the crisis, we have pivoted to a four-pronged
framework; protecting what matters; adapting to the changing environment; increasing
engagement; and preparing for the future.

Our first priority is to protect the bank, our people, customers and shareholders.

We’ve rolled out support packages, introduced health measures, moved to working from
home and maintained strong balance sheet and liquidity settings.

We were the only major bank to pass on rate cuts to home loan customers with the last RBA
decision, and now have the lowest fixed and variable rate home loans of the Majors.

We are conducting deep-dive global industry reviews focussed on high-risk sectors like
retailing, oil and gas and automotive, and continue to run stress tests to inform resource
allocation.

We have amended business writing strategies, changed risk-adjusted return hurdles, and
increased the pace of decisions, particularly with respect to credit and liquidity.

We are protecting customers as best we can, but sadly some will not return to their previous
strength.

Our support packages are designed to flatten the curve of financial failure, provide time to
prepare customers for the return to work and identify those that have structural issues
requiring intensive care.

We are mindful of our role in providing support as quickly as possible to those that need it,
but also acknowledge that in a small number of cases, payment deferrals or extra financing
may not be in our customer’s best interest and providing good customer outcomes remains
our number one responsibility.

Our next priority is to adapt to the new operating environment.

We are fortunate to have an experienced and stable senior executive team who are able to
navigate the changing environment effectively and quickly.

We are open for business and experiencing record volumes in areas like home-loan
refinancing applications and financial markets activity, with dramatic falls in ATM and branch
transactions.

That requires quick and safe adaptation of policies, resources and processes.

For example, excluding branch staff, 95% of our people have been working from home since
mid-March.

The principles of “agile” – test and learn, collaboration, shifting resources quickly and a
relentless focus on customer outcomes, have enabled us to quickly adapt to the new
environment with productivity benefits and minimal disruption.

In a time of uncertainty, communication has never been more important, so a third priority
is to increase engagement with stakeholders.

Our people and customers are seeking clarity and we have worked hard to keep messages
simple, provide appropriate guidance and be as accessible as possible.

We learned from the GFC, that investment and consumption take time to recover.

Even with the economy opening in the coming months, it could take 3 to 5 years for
employment to fully recover.

As a result, a lot will change for the long term – consumer behaviour, attitudes to risk,
usage of technology, management of supply chains and ways of working.

Interest rates are likely to be even lower, for even longer.

There will be no low-debt countries. Governments will be larger, manufacturing more
localised and health systems reformed.

Education and tourism will require substantial innovation.

New industries and companies will emerge. Some geographies, businesses and segments
will become more attractive, some less, and that is why we are not only managing the
present, but already preparing for the future.

Existing plans have already been through an “accelerate”, “stay”, “slow” or “stop” filter and
driven a significant reprioritisation of resources.

It also means we need to reassess skills.

For example, data and process re-engineering will become more important and so I have
asked Emma Gray, our current Chief Data Officer, to join our Executive Committee as our
Group Executive, Data and Automation.

Turning to the outlook, there is no doubt the months ahead will be extremely difficult.

The crisis is evolving at such a pace, it is difficult to predict how deep the economic impact
will be, or how long the recovery will take.

As a result, this will be the most profound challenge many will have faced in their lifetime,
including some of our own people.

But while we are dealing with the immediate impact, experience tells us there is opportunity
for those that protect their base and retain the capacity to invest for the long-term.

Strategic clarity, prudent risk settings and execution discipline have been the hallmark of
the previous 4 years, and that will continue.

Specifically our priorities are:
- A prudent approach to risk and capital,
- Focus on liquidity,
- Staying close to customers,
- Dynamic pricing of risk,
- Operational agility,
- Continued focus on productivity, and
- Investing for the long term.

With regards to capital, we start in a position of strength with our CET1 ratio at 10.8%, even
after bolstering reserves to record levels.

We acknowledge APRAs sensible guidance that allows banks to utilise capital buffers through
this crisis.

Given uncertainty, we should be prepared to use buffers, but it is imprudent to plan using
them all.

Based on what we know, we believe it’s prudent to set operating levers that tolerate short-
term use of buffers that could see CET1 dip below 10% for short periods of time.

That retains a significant buffer, with the flexibility to operate safely, while allowing us to
support customers, our long-term strategy, and the broader economy, without unnecessarily
diluting shareholders.

I need to be clear – this does not mean it is our plan to operate below 10.5%, rather it is an
acceptance that given high levels of uncertainty, and the multiple variables, we should allow
for the possibility that even managing prudently may result in periods where our CET1 dips
below that threshold and perhaps below 10%.

Our focus on absolute cost reduction will also continue to be important.

The crisis is driving material change in customer behaviour, much of which will be
permanent.

This strengthens the case for reimagining and digitising of our services.

Business as usual costs continue fell again this half and are likely to do so again in the
second half.

That creates capacity to invest and reinforces our belief that building a better and safer bank
will deliver our $8bn cost ambition, though events may change our delivery timetable a
little.

In the short-term we are tightly managing costs, while providing as much job security as we
can for our people.

Some costs are pro-cyclical and will naturally decline, like travel.

In addition we are pro-actively managing staff leave and discretionary spend.

Improvements in day to day productivity are still being delivered.

We are freezing salaries for at least 12 months, though there will be exceptions at junior
levels.

The Board will assess variable remuneration at the end of the year.

It is too early to assess the full impact of the crisis, but at this stage we expect variable
remuneration will be materially reduced and focused on rewarding front-line and junior staff.

In closing, we know many customers and members of the community face an uncertain
future, and many are frightened.

We have already assisted many and stand ready and able to do more.

It is times like these that test an organisations culture and values.

Our people have demonstrated resilience, agility, customer focus and accountability and I
have never been prouder to lead a team that so genuinely cares about their customers,
colleagues and communities.

The response of our people provides shareholders great confidence about how we will
manage through the crisis and emerge as a stronger and better bank.

I thank them all for their ongoing support and engagement.

With that I will pass to Michelle.


CLOSE

The challenge we face as a community is immense, with devastating consequences for
many.

While we are confident there will be a recovery, it will be some years before there is any
sense of economic normalcy.

Decisive action means we are well placed to protect the bank, our people and customers,
and well placed to continue investing for the long-term.

Understandably there is a lot of focus on the level of preparedness in terms of credit
provisions and capital, and it is reasonable to make comparisons with the past, however
each economic crisis is different in terms of transmission and impact.

Without diminishing the very serious impacts of COVID19, we have reached our decisions on
provisioning and capital management based on experience, but also with respect to the
current condition of our balance sheet and assessment of mitigating factors, like regulatory
and government intervention.

For example, while there are similarities with the 1990 recession or GFC, in the nineties ANZ
had significant exposure to commercial real estate, versus 7% of our lending today, and
there was no equivalent in the nineties or the GFC with respect to this government’s swift
and decisive support.

But we are not complacent or naïve.

We will continue to be prudent, we will continue to focus on the long-term and we will
continue to be flexible in our approach, balancing the needs of all stakeholders.

The key messages today are:
 our long-term strategy remains intact;
 we are well positioned to manage the crisis – financially, operationally and culturally;
 we remain committed to our $8bn cost ambition; and
 we agree with APRA that short-term use of CET1 buffers are prudent and appropriate
given what we know today.

Again, I acknowledge that many will be disappointed that we have deferred a decision on
paying the 2020 interim dividend, but we firmly believe it is in the long term interests of
shareholders.

No matter how prudent our approach, the environment will continue to evolve.

It is therefore appropriate that we provide a trading update to shareholders in August, which
will be an ideal time to update shareholders with respect to dividend policy.

Thank you.

ENDS

For media enquiries contact:

Stephen Ries, +61 409 655 551



Approved for distribution by ANZ’s Continuous Disclosure Committee

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Australia and New Zealand Banking Group Limited
9/833 Collins Street Docklands Victoria 3008 Australia
ABN 11 005 357 522
ANZ Half Year Result 2020
For Release: 30 April 2020

ANZ Chief Financial Officer Michelle Jablko Speaking Notes

As Shayne said, we entered the crisis in good shape.

After bolstering credit reserves with a $1.7 billion provision charge, and using our balance
sheet to support customers, our capital position remains above unquestionably strong.

This is the direct result of four years of conservative portfolio and balance sheet decisions.

Of course there is much uncertainty about the economic impacts of this crisis... but ANZ is in
a strong position to support customers... and protect shareholder interests.

Naturally, the clear focus today is on the implications of COVID-19, so I’ll frame my
presentation from that perspective.

Firstly, I’ll describe the key pillars protecting our balance sheet:

• liquidity
• funding
• and capital.

Secondly, drilling down within capital, I’ll discuss the major components, which are
earnings, credit risk impacts and business growth.

And finally, I’ll describe what all this means for the outlook on capital and dividends.

Let’s start with liquidity and funding on slide 12.

ANZ entered this crisis well positioned. Key ratios were well in excess of regulatory
minimums and well above our own management targets.

This, combined with the response from our regulators as well as the changing savings
behaviour of our customers across all businesses has ensured we have the liquidity and
funding to support customers and maintain balance sheet strength.

The RBA’s Term Funding Facility will provide access to an additional $12bn in funding for the
next three years, and this will grow as we further support Australian businesses.
All of this gives us the flexibility to stay out of term funding markets for an extended period
of time, if we choose to do so.

We also start with a strong capital position.

You can see on Slide 13, we’re above unquestionably strong with a CET1 ratio of 10.8% or
15.5% on an internationally comparable basis.

The best way to think about capital movements for the first half is to start with earnings
before credit impacts – you can see here that it was 87bps.

Credit impacts reduce this by 43 bps, largely as a result of increased credit reserves.

And portfolio growth was 44 bps, as we supported customers – at appropriate returns – in
the early phase of the crisis.

There was no capital impact from the impairment of our two Asian associate investments as
they’re already a full capital deduction.

Moving on to our financial performance for the half. Cash profit from continuing operations
was down 51%.

You can see on slide 15, that in addition to higher credit provision charges, the major
contributor to the fall cash profit was the $1.038 billion of large and notable items.

This was mainly due to the $815 million impairment to our associate investments.

Looking through these, profit before provisions was up 1% this half with income and
expenses both up 1%.

Naturally, we now move into a very different world so I’ll start with some brief insights into
margin, volume and expense dynamics, as we’re seeing them today.

I’ll then discuss in detail the increased credit reserves, which resulted in lower profits in all
our businesses.

So starting with margin on slide 16 Underlying NIM was down 4bps.

3bps of this was rate cuts made before our FY results announcement net of re-pricing. We
foreshadowed this at the full year result. And, of course, there were more rate cuts during
the half, and continuing impacts of competition.

Headwinds from low rates will continue. This is around 6 bps in the second half, net of
recent pricing decisions.

Replicating deposits and lower earnings on capital contribute around half of this.

Against this, there are some potential positives. For example, higher institutional lending
margins, deposit mix benefits and lower Bills/OIS spreads.

But, there may also be further headwinds from asset mix and competition, along with a cost
to margins from our strong liquidity position.

Let’s run through our business segments, starting on Slide 18.

In Australia Retail and Commercial, revenue was down 2% half on half. Retail income was
broadly flat and commercial revenue was lower.

Within retail, higher margins were offset by lower fees ... and lower unsecured lending
volumes are being impacted by industry-wide trends, like lower use of credit cards.

Commercial income was lower due to deposit margin headwinds from lower rates.

On volumes, Home Loan balances stabilised over the half. Commercial volumes remained
flat, as many customers are taking a prudent approach in uncertain conditions.

Mortgage application volumes have been improving, but we’d expect the number of property
transactions to reduce in the near term.

And, while some customers are taking up the offer of payment pauses, others are choosing
to pay down their debt faster given lower interest rates.

Many of these same dynamics are playing out in our New Zealand business.

So for Australia and New Zealand, balance sheet growth is likely to remain modest.

Turning to Institutional on Slide 19, revenue was up 10% this half.

This was driven by Markets, which grew 41% benefiting from increased customer hedging
activity and market volatility.

We still manage Markets as a $1.8-2.0bn business in terms of capital and resource
allocation, but some periods will of course be higher or lower, depending on customer
behaviour and market volatility.

Lower interest rates negatively impacted our other Institutional businesses, especially in
payments and cash management ... where lower deposit margins offset strong growth in
volumes.

Our lending businesses experienced strong growth, particularly in March.

Excluding FX and short term asset growth in Markets, lending growth was around 12%, and
focused on existing customers in our priority segments.

Importantly, this growth was priced for current conditions, based on a disciplined approach
to risk settings, and additional approval requirements.

Lending activity has moderated significantly in April with volumes broadly flat.

You can see on slide 20 that we continued our track record of managing costs well.

Adjusted for FX, costs were broadly flat for the half. This is after absorbing $69 million of
inflation and $63 million of increased investment spend.

This is below the guidance we provided at the FY, as we adjusted to current conditions.

Increased investment spend was focussed on our digital transformation, operational process
optimisation and delivering on our regulatory commitments. Importantly ~75% of our
investment spend was recognised upfront as OPEX given our $20 million capitalisation
threshold.

We remain committed to reducing absolute costs over time. The timing and extent of this
will evolve as we make decisions on our cost base.

Turning to Slide 21, COVID-19 has had a significant impact on provisions this half as we
bolstered our credit reserves by $1.4 billion.

The credit provision charge was $1.7 billion, and our annualised charge rate was 53bps,
which is double our through-the-cycle expected credit loss of 26bps.

The IP loss rate was 20 bps. It was $228 million higher half on half, as new and increased IP
was up $150 million, and we had $78 million less recoveries and write backs.

You can see on Slide 22, our collective provision balance has been increased to $4.5 billion.
This compares to $2.5 billion before the adoption of AASB 9 in September 2018.

The increase in the collective provision almost solely reflects a more negative view of
economic forecasts, rather than customer downgrades or increased delinquencies.

Under AASB9, the collective provision balance is based on probability weighting four macro-
economic scenarios.

We use a base case, which represents our current economic forecast as well as upside,
downside and severe stress cases. We assess these differently in each of our key
geographies.

Slide 23 sets out the base case economic assumptions. You can see here a sharp
deterioration in the near term, with gradual improvement over time.

As you’d expect, the outlook is subject to significant uncertainty.

Including the extent and duration of business closures the impact of various support
measures along with the extent and duration of the economic downturn.

At the bottom of the slide you can see the provision balance that would result if we applied
100% weighting to any of the economic scenarios. We’ve applied most of our weighting to
the base case and downside scenarios.

As part of this process, careful consideration was also given to the pressures on small
business customers, and higher risk industries. For some of these we applied a greater
probability to downside risk.

AASB9 is very different to the accounting rules that used to apply.

For one, it’s forward looking whereas we used to account for losses as they were incurred.
Also, as conditions worsen, we provide for more of the portfolio on a lifetime loss basis,
compared to 12 month loss in more normal times.

These factors essentially bring forward the build in provision balances.

I’ve mentioned that we enter this crisis with a strong balance sheet. It’s significantly
stronger than during the last crisis in 2008.

Shayne mentioned some of the choices we’ve made in our wholesale portfolio, and the
industry stress tests we’ve done. We’d be happy to go into these more in Q&A.

We’ve also made very deliberate choices on the composition of our Consumer Portfolio.
We’ve set out some of these data points on Slide 25.

We’ve preferred owner occupier and principal and interest mortgages. We’ve been cautious
in unsecured lending.

Across our Australian housing portfolio, the average dynamic LVR is 56%. Customers ahead
on repayments have increased from 71 to 76%.

And, 88% of customers are also paying principal and interest.

Australian Mortgage 90DPD were 110bp at the end of March, down 6 bp since September.

The absolute number of loans past due, and losses remain small.

As Shayne highlighted, we’ve rolled out a range of support packages for customers to ease
any immediate financial pressures.

This includes the opportunity to pause payments, for up to six months, across a range of
products. We’ve done this on an opt-in basis.

By way of example, in Australia:
• We’ve received approximately 105,000 requests for home loan deferrals, around
14% of home loan balances. The average dynamic LVR is 66%.
• Within Commercial... we have received 17,000 requests for business customers to
pause payments.

So, with significant uncertainty around the broader economy, three key factors are
influencing our thinking on capital and dividends:

1. Firstly, the impacts on earnings and risk weight migration.

2. Secondly, the use of existing capital buffers, and capital rebuild requirements over
time. Shayne mentioned that we’re being conservative here.

3. And finally our responses. These include disciplined capital allocation, balance sheet
growth and productivity measures.

On earnings...low rates will continue to provide margin headwinds. Growth in our retail and
commercial businesses is expected to be modest. Institutional growth has now moderated,
and was broadly flat in April.

We remain committed to further absolute cost reduction over time. How we get there will
evolve with the environment.

Credit impacts on capital will ultimately depend on actual losses, and the extent of customer
recovery.

In the near term, future credit provisioning and customer downgrades will depend on the
length and depth of the crisis, the shape of recovery, the responses of our customers, and
the effectiveness of various support packages.

By downgrades, I mean that as we observe changes in the credit risk of individual
customers or portfolios, we increase the amount of capital we hold against them.

If the economy worsens in line with our base case economic forecasts, we could see
customer and portfolio downgrades equivalent to around 110bps of capital cumulatively
through to 2021.

Some of the impact of this on collective provisions has already been factored in...given the
forward looking nature of AASB9. However, further collective provision charges may occur
as a result of changes to portfolio mix or migration between stages, and our view on
scenario probability weights.

Of course, we don’t know whether this will be the way that the economy unfolds. We’ve also
looked at a range of more severe stress scenarios; including a more extreme scenario that
might arise from an economy-wide shut down for a full 6 months, and a 24% fall in GDP.

This would take us further into management and regulatory capital buffers, and would
therefore take more time for us to rebuild to unquestionably strong. While this scenario is
becoming increasingly unlikely given the way that Australia and New Zealand have managed
the COVID 19 crisis it’s these uncertainties that have influenced our announcement to defer
the decision on the dividend.

We intend to provide an update on the operating environment in August at the time of our
Pillar3 disclosures.

With that, I’ll hand back to Shayne.

ENDS

For media enquiries contact:

Stephen Ries, +61 409 655 551


Approved for distribution by ANZ’s Continuous Disclosure Committee