Westpac Banking Corp

ASX:WBC

Earnings Call Analysis

Earnings Call Transcript 2022-Q1

[Andrew Bowden, Head of Investor Relations]

Good morning, and welcome to Westpac's First Quarter 2022 Conference Call. My name is Andrew Bowden, and I'm Head of Westpac's Investor Relations. Joining me are our CEO, Peter King; and our CFO, Michael Rowland. We have lodged 4 documents with the ASX this morning, a release explaining the results of the first quarter '22, a slide pack with additional detail on the results along with some information on asset quality and capital, our normal Pillar 3 report for the December quarter and announcement on changes to our organizational structure. If you haven't already, I'd encourage you to have copies of these releases handy. They're obviously lodged to the exchange, and they're also available on our website.I'll now hand over to Peter and Michael to make some opening remarks, and then we'll invite some questions. Thank you.

[Peter Francis King, CEO, MD & Director]

Thank you, Andrew, and good morning, everyone, and thanks for joining us. Conditions have certainly remained fluid since our full year results last November. Given the buyback and COVID developments over the summer, we decided to hold a call and provide some detail on our performance and the key trends we're seeing. And importantly, we don't expect to continue quarterly earnings calls going forward.If I turn to the first quarter, I'm pleased with the progress we're making on our strategic and transformation agendas. In particular, our core program has moved from the design phase to the implementation phase and that will drive further improvement in our risk management. The exit of noncore businesses is going to plan. And we're now focused on super and platforms as the next businesses. We're also making progress on our cost reset.It's been a solid start to the year with our first quarter highlights, including cash earnings up 74% or excluding notable items, cash earnings rose 1%. The balance sheet is strong with capital well above APRA's benchmark, funding and liquidity in good shape, while asset quality again improved. In fact, business stress is now lower than where it was at the start of COVID. We also grew our loan portfolios in priority areas of mortgages and business in Australia and New Zealand and made good progress on costs, which were down 7% this quarter. While we started well, particularly in treasury, margins remain under pressure from low interest rates, competition, continued flow of mortgages into fixed rates and the need to significantly lift liquid assets. Just as a reminder, there is a major reshape of the bank's balance sheet going on. The committed liquidity facility runs down to 0 this year, and we responded by increasing liquid assets by $29 billion this quarter. And given these NIM trends delivering, our cost reset is critical.So today, we also announced the next phase of organizational changes that build on our line of business model and assist in delivering head office restructuring. As a reminder, first, implemented in 2020, our line of business operating model has created businesses responsible for our major customer offerings such as mortgages, and the model is intended to establish end-to-end accountability, helps speed up decision-making and shifts decision-making closer to the customer.Today's changes take this model step further by moving more support functions such as finance and IT closer to the business and delivers a leaner and more focused head office. As part of the change, we're also combining our risk, financial crime and compliance activities back under the Chief Risk Officer. And you'll have seen that we've appointed Ryan Zanin as the group's Chief Risk Officer. Ryan is a seasoned risk executive beginning his career in Canada before taking on larger risk roles in GE, Wells Fargo and most recently at Fannie Mae.David Stephen and Les Vance, who lead our risk and financial crime and compliance functions now will be leaving the bank during the course of this year.Among other changes, Scott Collary will take on the role of Group Executive, Customer Services and Technology. And Scott will look after all those service activities linked to customers. And Carolyn McCann takes on the role of Group Executive, Corporate Services, principally all our corporate activities such as property, corporate affairs, along with shared services for HR and finance.With those comments, I'll hand to Michael to touch on the quarter.

[Michael Rowland, Chief Financial Officer]

Thanks, Peter, and good morning. This quarter, core earnings were $1.58 billion, well up on the quarterly average of the last half. Excluding notable items, cash earnings were up 1% from lower costs and a stronger treasury and markets performance. These gains enabled us to absorb the loss of earnings from the sale of our general insurance and LMI businesses, along with a turnaround in impairment charges.We grew mortgages and business lending by $5 billion with a strong contribution from Institutional Banking. New Zealand also grew but the appreciation of the Australian dollar reduced this impact on the group's results. You may also recall that we completed the sale of our wholesale dealer book in December and that reduced business lending by around $1 billion. We are pleased with the growth in mortgages in the owner-occupied segment following improvements we have made in operational and credit processes.Margins were down 8 basis points over the quarter, of which 6 basis points were due to the increase in liquid assets. We've largely completed the increase in holdings of high-quality liquid assets for the rundown of the CLF with only a small additional impact expected in the second quarter. The margin, excluding treasury end markets, was 167 basis points for December, down around 13 basis points from the September '21 margin. Excluding liquids, the margin decline was due to the continuing industry and dynamic of low interest rates, steepening wholesale yield curves, customer demand for lower rate -- the lower margin fixed rate lending and stiff competition. These pressures are expected to continue over 2022.Cost reduction was a feature of the result as we've begun to deliver on the plans we set out last year. Headcount, a combination of staff and contractors, declined by over 1,100 in the quarter. Most of the savings were from the simplification of our functions, projects, reductions from selling businesses and automation. We have more gains to come from completing our fixed priority and from the organizational changes announced today.Importantly, we've improved efficiency while investing in our franchise. We've increased banker numbers without pulling back on our program to materially lift our risk management capability.Credit quality continues to be in good shape. And while some customers are having difficulty, the numbers are small. Stressed assets are now back to pre-COVID levels and delinquencies in both mortgages and unsecured credit have continued to decline. In usual circumstances, these trends would have led to a credit impairment benefit. But we felt, given current uncertainties, it was prudent to use our judgment to increase overlays and put more weight to the downside economic scenario. These judgments added $551 million to provisions more than offsetting underlying declines. Total provisions were still $241 million lower, but that was entirely due to the write-off of almost $300 million in impaired assets.The CET1 ratio was a strong 12.2%. And even after the expected impact of the buyback, our CET1 ratio will be comfortably above 11%. Funding and liquidity have also been strong. The customer deposit to loan ratio is now up over 83%, while our liquidity ratios are well above minimums and buffers. And while we've much to do in the year ahead, we've made a solid start and have put in place a number of measures to continue that trend, particularly on costs.With that, let me hand back to Andrew for questions.

[Andrew Bowden, Head of Investor Relations]

Thanks, Michael. Look, just a reminder, this is a quarter, so we're not going to provide significant detail that we would at the half. And we want to keep this short. So I'm just going to ask if each of the analysts ask questions from, just keep it to 1 question, please.Can I take my first question from Jarrod Martin.

[Jarrod Martin, Director and Joint Lead Analyst]

Andrew, can you hear me?

[Andrew Bowden, Head of Investor Relations]

Yes.

[Jarrod Martin, Director and Joint Lead Analyst]

Michael, look I acknowledge that you don't want to provide further detail, but I think I want to demand something. If we go to Slide 5, the key number on Slide 5 is the 10 basis points of margin declines the loans, deposits and capital. Michael, in your opening comments, you said that the pressures are likely to continue throughout FY '22. Does that mean that rate of 10 basis points per quarter decline from a product perspective is going to continue each quarter throughout FY '22? And then any further color on the components of that decline between the switching, the mortgage from the back book competition and deposits is going to be greatly appreciated.

[Michael Rowland, Chief Financial Officer]

Well, Jarrod, I just kick off quickly. So we've also given you the month exit margin there of 4 basis points below the $171 million for the quarter. And broadly, that 4 is half liquidity impact and half business impacts, either there is a big rebasing of the margin happening because of this liquids build for us and the industry as the CLF comes down. But really, the big driver is mortgages and all the flow that we -- all the growth that we had was in the fixed portfolio. Again, which is lower spread and also being impacted by the fact that the swap rates are moving up pretty quickly as the yield curve moves.So what we're actually seeing in flow is a moderation in the proportion going into fixed rates. So it averaged around mid-40% in the first quarter this year compared to $53 million last half. And most recently, it's in the third -- mid-30s to give you a sense. So as fixed rates have moved up, they're up about probably 70 to 100 basis points in the 2- and 3-year terms. We are seeing customers not choosing fixed rates as much as what they were. So it's really in that fixed rate piece. We have had continued competition in variable, but a lot of the growth coming through in the fixed book.So that gives you a bit of a sense, I think, of the main driver and the liquidity there. And then treasury, as I said, had a very happy -- very good quarter. They manage the movements in the markets very well and added value in the quarter.

[Andrew Bowden, Head of Investor Relations]

I'll take a question from Brendan Sproules, please.

[Brendan Sproules, Director]

Look, I just got a question on -- just a follow-on question from what you're just talking about the fixed rate. I mean as we go through for the next 3 quarters, how do you expect that to evolve? Obviously, you've repriced fixed rates, you got less demand, the yield curve moves are probably not going to be as violent as we saw in the first quarter. So we expect as we get through to the second half of the year that some of those fixed rate pressures will moderate?

[Peter Francis King, CEO, MD & Director]

Well, I think we're -- as I said in the flow, we're already starting to see the flow moderate as based on what's happened historically. But Brendan, it's sort of to really answer that question, I've got a guess or forecast where fixed rates are going to go in the future. So that's probably best left to you folk about that because I can't comment on future price moves. But I think the key point I'd just say is we have seen a move back to variable in a proportion sense of flow.

[Andrew Bowden, Head of Investor Relations]

Okay. I'll take a question from Victor German, please.

[Victor German, Analyst]

I was hoping to also ask a question on margins. 9 basis point improvement in markets income -- in treasury income. How should we -- do you think we should look at that? Is that just a really strong quarter? Or is it just a reflection of the previous quarter being particularly weak, and this is a more sustainable level where do you think sort of the treasury component should be going forward? And if I could just sort of try to like a lot of focus these days on potentially high interest rates. Could you maybe just remind us what's your sensitivity to a 25 basis point interest rate increase, just purely the rate component?

[Michael Rowland, Chief Financial Officer]

So I'll touch with the first question. So treasury and markets, as we said at the full year, we're disappointed with our full year treasurer performance, and the Institutional Bank has done a lot to rebuild that team. And they had a good quarter. So we're very happy with the turnaround in that business. So we see that as a sustainable trend going forward. Treasury also had a really good quarter on the back of volatility in the markets, on some funding we did. And so that was an excellent quarter. We wouldn't necessarily expect that to be continued, but certainly, some of that will continue through the rest of the year. But fundamentally, the treasury result was a very pleasing uptick from last half. On the high...

[Peter Francis King, CEO, MD & Director]

I'll just add on that, Victor. The fact that the bank reentered wholesale funding markets meant that treasury was getting the LIBOR bills positions coming in again. So that was also a source of ability to risk manage. So that's something that is back in the mix, if you like. So -- and they did that well. On the -- just on the interest rate sensitivity, I haven't got it handy, but it will go down because of the big shift in the variable book between -- the mortgage book between variable and fixed in the short term and then probably expand out if we see normal movements back to variable rates, but we can give you that detail at the half.

[Andrew Bowden, Head of Investor Relations]

Okay. I'll take a question from Brian Johnson, please.

[Brian D. Johnson, Equity Analyst]

Peter, as a mean stockbroking analyst, I don't get access to the Chair's like a lot of the institutions but management at Westpac are very keen to talk about the $8 billion cost target, which is great, and you've made certainly better-than-expected progress during the quarter. But your Chair seems to be talking about a cost-to-income ratio target -- the revenues in this result, the NIM looks bad. Pete, can you just reconcile this for us? Is there a cost-to-income ratio target or a cost target? Can you just marry the 2 together, please?

[Peter Francis King, CEO, MD & Director]

Yes. No, we've got a cost target, Brian, $8 billion. I think that's pretty clear in what the Chairman's letter says in the annual report and consistent with my letter. And you're right, the cost-to-income ratio will be pushed around by the revenue of the bank and low interest rates and the competition in the market and the move to fix has seen a change in margins. And as I said upfront, the reshape. We've got big reshaping of the bank's balance sheet going on with us buying a material -- a significant amount of liquid assets to unwind the CLF. It was -- the CLF was $37 billion last year. So if everything stayed the same, we'd be buying $37 billion, and we did $29 billion this quarter plus a bit last quarter. And that's a rebasing of margins because you've got a lot of lower-yielding assets on your balance sheet. But we have a cost target, Brian.

[Andrew Bowden, Head of Investor Relations]

Take a question from Richard Wiles, please.

[Richard E. Wiles, Managing Director]

I just wanted to ask a little bit more about the costs. In the waterfall chart, you've got the $61 million decline in the fixed costs, which you've said are nonrecurring. That's a pretty small move in the quarter, given that those fixed costs were over $1 billion in 2021. You've said they'll be 0 by 2024. How much do you think those fixed costs should come down this year?

[Michael Rowland, Chief Financial Officer]

So Richard, as we indicated that the fixed program is a 3-year program. And we expect to continue to invest in 2022 a similar amount to 2021. So that's a 3-year position. We don't expect that to change too much over 2022 is a quick answer to your question.

[Richard E. Wiles, Managing Director]

So you've still got close to $1 billion of nonrecurring fixed costs expected to total cost base this year?

[Michael Rowland, Chief Financial Officer]

We're committed to completing our fixed agenda, and that means we'll continue to invest what we need to invest. As we indicated at the full year, a lot of the focus initially is on our BAU cost base, which we outlined, and that's where you'll see the -- you see most of the reduction in the quarter.

[Andrew Bowden, Head of Investor Relations]

Take question from Andrew Triggs, please.

[Andrew Triggs, Research Analyst]

Just a question to follow up on that expense on the full chart. The $120 million reduction in ongoing costs and investments. Just interested how much of that is investment spend, i.e., what was investment spend annualizing for the first quarter? Will it rise into the second half and what overall investment spend you expect for the full year?

[Michael Rowland, Chief Financial Officer]

So the quick answer is that most of it is as ongoing BAU cost. There's a little bit of investment spend which is a function of seasonality. I wouldn't extrapolate that. And our investment profile will be similar this year to the way it was in 2021.

[Andrew Bowden, Head of Investor Relations]

I'll take a question from Jonathan Mott, please.

[Jonathan Mott, Analyst]

I've got a question about the lending volumes. If we look at the credit stats, we're seeing the housing lending slowed pretty quickly compared to where you were, both absolute and relative to the system over this quarter. And it's also been a period where you've been leading the market up with your fixed rate pricing. A bit of feedback we're also getting from the brokers is that their flow into fixed rate doesn't appear to have slowed as fast as the numbers that you've indicated just before. So do you think part of this pullback in your lending volume is a reflection of being less competitive on fixed rate pricing?

[Peter Francis King, CEO, MD & Director]

Jonathan, I think I've got the question. You just cut in and out. Certainly, when you move fixed rates, and there's a couple of times where we have moved this half and brokers look for better rates and we haven't been the sharpest in fixed rates across the market in this upward phase of fixed rates. So that probably has impacted a little bit of flow. I think we're doing, as Michael said, we're doing well in owner-occupied and not as well in investor, and that's an area that we think we've got improvement. A lot of the benefits have gone into the -- of our investment in processes have gone into the Consumer segment where we're doing well and there's a bit more to do in business.

[Jonathan Mott, Analyst]

So if we think of it this way, the looking at an impact of competition, you're saying 10 basis points or almost 5% of your margin disappeared in the quarter. Yet the annual growth of your balance sheet, excluding -- well it's underlying lending growth is 3% or 4%. So the hit tier margin in the quarter has offset a year of lending growth. Is that a way we should think about that?

[Peter Francis King, CEO, MD & Director]

Yes, they've been pretty big moves. I mean, the fixed rate spread compared the variable rate spread is materially different, significantly different. And with the switch, both, we've got existing customers switching into fix and a lot of the new flow coming in into fix, it does has had a big impact on revenue. You might argue that's cyclical. Normally, a lot of this will roll back into variable when people roll off, but that will depend on the interest rate relativity at that point in the future.

[Andrew Bowden, Head of Investor Relations]

I'll take a question from Azib Khan, please.

[Azib Khan, Senior Banks Analyst]

Peter, in the last half, we saw your investor home lending, interest home lending and business lending portfolios growing below system and that was weighing on your margins. Are these portfolios continuing to grow the low system? And if so, when should we expect them to return to growing online the system?

[Peter Francis King, CEO, MD & Director]

Yes. So in just one point on the quarter, as Michael said, we had the sale of Auto Finance go through. So that was $1 billion out in December. So I just need to factor that into your thinking when you're looking at the results. But we're seeing good -- very good growth in the Institutional Bank. So there's been a lot of M&A activity. And Anthony and the team have done a good job to help customers with that activity. The commercial bank, the top end of the business bank, there's been good demand. SME is the area, I think, where we can do better, and that's what we highlighted. But in aggregate, if you adjust for the auto finance transaction, we're around market, but a lot of the growth has actually been at the top end and we've been in commercial.

[Azib Khan, Senior Banks Analyst]

And investor Home Lending and interest-only home lending, Peter? Or how are they growing relative to systems?

[Peter Francis King, CEO, MD & Director]

It's -- investor, it would be below owner-occupied. -- we're pretty good. Investors will be below. Interest only has been contracting again. So we've probably been in a different cycle to the other banks. So -- but it's probably done the heavy lifting on interest only now.

[Andrew Bowden, Head of Investor Relations]

Okay. I'll take a question from Ed Henning, please.

[Edmund Anthony Biddulph Henning, Research Analyst]

Your capital pro forma is now $11.65. APRA's now set its guidelines. You called out you're above 11%. Firstly, is that what you're targeting at the moment or what is your target for capital? And then thinking about the buyback, if you do have to do some of the $3.5 billion on market, is there scope to increase that, please?

[Michael Rowland, Chief Financial Officer]

This is Michael here. Yes. So obviously, we're pleased with our capital position. It's quite strong. Our organic capital generation is good. You're right. We just need to see the outcome of the buyback, which I encourage everyone to read the booklet and participate. But we will be above where we expect to, but we are working through just where the APRA's final capital rules will end up, and we'll provide more of a detail on that at the half year.

[Peter Francis King, CEO, MD & Director]

We're committed to the $3.5 billion. The $3.5 billion is what we announced, that's the plan. Any future decision we'll consider at that time.

[Michael Rowland, Chief Financial Officer]

And we'll assess how we play through at the half year.

[Edmund Anthony Biddulph Henning, Research Analyst]

Okay. And you're going to come out with a capital target at the half year once you continue to go through APRA's guidelines?

[Michael Rowland, Chief Financial Officer]

Yes. So we did say we would give you an update at the half year. We'll come up with our operating range at that time.

[Andrew Bowden, Head of Investor Relations]

Okay. I'm going to take a couple more questions from the analysts. [Operator Instructions] I'll take a question from Nathan Zaia, please.

[Nathan Zaia, Senior Analyst]

Just one more question on the mortgage volumes. So you were lagging the market for some time and did seem to turn that around probably driven by price. But can you just confirm it didn't result in any deterioration in your turnaround times and approval times as you sort of did get that rush in application volumes?

[Peter Francis King, CEO, MD & Director]

No, no, certainly, in the middle of last year and during parts that were impacted by COVID, we did have longer times that they've come back in now and particularly for simple deals that can be done fairly quickly. But we're probably at a point now where demand in the markets come off a little bit, and service levels are pretty solid.

[Nathan Zaia, Senior Analyst]

So you'd say you're competitive on service. Happy with where you're at?

[Peter Francis King, CEO, MD & Director]

Certainly, our improvements have gone into the first party, so we're feeling good about that, and they're being rolled out to the third party right now. And the third party will get the benefit of that over the course of this -- our first half.

[Andrew Bowden, Head of Investor Relations]

The question from Andrew Lyons, please.

[Andrew Lyons, Equity Analyst]

Peter, you've noted that you've increased your overlays reflecting the current COVID outbreak. I was just wondering if you could make some comments on how your frontline is seeing the impact of this outbreak on activity levels and how you see the current outbreak impact in the remainder of the year from a volume perspective across mortgages, business banking and institutional?

[Peter Francis King, CEO, MD & Director]

Yes. For the bank, the -- we certainly saw like we've seen in the broader stats for Australia that the 2 weeks after Christmas and New Year's, when we had a lot of people reporting they were either isolating or had COVID. So we had a peak period around there. It did see about 15% of branches were impacted, in many cases closed, and it's down around 6%. So it's been the operational aspects that have been -- in the branches have been most challenged. I think the other parts of the bank have done pretty well.In terms of activity, we've seen credit card activity come back in that -- in the last bit of January. So that's back up. It's probably a bit early to tell on mortgages because you have that seasonal impact of everyone not doing a lot over Christmas. But again -- and then if I look at hardship calls actually nowhere near what we feared. They've been much lower now. That means there are people that are impacted but in the scale of the bank. You can see in all the big credit metrics, whether it's business stress. As I said there, the business stressed ratio is now down below where we before COVID. The mortgage stress -- mortgage 90-day rate improved. Unsecured credit in Australia, again, is down below where we started in COVID. So the macro measures are pretty good, but we still do have customers that are impacted. CBD still have a pretty nearly like deserts when you walk around them at the moment.

[Andrew Bowden, Head of Investor Relations]

I'll take a question from Peter Ryan from ABC, please.

[Peter Ryan]

Yes, Peter. I just wanted to get a bit of color just about the situation with competition in mortgages. And I know you don't comment on interest rates, but what are you seeing in terms of people looking at, I guess, commentary from the reserve bank about the potential for rising interest rates and that move into the certainty of fixed for a period and what that actually means for margins and how you manage that?

[Peter Francis King, CEO, MD & Director]

Yes. Peter, I think we've touched on that. So mortgages are very competitive. And one of the biggest shifts actually has been the proportion of fixed rate in our mortgage book has moved from the 15% to 20% mark up to 40%. So we've had a material reshaping of the mortgage book and that was really the peak -- sorry, the low point in fixed rates was really middle of last year, and they've moved up from that point.Just on interest rates, I just -- I'm not going to jump into the commentary on when the cash rate will move, but we're seeing fixed rates have moved up consistently over the last 6 months. And really, I think if the reserve bank decides to lift interest rates, then that means the economy is going to be doing well because the unemployment is down, there's wages growth and a bit of inflation. So that is, I think, the bigger picture if I step back and think about the debate. The risk is that it overshoots, but that risk is there. And I think from what the Reserve Bank Governor said yesterday, he's watching that closely, but that's probably the risk that it overshoots. But a raise in interest rates means a better economy and we've assessed mortgages with buffers and floors on the expectation that rates won't stay this low forever.

[Andrew Bowden, Head of Investor Relations]

A question from Ayesha de Kretser, please, AFR.

[Ayesha de Kretser]

Peter, you mentioned provisioning, and you talked a bit about how you're not seeing bad credit yet. Can you just let us know how pessimistic are you in what you've added there compared to what you were in 2020? Is it worse or better in terms of the number?

[Peter Francis King, CEO, MD & Director]

The overall provisioning level is down on 2020. So there's just -- there is actually a slide in the discussion pack that shows that. So in that sense, where we've got a more optimistic outlook is probably the way to answer that question. But it's still uncertain. We're not through this COVID outbreak, had twists and turns that we haven't foreseen. So we've just remained prudent and the outcome has been our sort of coverage of the loan balances for collective provisions is relatively unchanged is what the outcome is. But certainly more positive than what we were in 2020.

[Andrew Bowden, Head of Investor Relations]

Take question from Clancy Yeates, please.

[Clancy Yeates]

Peter, you said again today that you wanted to reduce the size of head office functions by 20% and 1,100 jobs that have already gone in the last quarter. I know you've spoken about this before, but can you say how many jobs do you expect in total will be affected by that 20% reduction?

[Peter Francis King, CEO, MD & Director]

Well, Clancy, in terms of the reductions, I think we've said 1,100 in the quarter, probably similar. But this is a -- I'll just remind you, this is a 3-year plan with 3 big focus areas. The first is to resolve our risk management issues, and that will drive less notable items. The second is the exit of the noncore businesses. And then the third is also reducing our BAU cost base. But as an example, because COVID hasn't had as big an impact on our loan portfolio, we haven't needed as many people in our hardship teams. So that's part of it.The initial focus has been on contractors into the bank, and that was 900 of the 1,100 reduction in headcount this period. So we're making progress. It's been a good quarter, but it's a 3-year plan.

[Andrew Bowden, Head of Investor Relations]

I'll take a question from James Eyers, please.

[James Eyers]

This is just a follow-up to your answer to Peter Ryan's question when you were just talking about the governor's comments at the RBA yesterday. Look, it's generally understood, I suppose, to the ultra-low rate -- ultra-low cash rate has been a NIM headwind for a decent period of time now. I just wondered like can you just sort of talk a little bit about the mechanics of how the rising cash rate when it does occur sort of flows through? You answered Victor's question just by talking about customers switching from fixed to variable. I mean, is that the main thing we need to look at? Are there any other mechanics that flow through as the cash rate rises?

[Peter Francis King, CEO, MD & Director]

Well, it's the -- margins have lots and lots of moving bits. The most direct impact of -- so the cash rate really is the start of the yield curve, and we have many points of exposure across the yield curve, but where it most directly impacts is how we invest our capital, which is every -- at the 3-year swap point. So that's already moved as an example. So what was a headwind for us in terms of lower returns on capital will become a tailwind. So that's one that feeds directly through. And then you have just the spread between loans and deposits, the spread between loans and household costs, so the mix between deposits and wholesales, another driver and then competition in lending. So it's a hard one to say that rate has directly impacts the margin in this way because it's -- there's many different factors. So we've got to manage all of them as if we -- if the market is right and cash rate goes up, then the yield curve changes and we've just got to manage all those points.

[Andrew Bowden, Head of Investor Relations]

Okay. I might take a question from Joyce Moullakis, please.

[Joyce Moullakis]

I just had a query around the changes to the risk function. Obviously, it wasn't long ago that you were making financial crime a separate report into their CEO with Les Vance and now you're sort of unwinding a lot of those changes. Obviously, you've got the 3 phases in your transformation plan, but you're obviously sufficiently comfortable with the risk function and the changes that have been implemented to make the announcements you have today. Can you talk me through it, please?

[Peter Francis King, CEO, MD & Director]

Yes. Joyce, we're moving into what I would describe as the second phase of our core program and in fact, our financial crime program. So a lot of efforts gone into both, but there's still more work to do.And the second phase is about implementation, particularly in our line divisions. So a lot of the improvements in policies frameworks, a lot of the response to what the issues were raised in AUSTRAC have been dealt with, but that's what I'd describe as Phase 1. Phase 2, we've got to pull it all together in our operating businesses. And so the teams have done a good job, but it's much more about Phase 2 is the first-line teams picking up the risk and managing it. And don't read these changes as we're done. It's -- in fact, this is the otherwise just that I want to bring the risk classes back together because when you're implementing in a division you need to look at all things consistently and at the same time, so you get your execution right.

[Andrew Bowden, Head of Investor Relations]

I'm going to take 2 more questions. Next one from Nabila Ahmed.

[Nabila Ahmed]

You spoke about CBDs being like deserts. So I was just wondering if you could please talk about your plans for bringing staff back to the office and how Omicron is affecting that? And separately, if I may, what effects are you seeing from the macroprudential measures to cool the housing market? And do you expect further moves along those lines?

[Peter Francis King, CEO, MD & Director]

Yes. So I think CBDs -- so I should say, our approach is going to be a hybrid approach. So we expect people will spend time in the corporate buildings but also working flexibly from where they choose to work. So that's where we've landed on our approach for working at Westpac. We are targeting the 1st of March for more people to come back into our head offices, but I'm also aware that people are managing the risk of COVID in different ways. So that will be a gradual process, I think, over time. And we're just going to have to find ways, I think, to work to have more activity in the central business districts to bring people back. But I do -- if you do go for a walk around, there's not a lot of people at the moment around.On macroprudential, I think I'd describe it more as the market as I'm looking at, it looks to be slowing a little bit. So if we looked at the latest housing price data, certainly, the biggest states of New South Wales and Victoria have seen moderation in price growth. Queensland and South Australia are still going pretty strong interestingly. But I think the markets actually starting to slow down a little bit. And I'm sure the regulator will look at all aspects. They tend to focus on higher risk lending such as higher [ D to I ] lending, but we'll wait and see. I think it all depends on what happens in the market.

[Andrew Bowden, Head of Investor Relations]

Okay. I'll take the last question from Richard Gluyas, please.

[Richard Gluyas]

I was just wondering in terms of the margin situation, how much of that -- how much of the crunch would be attributable to Westpac as opposed to industry factors. And could you put it in some kind of overall historical perspective as well? How does this current crunch compare to previous crunches?

[Peter Francis King, CEO, MD & Director]

Well, I think for Westpac, where our business portfolio is the most skewed to mortgages. So our portfolio mix means that we're probably more impacted when the mortgage spreads come in. So that's 1 of the biggest things. And [Audio Gap] have been the biggest driver of the change, Richard. We chose to grow in the last couple of years at the point when competition is really increasing, but we thought that was the right decision because we needed to get the franchise moving again. So it's a bit of our portfolio makes our decision to get growing again and then some of the industry dynamics and customer dynamics about fixed versus variable -- but that's why we're also very focused on the cost reset because we could see that margins were going to come under pressure with competition and therefore, the cost reset was our response.

[Richard Gluyas]

And do you have some kind of historical perspectives?

[Peter Francis King, CEO, MD & Director]

Well, I mean, interest rate, interest rates have never been lower. That's one of the challenges. And we've never had the level of support in terms of the cash rate, the liquidity provision that we've seen recently. So there are -- I can't sort of point you to a point in the history because it's been unique this last couple of years.

[Andrew Bowden, Head of Investor Relations]

All right. Thank you, all. Really appreciate your time this morning, and good morning. We've got a few more calls on -- a few more questions or answer we will follow those up separately. Thank you.