Andrew Bowden
My name is Andrew Bowden, and I’m Head of Westpac’s Investor Relations. Presenting today of course will be Gail Kelly, our CEO; and Phil Coffey, our CFO. And then of course, we’ll have plenty of time to open up for questions. So with that, I’ll ask Gail to take the stage.
Gail Patricia Kelly
Thank you. Thanks very much. Thanks, Andrew, and good morning, everyone. Thanks very much for joining us for our 2013 full year Westpac results presentation.
Let me start by saying that we’re really pleased with this result. We do see it as a high-quality result. We’ve strengthened financially. We’ve deepened our relationships with even more customers. All of our business divisions, and indeed, all of our brands, contributed positively to this result. We’re executing well in our strategy, and we’re going to 2014 with good momentum.
First, let’s have a look at the numbers themselves. Cash earnings, up to $ 7.1 billion, so up 8% over the year. Our cash EPS, up 6%. Our return on equity came in at 16%, up 51 basis points. Our common equity Tier 1 ratio, up 9.1, so very strong 94 basis points improvement over the course of the year.
In terms of ordinary dividends, as you would’ve seen, the directors declared a further $ 0.02, so $ 0.88 this half, up $ 0.02 on the $ 0.86 in the first half. And again, on the basis of the strength of our capital position, declared a further $ 0.10 special dividend.
You would have seen our 5 strategic priorities over the last several results presentation. This is the shorthand version of them and showing that we remain strong, targeting our growth, driving deep customer relationships and showing that across our business, we work to simplify that business, and of course, pulling together as 1 team.
You’ll also have seen the construct that we have of strengths, return, productivity and growth. Now that’s been really helpful for us within the business in terms of framing how we go about driving the business. It would be fair to say over the last 18 months or so, we’ve prioritized strength and return, and you can probably see that in our result.
We’re tilting a little more to growth as we go into the 2014 year, but you can be sure we’ll do that with all the disciplines that you’d expect from the Westpac group. We’re very aware that it’s easy to achieve growth at the expense of strength, if you go up the risk appetite, or indeed, you can achieve growth at the expense of return if you price inappropriately for risk. So you can expect us to retain our disciplines.
Let me then talk to those 4 dimensions and start with strength. And one critical element of strength, of course, is to look at the credit quality of an organization. And so if you look at our stressed assets to TCE, you see it comes in at a low 1.6% of TCE, which is actually half of what it was at the peak in September 2010, it came in at 3.2%. Our overall impairment charge for the full year, 16 basis points for the second half, 15 basis so very low level.
I’ll speak to capital more in a moment. On the bottom line there, we’ve actively worked over the last period of time to improve our funding profile and improving our customer deposit-to-loan has been an element, a specific focus across our business. Actually, if you go back to 2008, that deposit-to-loan ratio was at 52.6, so you can see what a substantive uplift that’s been over the course of 5 years from 52.6 to now coming at 71.4. And of course, we’re preparing ourselves now for implementation of the LCR, so focusing on the quality elements of our deposit raising.
Liquid assets, up $ 16 billion to $ 126 billion, so really well placed to internally fund the Lloyds acquisition that we announced a short while ago.
Employee engagement, one that I’m particularly pleased about, that’s gone up 3 percentage points from last year to now come in at 87%, which is 2 percentage points above the global high-performing norm. And then 97% of our people had indicate that they understand how their work aligns to the vision and the strategy of the firm. So that you can just see is how powerful that could be for performance across our business.
Right upfront, I mentioned that all of our business divisions have contributed positively to this outcome. Now Australian Financial Services, which includes Westpac Retail & Business Bank, St. George and RBC Financial Group, up 10% core earnings over the year and up 12% cash earnings over the year.
What pleases me about Australian Financial Services is the portfolio approach that’s being applied. We can see that translating into bottom line value. There’s more coordination between the businesses, there’s more sharing between the businesses. And there’s really thoughtful allocation of capital across the different opportunities in those businesses.
In Westpac Retail & Business Bank, the consistency has been remarkable here over the course of the past 3, 4 years since we first implemented Westpac Local. And you see that translated through to this year’s results as well, 11% up on core earnings and 9% up on cash earnings. And indeed, the second half had core earnings growth of 6%.
The hallmarks of the Westpac Retail & Business Bank this year has been very strong deposit growth, excellent expense management, very good margin management. And I have to also call out that this, our largest division, had an employee engagement of 93%.
St. George has had a strong full year 2013 on the back of a strong second half of last year. So core earnings up 7%; cash earnings, up 17% with core earnings 5% up in the second half of the year. Highlights for St. George would be above system growth for mortgages, above system growth for retail deposits, again, good margin management and much improved asset quality. All of the brands within the St. George group have been performing. Bank of Melbourne’s now into its third year, and it’s exceeding its goals.
BT Financial Group, well, if you look at 13 and 13, you can see it’s been a really strong all-around performance from our wealth business, which is one of the areas within our group that we’ve been investing in and prioritizing from a strategic point of view. And I’m particularly pleased with that outcome when you bear in mind the extraordinary load and effort that’s had to go into the regulatory agenda over the course of the past year.
Westpac Institutional Bank, we are the lead Institutional Bank within Australia. We come out #1 in the Peter Lee surveys in terms of our relationship strengths, #1 in overall customer satisfaction. And for 10 years in a row, we’ve been the #1 transactional bank within Australia. So very strong levels of customer activity and strong outcomes in our debt markets business. Of course the headwind in the Institutional Bank has been margins. The compression of margins year-on-year has been 23 basis points down and 9 basis points down in the second half.
The highlight, or the hallmark perhaps, of the Institutional Bank is the strength of its asset quality. And so again, both of the halves, first and second half, we’ve had a positive return out of the impairment line, overall $ 89 million positive contribution to earnings in that I mentioned, I think, you can see all the way through the GFC, the strength of the asset quality in our Institutional Bank.
Westpac New Zealand, and this is in Australian dollars, up 8% core earnings and 16% cash earnings. If you want to see that in New Zealand dollars, it’s 1% and 9%, respectively, with exchange rate movements having quite an impact there. And New Zealand is a fiercely competitive market, as you know. And there’s also been margin compression in that market year-on-year, 10 basis points reduction in New Zealand.
We’ve had a stronger second half than first half in New Zealand. And the call-outs I’d make there is strengthening the balance sheet, strong deposit growth, improvements in asset quality. And from a mortgage point of view, we focused on the sub 80% loan-to-valuation ratio in that environment.
Westpac Pacific is our smallest business unit as you can see, but a really good cash earnings outcome of 34% up. And that’s largely on the back of much lower levels of impairments over the 2013 year.
Group businesses have had a large negative outcome over this year compared to last year. That’s largely driven by our treasury business, which is 20% down in revenue turns this year on last year and with the biggest impact in the second half of this year. So much lower second half this year against what was a strong first half and a strong second half of last year. And Phil will give us more detail on that.
So on capital, you would have noticed that 94 very strong increase in our common equity Tier 1 ratio that takes it up to 9.10 common equity Tier 1 ratio, which is, as you know, sector leading and well above our own target range of 8 to 8.5. And that’s facilitated the declaration of that further $ 0.10 special dividend.
Our $ 0.10 special dividend would amount to about 10 basis points of capital. So you can see, after that, we have plenty of headroom to absorb the Lloyds acquisition and still remain comfortably above our target range and comfortably ahead of our peers.
Now, there’s been a lot of commentary over the last week or so about capital, in particular, with regard to the D-SIB world, so let me just talk to what we know and what we don’t yet know. What we know is that the D-SIB world is going to be imply — applied within the Australian context. We know that’s going to come into place from the 1st of January 2016, so 3 years from here. What we don’t know yet is how much it will be. We don’t know anything about the implementation timetable yet. In Canada, for example, a market that’s similar to ours, the implementation timetable will be over 3 years, starting from 1st of January 2016 and there’s some elements of capital measurement that haven’t yet been defined. Of course, outside of that, we’re also still awaiting finalization on the conglomerate rules. So once we have all of that, we will, of course, assess what the implications are for us, but as you can see, as we stand right now, both from an asterisk level point of view and in a relative sense, we’re very well placed.
Moving onto returns. And as you know, net interest margin is something we’ve been very actively managing in a very disciplined way over the course of the past few years and notwithstanding the headwinds that we’ve experienced this year in WIB and in New Zealand that I referenced earlier. We’ve really managed to hold our net interest margin more or less flat over the period of the full year, so down 2 basis points if you include Treasury and Markets impact and up 1 basis points if you exclude them.
Key to managing margins is driving deep relationships with customers. We’ve — there’s a range of metrics that we look at to assess our performance there across both Westpac New Zealand as well as within Australia. Two of the major ones are the MyBank metric and the wealth penetration metric. The improvements there, of course, flow directly to supporting the increase in the customer return over credit risk-weighted asset that you can see in the bottom left hand part of that chart. That’s something that all of our business units focus on as a metric of quality, of the customer business that they’re writing.
Return on assets, pleased to see the increase there to 1.18%, that’s again, in the light of the very significant uplift that we’ve had of our funded liquid assets. We’re also pleased with our return on equity, coming in at 16%, well above that line in the sand of 15% that we put in place 18 months ago.
Moving to growth. Well, we’ve targeted our growth in a number of areas. Deposits, all elements of wealth, Bank of Melbourne, Asia and, indeed, also driving additional adoption and facilitating further take-up of mobile and digital with our customers. Customer deposits I’ve referenced that already, up 10% over the year, 1.3x system growth in household deposits and really a strong story for us.
In the wealth area, you can see that FUM and FUA are both up quite strongly over the course of the year. Obviously, aided by strong, stronger markets, particularly as the year progressed. But also, we’re very happy with the net flows that we’ve had in those parts of our business.
Insurance premiums, well up both for general and for life. And that’s largely on the back of the cross-sell activities across our own customers through our banking distribution networks.
Bank of Melbourne, where we’ve been steadily growing our overall Victorian market share across the group, and the activities have been Bank of Melbourne has assisted us with that. So in Bank of Melbourne, we achieved 3x Victorian market share in mortgages and 5x Victorian market share in deposits. And we’ve grown our overall customer numbers by 10%.
In Asia, we’ve set about, in a very disciplined and steady way over the course of this past year, putting in place new infrastructure, bringing on board some really quality new people, building out new platforms; for example, our trade platform, our new capabilities; for example, the Market Makers’ License that we were awarded with in the middle of this year to facilitating the Aussie-Renminbi trade. You can see the trade volumes in that slide have picked up very substantially. Of course, they’re offset by margin compression in that region. But overall, our revenues from our Asian business is up 33%, that’s in USD.
On digital, we’re following our customers here in lots of ways. Our customers are preferring to deal with us digitally. And mobile, that’s pretty exciting for us. We are enjoying providing these facilities and services for our customers, it does drive deeper customer relationships, the deeper the penetration you have of digital and mobile. And we’re doing some very innovative things in this space that I’ll touch on briefly at the end.
In terms of lending growth, our overall lending growth in a subdued environment, both New Zealand and Australia, is up 4%. And our Australian mortgage growth has been the major part of that growth and that’s up 4% as well.
On Australian mortgages, we achieved 0.8 of system for the full year 2013 with some pickup of momentum in the second half. You can see on the chart at the top there that there’s been a high level of new lending in the second half relative to the first, but also a high level of repayments in the second half relative to the first in this declining interest rate environment.
We look into grow our mortgages at about system growth over the course of the 2014 year. We determined to do this in a sustainable way, and there are a number of areas that we’re focusing on to achieve that, starting with consideration, increasing the customers’ consideration of the various brands that we have for their homes. And that goes to marketing and goes to promotion. We’re also increasing our sales intensity and sales practices and focus across our distribution networks. Within Westpac Retail & Business Bank, we’re increasing the number of people we have available for sale. So our home finance managers are being increased in that brand.
And then the range of things in the servicing front that we’re working on to improve, be it time-to-approval, time-to-settlement, the top-up processes that we have, the valuation processes that we have. So a range of activities underway to assist us to get that 0.8 up to around system growth for the full year 2014, but do that sustainably.
With regard to business lending, well, that’s been modest as you can see over the course of the year. We’ve had some increase in Westpac Retail & Business Bank. In fact, we grew above system in that part of our business. And some increase in WIB as well, but that’s been offset by the runoff of stressed assets. Looking forward, there is some increased confidence across the business community, but that’s yet to translate into any drawdowns or actual investments activities. So time will tell as we get into the early part of next year.
Productivity, the fourth element of those 4 dimensions that I spoke of earlier and a really important one. I remember standing here in 2009 and sort of reflecting on the new world that we’d be in, post the GFC, and that deleveraging was going to be a very substantial trend. And we could expect much lower levels of credit growth, and therefore, building out productivity as a core competence, as a core capability was going to be crucial for the future, and particularly in the light of the investment that we knew we wanted to put into our business. And so we started out on a rolling series of programs. And you can see those listed on the slide that have led to both cost benefit as well as revenue uplift over the period. In fact, from a cost benefit point of view, over the 5 years, from 2009 through to today, we’ve delivered over $ 1 billion in savings from these programs. But the critical thing here is not just sort of cost programs. It’s actually pretty much of our driving a productivity culture throughout the organization. So we simultaneously started that some years ago driving lean capabilities and thinking and really a revolution across our business of everyone thinking about how do we simplify and streamline our business to give a better experience for customers and make it a whole lot easier for us to deal with ourselves. And really, this year 2013, we’ve got some real traction on this, I’m delighted to say. And you can see on that slide, a range of the simplification benefits that we’ve delivered over this year. There is a long list that that’s a much shorter subset of them. But they’re going to simplify processes, taking out paper, reducing over customer complaints, illuminating rework, using self-service for our customers, so that you don’t need to actually do manual sorts of transactions and the like. So quite a significant list really driving savings for us.
The last thing I’d say about productivity is that we’re also changing the way we work across the Westpac group. Driving flexibility is much more of a way of doing things in our organization, and that’s very well received by our 35,000 employees. And to build a trust, and actually, it translates into a very high level of discretionary effort that our employees bring to work. And so with that, I’d really like to thank all of our employees for their hard work and their performance this year.
Before I hand over, to sum up and then hand over to Phil, let me just say a few words about some of the very significant initiatives that cumulatively are going to change the experience for customers over the medium term.
Firstly, on online and mobile, as you know, is part of our SIPs agenda. We’ve been running with a new online application, and this is now in pilot with 4,500 customers and will shortly be rolled out. And we’re pretty excited about the features that it brings to the market and think it will be leading in our market. Of course, it offers real-time look at your real-time running balances, 3 years history, transaction history, a range of self-service situations for customers that they can actually tell us if they’re going overseas, if they’d like a top-up, if they want you to change anything in their situation with us. From a business customer’s point of view, they can access both their business and their personal customers’ relationships or accounts with a single log on, which is something our business customers have told us they’d like to do.
We’re coupling the work in mobile and in online with very substantial changes to our distribution network as well. So smaller physical footprint, more highly skilled people in our branches and a lot more use of smart technology and capabilities on 24×7 basis in our distribution network.
Bank Now is the program name for the initiative being rolled out across our Westpac Retail & Business Bank distribution chain. And we’ve got 17 Bank Now branches up and running already. And Jason tells me that they’ll be, on average, 1 per week over the next 2014 year. This is early days, but the benefits of coming through in the sense of about 10% uplift in revenue from those branches that have been converted to our Bank Now sites with lower levels of queues, obviously, and much high levels of customer satisfaction.
SME is one of those areas of targeted growth for us. It’s an area, we believe, that we have room to grow. We’re lower than the natural market share that we should have when you bear in mind the strength of our brand. And we’ve got different models operating in the different parts of our distribution business. Within St. George, we’ve been piloting something called, Business Connect. We’ve piloted in 30 branches so far. Effectively, it’s a videoconferencing facility from branches into a central area. And that central area, which right now is in Kogarah, it provides access to all of the expertise that a business customer might want from credit expertise to relationship management to equipment finance leasing, transactional banking capabilities, financial market capabilities. This is being really well received by our branch staff as well as by customers. And again, early days, but the signs of improvement are customers leveraging this service have gone from an average of 1.6 products per customer to 4.5 products per customer. St. George will be rolling this out to a further 150 branches over the course of the next financial year.
In Westpac Retail & Business Bank, we’ve got a very extensive physical footprint through our branches, through our local business bankers. Our bank managers and personal bankers, in fact, the strongest footprint of salespeople across any of our peers to support in the SME segment. So more focus there, too.
Wealth is an area, as you know, that strategically we’re driving and continuing to build our competitive advantage. We’re in the midst of — or early days still, but underway with our new wealth platform, which will truly transform our wealth business for us. It’s a straight-through processing arena. It will serve to consolidate all of the different platforms that we have on to one. It will add on new features and capabilities for our bankers as well as for customers and very much integrate banking and wealth for our customers in one platform.
And as you know, we’re doing that through our distribution channels as well. And the AFS model really helps us with that, having our people at the frontline really think wealth and banking in one. So supporting our customers total needs. And as you know, our Super for Life initiative has been really so well received by our people in the frontline. It’s probably the best example we’ve got of that. We still routinely sell 1,600 Super for Life products through our retail distribution. We’ve got close to 400,000 customers in Super for Life right now and $ 3.7 billion in funds under management.
The last thing I’ll mention is customer information, which under Brian’s leadership has been a huge area of focus for us and improving our data management capabilities. And of course, the new world here is not generalized information, it’s got to be specific and tailored and useful for a specific individual. And so you’ll see as is reflected on the slide, that over last year, we’ve sent out 59 million specific-tailored pieces of service information to customers to really help them and live their everyday lives and a lot more focus in here. And this is certainly the way of the future.
Let me sum up then to say that we see this as a high-quality performance and a strong performance. We really aim across our business to drive balance and to drive consistency. We’re disciplined in the execution of our strategy. We have a best-in-class balance sheet with strong capital generation and all of our business units are — have performed very well in 2013 and have good momentum going into 2014.
So with that, let me thank you and hand over to Phil.
Philip Matthew Coffey
Well, thanks, Gail, and good morning, everyone. As we’ve done in recent periods, I’ll focus on areas of special interest or areas where I think some additional data will assist analysis. And I’ll also look in more detail around our second half performance in 2013.
If we start with a breakdown of our earnings and looking at the quality and sustainability of the results, I think there are 3 major points to call out. The first, it has been the operating divisions that have driven the full year result with their core earnings rise being the primary driver of the growth we’ve seen in our cash earnings. And this is particularly evident in the second half where AFS division produced an excellent result with each business performing well, and that was on top of a good first half result. So AFS, which makes up 63% of the group’s total earnings, recorded core earnings growth in the half of 6%.
The second thing to call out is that the second half also experienced a substantial decline in the core earnings in the group business unit, mostly from a lower treasury revenue outcome. A $ 32 million reduction in research and development tax credits and $ 25 million in realized FX hedge losses also contributed to the decline. And I’ll comment more on treasury in a minute.
Thirdly, the group has continued to benefit from its very strong asset quality position with a slightly lower impairment charge in the second half, following a significant drop in the first half. Our improving credit position is a direct result of consistent choices that we’ve made over a prolonged period, and they are a hallmark of Westpac.
On assessing the quality of the performance, there are a number of lenses that can be applied to see benefits from irregular items, from accounting outcomes and the more volatile aspects of the business.
Looking at our cash earnings adjustments this period, you can see that this was a clean result. There’s little to call out for the half, and we’ve treated all items consistently. There were no new infrequent items. Amortization of intangibles is almost identical period on period, and timing differences are the only element requiring adjustment.
The better growth rate that you can see in our strategy-reported profit was mostly due to the unusual tax outcomes of 2012, where, if you recall, we incurred a tax cost associated with the new tax consolidation rules that were introduced that year.
The impairment charge is another item that sometimes moves around period-to-period and you can see ours was straightforward. There was little change in the economic overlay in the half and only a small increase over the full year. And the lower impairment charge outcome was also consistent with other asset quality assessments, with a smaller deduction for regulatory expected loss and the GRCL unchanged in the half.
Our most volatile items tend to be earnings from the management of market risk, and we do that in WIB and within Group Treasury. These are attractive ROE activities, even with the higher regulatory capital, but results are less predictable half-to-half. You can see in the bottom right hand of the slide that the markets-related contribution dropped in the half because of lower Treasury revenue. In particular, the relative stability of credit spreads and the flattening of yield curves saw returns in managing the liquidity book drop in the half. We also had lower revenue from the management of high-dollar interest rate risks in the overall balance sheet, and this activity was a good result for us over the full year, but it was lower in the second half.
Market risk revenue in Institutional Bank was up in the half and in the year, in part because of the CVA adjustments and the benefits that we saw. But the overall markets-related income was a drag over the year and especially in the second half.
When thinking about quality and sustainability, perhaps what’s most pleasing with this result has been the consistent performance from our operating divisions. And you can see this in the chart at the top right of this slide. These divisions are our engine room and their contribution to cash earnings was up, and we saw 12.5% growth year-on-year and a 5.6% growth over the half.
Gail has touched on returns in our performance and, as always, the net interest margin is a critical area of focus. This year saw similar trends to recent periods with high deposit costs offset by higher loan spreads, although the second half saw smaller impacts from both these factors.
For the first time since the GFC, wholesale funding costs dropped sufficiently to provide a benefit to margins, and that gave us a 3-basis-point uplift in the second half. This benefit, though, was more than offset by the drag from holding more liquid assets and from lower returns on interest rates, which we earn on both our capital and on our low-interest balances. And I think that these 2 offsetting factors are likely to continue at least into the first half of 2014.
Lastly, the drop in Treasury and Markets that I mentioned had a material impact on the most recent half, pulling overall margins down by 7 basis points. If you exclude these more volatile market influences, our underlying margins were flat in the half and up 1 basis point year-on-year. And so, you can see that in this year, as in previous, we’ve managed margins well, and we continue to focus on that and expect it to be an ongoing feature of our performance.
The margin picture also incorporates a significant strengthening of our funding and liquidity position, and this had a number of elements. First, we’ve adjusted our focus over the year orientating towards deposits which are more sustainable and more highly regarded under the new regulatory rules, especially the LCR, which officially commences in a little over a year’s time. Gail has mentioned the 1.3x system growth that we achieved in household deposits, and we’ve also had good growth in new business accounts that are specifically designed for the LCR regime. In our funding composition, deposits continue to grow in quantum as well as quality, while short-term wholesale continued to decline.
Second, with the excess in deposits raised, we’ve prepaid $ 8 billion of government guaranteed debt maturing in the calendar 2014 year, and we reduced our long-term wholesale maturities by doing so. On the right-hand side of that slide — this slide, shows the maturity profile of term debt over coming years and compares that to the borrowing programs of recent years. And you can see that maturities are relatively modest in that context.
So the result of all of those strategies that I’ve talked to has led to a stronger balance sheet, but it did have a drag on margins. The upside, of course, is a better transition to LCR compliance over 2014 and gives us — giving us the flexibility to respond to high credit growth as opportunities emerge.
Lastly, on returns and quality, I draw your attention to the simple Dupont Analysis we’ve discussed over recent periods. You can see the drivers of our improvement in ROE, and one item we haven’t yet mentioned that I’d like to call out is the increase in noninterest income, especially from wealth. This was an important but positive contributor over the year and, particularly, in the most recent half. The ROE improvement we’ve had over the year came with little change in leverage. All up, I’ve been pleased with the improvement of our returns over the year. It’s been a key area of emphasis across divisions as we increasingly focus on and manage the business to its capital intensity, returns and the risk that each of our businesses have.
Gail has highlighted the importance of productivity for the Westpac Group and ongoing expense disciplines continued. Over the year, productivity savings from previous and new initiatives offset the bulk of the operating expenses uplift, and the net of those 2 items saw cost 0.6% higher.
Two other factors drove the overall reported increase in expenses. The major item was the impact of investment and regulatory change, and this included $ 145 million in the introductory cost in growth and productivity initiatives, including our expansion in Asia across Bank of Melbourne and investments in wealth. There was a $ 60 million uplift in amortization and depreciation expenses and a $ 35 million increase in onetime regulatory cost to do with wealth regulation around the Stronger Super and introduction of FOFA.
The second item to call out is the impact of FX translation on our results, especially from the stronger kiwi dollar. Translating our global expenses into Australian dollars added $ 45 million or 0.6 percentage points to our overall annual expenses growth. So underlying expense growth was a shade under 4% for the year, and we believe we’ve continued to get the balance right of investment and savings to generate core earnings growth, both today and over the medium to long term.
We lifted our investment spend in 2013 to $ 1.15 billion. Our investment has tended to average around $ 1 billion annually, but the timing of various projects does have an impact year-to-year and you can see how that has played out over the past 3 years. The direction of that spend has changed, with the SIPs program winding down and a much greater weighting toward growth and productivity initiatives. The regulatory change requirement has also grown and, in wealth, there were really some specific requirements that we had to achieve and specific milestones that we had to achieve in the 2013 financial year. Within our overall investment spend, the proportions of expense and capitalization has been very stable over the 3 years.
Our impairment result was clearly a highlight, underpinned by a material improvement in the quality of our portfolio. Our stressed exposure ratio improved by around 18% over the half. And the composition of this improvement was also really encouraging, with a $ 680 million fall in impaired assets, a $ 190 million fall in wealth secured but 90 days past due and a $ 1.1 billion fall in our watch list and substandard categories. The significant drop in impaired assets mirrored the continuing downward trend that we’ve had in new and increased impaired loans.
Looking across the various industry segments, you can see that property exposures have continued to be the biggest part of our stressed portfolio, but also the biggest improvers. The reduction in stressed in that part of the portfolio reflects improving industry characteristics with better asset market supporting sales and restructuring of clients. We’ve used the improved conditions to sell down impaired assets and to facilitate selective refinancing.
There has been some modest deterioration in utility and mining sectors in line with specific industry and customer issues, but they’re not a major issue for our total portfolio. This is a very strong picture overall for us and reflects the benefits of remaining disciplined on asset quality through the cycle.
The lower impairment charge that we recorded during the year was mostly in those businesses with heavier commercial exposure: St. George, WIB and New Zealand. And you can see in the top-right hand of this table, the drop in the impairment charge was almost solely due to a $ 330 million reduction in individually assessed provision charges. Write-backs and recoveries were little changed over the year and collective provisions were a little lower in line with less stressed assets and notwithstanding the $ 26 million increase in the economic overlay.
The reason for the drop in individual provisions was the material reduction in impaired assets and very pleasingly, this was due to impairments returning to performing or being repaid. And the bottom-left hand of the slide shows this was a real highlight for us, particularly in the second half. Our provisioning cover remained strong with individual provisions to impaired assets in particular increasing to 43%.
2013 has seen us materially increase our capital ratios again, the 94 basis point uplift in capital over the year equivalent to around $ 2.9 billion in capital. Our strong and high-quality earnings growth was the single biggest driver of our capital accumulation and that has supported our dividend returns.
At 9.10% common equity Tier 1, we are clearly the strongest capitalized bank across our Australian peer group and, at 11.6% on a global BASEL harmonized basis, we continue to be one of the best capitalized banks in the globe. Given this position, the board felt that the issue of shares to satisfy the DRP was not required, and so we’ll work to neutralize these for the final dividend. And given this strong capital position and surplus of franking credits, a further $ 0.10 special dividend could also be supported.
Looking ahead on capital, there are a few moving parts. As Gail mentioned, you’ll be aware of our Lloyds acquisition, announced just over a month ago, and that acquisition will effectively utilize around 38 basis points of common equity Tier 1. We also have the final tranche of our St. George tax consolidation benefits and they’ll flow through in December as well, and that should add around 8 basis points of capital.
And then finally, as Gail noted, there continues to be quite a lot of discussion around how the Basel III framework is going to be applied in the Australian banking sector, and that’s included recent announcements by APRA with regards the conglomerates rules and with regard to the D-SIB capital buffer. And I expect this framework to become clearer over 2014 and we’ll manage to that situation in that time, but you should expect us to continue in the traditional approach of emphasizing the value of strength.
So as we look into FY 14, let me call out a few factors to assist your thinking. I’m not going to be doing line by line outlooks. We’ve never done it, and I think we won’t be doing it.
So here we go. Look, on second half lending, I think you had seen some pickup, and that’s a direct result of the increased focus on our lending to retail and business customers, and Gail mentioned a number of the initiatives that we’re looking to pursue and that are already underway. Repayments, though, will likely to continue pretty strongly with this low-interest-rate environment we’ve got and I think you should expect some further reduction in business stressed assets as well. Having said that, the housing market in New South Wales is picking up and we feel we are well placed with our portfolio of brands to benefit from that.
Within that overall picture, I would reemphasize that we are seeking to sustainably improve growth. So we’re not going to be chasing growth at any price and you should expect to see us continue to focus on risk-adjusted returns.
We feel well-placed for the introduction and the finalization of the LCR rules and its introduction over 2015, but there’s still some important decisions to be made, particularly around how the CLF will be used by bank to bank.
In WIB, we had some benefits in 2013 from Hastings asset sales, which are unlikely to repeat and competitive pressures, as Gail outlined, on margins continues. Having said that, we have a very strong WIB franchise, and we continue to lead all comers on our transactional banking offers and, pleasingly, corporate activity is picking up.
We’ll probably have a slightly smaller investment spend in 2014 as our new online and mobile platform moves into customer rollout. You should expect us to continue to focus on growing core earnings, with cost growth appropriate for the operating environment.
On impairments, I expected that our first half ’13 result, at 17 basis points of gross lines, would have been toward the bottom of the range. I was certainly sort of correct, but we obviously did better in the second half. The quantum of write-backs in WIB during the year is unlikely to repeat, but the book does look very clean, and that should further support our lower impairment costs and strong capital position.
So let me finish with the observation that, as Gail highlighted, all of our operating divisions are performing in a way and with momentum that supports our confidence. With that, let me ask you to offer some questions to Gail and myself. Thank you very much.