Macquarie : 2024 operational briefing - transcript

TRANSCRIPTION

MACQUARIE GROUP LIMITED

THIRD QUARTER FY24 TRADING UPDATE 13 FEBRUARY 2024

[START OF TRANSCRIPT]

Sam Dobson:Good morning, everyone, and welcome to Macquarie's 2024 Operational Briefing and 3Q Trading Update. Before we begin this morning, I would like to acknowledge the Traditional Custodians of this land and pay our respects to Elders past, present and emerging. If I could also ask everyone to switch their mobile phones to silent at this point.

Today you will hear from our CEO, Shemara Wikramanayake, followed by Q&A, and then we will hear from respectively our Asia team, followed by a Q&A session, and then our BFS team, followed by Q&A. So, with that, I will hand over to Shemara, thank you.

Shemara Wikramanayake: Thanks very much, Sam, and welcome everyone, good morning. As usual, before I go through the 3Q Trading Update, I will just touch on our footprint and businesses. Many of you are very familiar with this, but to those who are newer, we have four operating groups that operate across very diversified business lines, exposed to very diversified underlying themes where we have deep expertise and we are well positioned for structural growth.

So, that is our Banking and Financial Services business, which is Australia focused and is a digital customer experience focused business, and Greg and the team are here in the front row will be giving you more detail on that soon. Macquarie Asset Management, our global asset manager in both public investments and private markets. Commodities and Global Markets across Financial Markets and Asset Finance as well as Commodities, and Macquarie Capital, which provides advisory and capital markets solutions as well as principal investing where we have deep expertise.

Now, those four businesses are supported by our four very important central service groups and that is our Risk Management Group, our Legal and Governance Group, our Financial Management Group, and Corporate

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Operations Group which throughout time have helped us access capital, manage risks, manage the operating platform, and deliver great service.

So, turning then to the trading update for the third quarter. As many of you who are familiar with us know, we had exceptional market conditions last year, particularly in the third quarter last financial year in our commodities and global markets business, and we had a very strong year for realisations in our green investment group assets in Macquarie Asset Management.

We have not seen that repeat this year, and as a result, our results are substantially down compared to that very strong year last year for both the year to date, and for the third quarter. But importantly, our franchises remain resilient and are demonstrating ongoing organic growth across the businesses and across the regions, and we also have our team from Asia here to talk to you about one of the regional updates as well.

So, looking at the two broad groupings, the annuity style and the market facing, the annuity style businesses were down on the third quarter last year, and down substantially on the year to date last year, principally because of what I mentioned in relation to the realisations in the green investment group, where this financial year we are holding those assets for the renewables fund which is going through its early raisings.

We also in the third quarter in BFS, like the rest of the market, experienced margin pressure and also the continue streamlining of our car loan portfolio, but that was offset by volume growth in both our home lending and our business banking. Then, in the market facing businesses, again, as I have just mentioned, primarily substantially down both for the third quarter and the financial year to date because of the exceptional market conditions we had in commodities and global markets over the last year, particularly in the third quarter.

In addition to that, we had lower fee income in Macquarie Capital where market activity in Mergers & Acquisitions despite the perceived slowing of interest rate increases still has not picked up. Confidence has not returned and activity levels have not returned despite equity markets being up and debt capital markets being active. Offsetting that we had higher investment income as we grew the private credit book, and we had some investment gains, albeit lower asset

realisations in Macquarie Capital. 2

So, that is the summary of what the financial results were for the third quarter and year to date versus last year. I will touch on the four operating groups and the franchises, and what we have been seeing, and then make some comments more broadly across the Group.

But starting with Macquarie Asset Management, and our assets under management were down slightly at the end of the third quarter. The private markets assets were up slightly with fundraising and investing. The public markets were down slightly and that was because of net flows, monies flowing away from fixed income as we go through the interest rate cycle. We have had very big flows into fixed income and also, we had market movements picking it up but offset by foreign exchange.

I would note in terms of the growth of the underlying franchise that we did have in the worst fundraising year for private markets in 15 years, we closed our seventh in our series our latest of our European funds, that was a record raising of over €8b and above what we were targeting. So, we are seeing for core strategies from core managers, with still very good support in what has been a very, very challenging market, and equally we are launching, as you know, in addition to our core renewals and energy transition strategy, we were targeting about $US2b for that. We have had a first close of $US1.9b. So, we continue to have good support from investors in growing the franchise both in our very core infrastructure area, but adjacent areas like the green investment, being the big one, but agriculture, private credit, et cetera.

BFS, as well, the franchise continues to grow well, and you will hear much more on this from the team shortly. But you can see we are up on everything, deposits, home loan portfolio, funds on platform, business banking, and it is really only the car loan portfolio that we are continuing to focus and streamline, and that has been a strategy that we have been pursuing. So, again, the franchise growing despite the market where margin pressure is increasing.

Commodities and global markets, as we said, the result is substantially down because we have not had the exceptional market conditions that we experienced last year, principally North American gas and power and a little bit of a EMEA Gas and Power. The year before that, very strong conditions in terms of EMEA Gas and Power, and so the inventory management and trading income

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is down, and so is slightly the risk management where our services do increase with volatility.

What I would note for that business, is we have been guiding, because of the exceptional conditions in FY23, we expect the commodities business to be more in line with FY22, and you will see from our results in terms of how we are going this year, that the income line is in line with FY22 which did have exceptional trading gains in there as well from EMEA Gas and Power. That is offset by increasing costs and Alex showed, I think, at the second half results that the costs just over the half were up $A300m.

So, we are investing heavily in the platform in technology, regulatory compliance, et cetera, to give ourselves a very robust platform to position ourselves for the sort of growth that we are seeing and prosecuting on in CGM. The financial markets business continues to grow nicely and so does the assets finance, so those franchises are continuing to build up, and I am happy to talk about those in a little bit more detail as we go through questions.

Macquarie Capital, what happened is we had lower fee and commission income. As I said, activity levels are still much lower than they have been, in fact the lowest in 10 years in terms of volumes and revenues in the Mergers & Acquisitions markets globally and by regions. Despite that, as I said, the private credit book is growing, it is over $A20b, and that is generating very good stable repeatable earnings in Macquarie Capital, and then on the investment side we have had some gains on some of the positions as well in Macquarie Capital. But all four franchises growing really nicely as they have been.

In terms of our human capital, so we are at 20,800 people now. More than half of those are offshore. Now, as I was mentioning in relation to CGM, we have been through a program of heavy investment in tech, in reg, it is reflected in the fact that our headcount is 20,800 at the moment, slightly down from the 21,270, I think it was, Alex, at the half year. But up a lot from three years ago.

So, at FY21 we had been sitting stably at about 15,000 getting to about 16,000 people, and operating expenses at about $A10b, $A9b, actually we were running at until then, pretty stabling at $A9b. In the three years since then, our headcount has gone from about 16,000 to over 21,000, and our operating expenses had gone from $A9b to $A12b as we have had to make material

investment. Alex, has been sharing all the details in technology, in regulation. 4

What we are seeing now is some of those programs start to deliver and we are being able to run off some of those programs, and so that is reflecting both in our cost base and in our headcount, and so we have seen the headcount, which is still up from where it was at 1 April this year, is coming down from 1 October this year, last year, sorry. I am talking this year in terms of financial years, apologies.

In terms of our funding and capital position, still very strong. Term funding comfortably exceeds our term assets. The team were able to raise $A10.7b of term funding over the last quarter, and our customer deposits, as I mentioned earlier, up 3 per cent. I didn't go through the details, Greg, because your team will cover that, but that is close to $A140b.

In terms of our capital update, we are at $A9.7b now of surplus capital, but a slight reduction in our surplus partly because we have been undertaking the buyback. We have acquired about $A236m of shares so far, but also offset by the net profit after tax, dividend payments, et cetera.

In terms of capital absorption in the business, we are continuing to also deploy capital into the businesses. You can see there over this most recent quarter, $A0.4b into each of CGM and Macquarie Capital. In CGM, that is credit risk capital is where we are absorbing capital, which is driven by the derivative exposures increasing in FX and interest rates, and in Macquarie Capital, we continue to deploy, as I said, in credit and also equities. But we remain comfortably above all our key APRA Basel III minimums on regulatory ratios and in terms of regulatory updates, there are no changes really on this page, it is the same as we had before.

But what we do want to update on as you will have seen this morning is the management change, where Nick O'Kane after almost 30 years at Macquarie has decided to step down as Head of the Commodity and Global Markets from the end of this month to pursue opportunities outside Macquarie, and I really want to thank Nick, it has been an incredible journey. He has made a massive contribution and impact.

Part of that has been building an awesome team around the world, mostly through the commodities business, but also more recently across the whole of CGM, and I think he has said that it is the depths and capability of that team

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and how they are positioned as well that gives him comfort to take this step which he has told the team he is doing for a range of personal reasons.

Happily, Simon Wright, who is with us here in the front row and we have overlapped for 35 years, Simon, even though you still look 32. He is here, and he is stepping up as the Group Head of CGM. Simon is highly respected across the whole Group. He has most recently been leading financial markets, but has been here since the early days of Andrew Downe when we had two men and a labrador in that business, and will oversee the transition to the next phase for CGM. So, we are very pleased to have Simon here with us.

So, the last thing I want to finish on is just talking about the outlook for the short term, and then the medium term we will touch on as well. But in terms of the short term, as we have been saying in Macquarie Asset Management, looking at it by each group, we expect the base fees to be broadly in line, but in terms of the net other operating income, subject to market conditions and completion of transactions, we expect this number for the second half of this financial year to be substantially down on the second half of last financial year, and I have been talking through the reasons there with the green investment.

Banking group in BFS, as we have guided previously, we are seeing growth as I have shown across loan volumes, deposits, funds on platform, that is obviously impacted by market dynamics and what is going on with margins, and we are continuing to invest in the platform, in technology, in compliance, in growth of the offering to customers, and we will continue to monitor our provisioning in that business.

Macquarie Capital, as I have been saying, transaction activity in this financial year is expected to be slightly down on last financial year, but in the investment related income area, we are expecting the income in the second half to be significantly up on the first half and that is partly the revenue that we are seeing from the private credit portfolio and a small number of investments, gains as well, partially offset by the timing of our asset realisations.

As we have guided for commodities and global markets, as we said, and I have been saying today, we had the benefit of these exceptionally strong trading conditions in the last financial year. So, in terms of guidance for this financial year, we are saying that we expect the income to be broadly in line with prior

year, FY22, which is what we are actually seeing and we are expecting 6

consistent contributions from both financial markets and the asset finance business. Compensation ratio and tax rate, we are expecting to be broadly in line with historical levels.

This outlook of course is subject to market conditions including geopolitical events, completion of period end reviews, and transactions, the composition of income including FX and potential tax or regulatory uncertainties, and given that we maintain our cautious stance and conservative approach to capital, to funding, to liquidity, to position us well through this and any environment.

Over the medium term, as we have said, and as I said at the beginning, we think with our four diversified businesses we remain well positioned with good structural growth in all of them, customer focus, digital bank, the private and public markets, the commodities and global markets, and our Macquarie Capital advice capital solutions and investment business supported by ongoing strong technology platform, our risk management, our legal and governance skills included in that, and where we sit in terms of our conservative funding and capital. So, with that, I will hand back to Sam now to take your questions, thanks.

Sam Dobson:Great, thanks, Shemara. So, we will start with questions in the room, and then we will go to the lines. Andrew.

Andrew Triggs:Thank you, Sam. Andrew Triggs from JP Morgan. I am just interested in the short-term outlook statement in regards to both Macquarie Asset Management and Macquarie Capital. Obviously, we are seeing a continued pushback in expectations on timing of asset realisations. Can you make some comments on the drivers of that? You have also said in the past, there has been a gap between expectations between buyers and sellers that is affecting those realisations. So, keen to hear any thoughts on those issues. Then, also with respect to green investments, specifically. How advanced are the sale processes, and how much visibility do you have on Q4?

Shemara Wikramanayake: Yes, well, I mean, I guess the broad point is as I said, the Mergers & Acquisitions activity is the lowest its been in 10 years. I think that has partly been driven by confidence that is taking a while to come back with buyers and sellers, but it is also, as you know, less money is being returned out of private equity funds, so people have less liquidity, but

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caution as well. So, we are finding in sales processes where previously you would have had five buyers, there may be two.

In addition to that, well, I mean, for us, because we are very well funded and capitalised, we are having to make a call in these processes, do we actually want to take today's prices, or should we defer some of these processes? We are being pretty disciplined about that because if we think there is real gain from holding, then we will continue to devote the balance sheet to it, but if not, we are just clearing out the assets and moving on and deploying our capital in what we think would be better places as we go through this environment.

We have had a small level of impact as well from regulatory approvals, so we have needed in terms of assets we are transferring to the renewables fund, et cetera, a bunch of approvals that are taking a little bit longer, so that could have some timing impact on the transfer of those assets. But I think that the main contributor, we have had some positions where we have had investment gains without realisations. Things like listed positions that have gone up because equity markets have come up and we have also had some third-party investment into assets where we have revalued things. Anything to add, Alex?

Alex Harvey:Oh, no, that probably covers it. I mean, the only thing I would add, Andrew, is obviously, the interest rate environment has changed, but it has changed relatively quickly, and one of the things that we talked about, obviously, at the half year result, was the need to see stability in rates, and then the need to see transactions pick up. I think what is really happening is that stability seems to be more evident today, but as Shemara just said, the transaction activity is still relatively low, so you are still seeing people adjust to that new environment.

You'd expect over time, obviously, vendor with expectations is going to have to come down a bit and purchasers are going to have to come up a bit to actually enable those transactions to happen. That is still working its way through, and I suspect to play out over the next, I don't know, six to 12 months as people get used to a different environment.

Andrew Triggs:Alex, just to follow up on Shemara's point around those investment sale gains, effectively mark-up of existing assets, is that a departure from historical

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treatment of those assets given growth seems to be pretty conservative with accounting of assets.

Alex Harvey:No. Some of the positions on the balance sheet have to be fair valued through Profit & Loss. Where you've got an interest that is lower than the equity accounted threshold you've got to fair value it through Profit & Loss. So some of the gains that Shemara just talked about obviously are positions and we've got a list of securities where we have a lower amount that the equity threshold. We're just remarking those.

Shemara Wikramanayake: And our accounting standards are exactly the same. So there's also been situations where we've written off tangible or expensed intangible. We have converted some capitalised costs to development expenditure over the quarter because of the application of the accounting standards that we work closely with the auditor as well. So the same accounting standards in our approach.

Sam Dobson:	Great. Jon?
Jonathan Mott:	Thank you. Jon Mott from Barrenjoey. A question actually on the
	commodities short term update as well. It's actually quite a decent
	number. If you look at the environment you've had very low volatility,
	prices falling and pretty warm weather through North America. Apart
	from one cold week it's been very warm. So to actually hit the numbers
	it looks like a pretty good effort.
	So I wanted to get a feel on how you've actually managed to do that.
	You've either won market share, and I think when we were over in the
	US back in March last year you talked about roughly 10% market share
	in gas marketing. Have you won market share or are you taking risk that
	has actually worked? So just, first of all, I just wanted to get a feel for
	how you've actually achieved a very strong number despite pretty
	difficult market conditions?

Shemara Wikramanayake: Yes, and look, I'll answer that first and then we have a couple of people here from CGM who may want to comment. But as you say, John, and it's good you're picking up on it, the income line, the revenue line basically is tracking FY22 where we had exceptional EMEA gas and power revenue in inventory management and trading. What's happening now is the underlying areas, the financing, the risk management, the transportation, the storage, those revenues

which are more franchised ongoing underlying annuity income have picked up 9

because we have managed to grow, not just sharing the areas in which we've been in but into adjacent areas.

That business is super diversified in commodities. For example, this year Dan Vizel who everyone would have seen in Houston, is here to present in Asia but the oil and agriculture business that Dan heads up is contributing very strongly while gas and power has contributed less compared to historically because we've had less weather events, more storage et cetera and more stability. So it's growing underlying multiple franchises in geographies as well as sectors that is lifting up the ongoing underlying earnings. This year it's a better quality earnings figure than FY22. Now, the operating expenses has gone up as well, which has impacted the net figure relative to FY22.

The other point I would make is we're still small in CGM. The runway for growth is huge. Gas and power is huge in North America. We've managed to transition into EMEA. We've got teams now growing in Asia. That's a market for us to grow into. As I said, it's a franchise growth. You had a follow-up question?

Jonathan Mott: Yes. It would be just great to get some more disclosure at the full year if possible on these exact points so we can actually - we get risk management inventory to actually be able to model that and get a good feeling on how well that franchise is doing. It would just be great to get some more disclosure if possible at the full year. But also a follow-up question. We've talked a lot about the change that every investment bank in the world is hopefully - well, are commenting on, especially since the Fed pivoted.

You're starting to see the pipeline improve, companies talking a lot, a lot more balance sheet getting deployed and obviously there's this timing difference. Even when companies start talking about it to announcing a transaction to settling is three, six, up to 12 months. Does this give you much more confidence in FY25 that, as you were saying, you're not doing deals now. We've got six weeks left to the end of the year, but FY25 you've got a lot more confidence in how that's looking?

Shemara Wikramanayake: Yes. Look, I'm cautious about guiding because ordinarily when we've looked at how market has picked back up when rates stabilise and confidence comes back it's been a bit sooner than this. We've been going since the last quarter of last year and activity levels are still quite becalmed. At some point that has to come

back. There's huge liquidity in dry powder out there. We've sitting on $A35b+. 10