Macquarie : 3Q 2023 Trading Update transcript

TRANSCRIPTION

MACQUARIE GROUP LIMITED

THIRD QUARTER FY23 TRADING UPDATE

7 FEBRUARY 2023

[START OF TRANSCRIPT]Operator:

Thank you for standing by and welcome to the Macquarie Group Third Quarter Trading Update. All participants are in a listen only mode, there will be a presentation followed by a question-and-answer session. (Operator Instructions). I would now like to hand the conference over to Mr Sam Dobson, Head of Investor Relations. Please go ahead.

Sam Dobson:

Thank you, thank you very much, thanks for joining us and welcome to today's third quarter FY23 trading update. A slight change from our usual process of giving an operational briefing as we are hosting a US analyst investor tour, as you're aware. So, today we'll hear from our CEO, Shemara Wikramanayake, who'll give you the update on the third quarter and then we'll open up for questions. Thank you very much.

Shemara Wikramanayake: Thanks, Sam, and good morning everyone from me as well. As usual, before I go through the results, I'll just spend a moment noting our business footprint which as everyone would know, comprises four operating groups in which we have deep expertise, and which are all positioned well for structural growth but diversified across those four businesses.

The first of those obviously is the Australian Banking and Financial Services business, which is a digital banking offering in personal banking, business banking and wealth and still a small share of the Australian market in all those areas, so good platform for growth there.

Then our global asset management business which is a leader in real assets in the private markets area but also has a meaningful footprint in public investments, and again well positioned across that entire capability to grow in a sector where our representation is still small.

Then we have our Commodities and Global Markets business where we have a strong base in commodities and financial markets that continues to grow 1

patiently adjacently into new regions and across new products and also a long runway for growth. And lastly Macquarie Capital where we provide advisory and capital market solutions again growing into many more regions but complemented, different to a lot of our peers with our principal investing capability across debt and equity.

As I said, across those four businesses, very diversified underlying thematics that they're exposed to and supported by four very important and strong central services groups in risk management, legal and governance, financial management and corporate operations.

So, with that, turning to the most recent result for the third quarter of FY23, as I mentioned given our diverse business footprint, there were varied conditions applying to each of our operating businesses and the net profit for the third quarter and the year to date indeed is slightly up on the FY22 year to date. Which you will recall FY22 had a particularly strong record quarter in the third quarter.

In terms of the annuity-style versus markets-facing businesses, the annuity-style businesses were substantially down on prior comparable period, both for the third quarter and for the financial year to date in FY23, and that was driven by the fact that we had strong realisations in our green energy sector assets last year, particularly in the third quarter in the Macquarie Asset Management business, but that was offset partially by continued growth in Banking and Financial Services.

In the markets-facing businesses, Macquarie Capital faced more challenging market conditions and had both a lower level of realisations and lower fee and commission income, but overall the markets-facing businesses were substantially up both on the prior comparable quarter and the prior comparable year to date, driven by the exceptionally strong results in commodities, including in the gas and power business across all regions. With the result for the third quarter of FY23 being substantially up on the first half of FY23 results in Commodities and Global Markets.

Looking then in a little bit more detail at the third quarter in each of the operating groups and starting with Macquarie Asset Management, the assets under management were broadly in line with the prior comparable September 2022 amount, sorry, broadly in line with where we finished the last quarter with 2

the public investments assets being down 1 per cent, mostly driven by foreign exchange and net flows and partially offset by what happened with market movements over this last quarter.

In private markets our assets under management were up 3 per cent and that was mostly driven by fund investments and asset valuations. I note particularly there was $A7.4 billion of new equity raised in the last quarter, bringing the raisings in that business to about $A30 billion year to date this year, compared to $A27 billion of raising for the whole of last year, which was already an increasing rate of raising for that business. $A5.3 billion of equity invested and the business in the quarter with $A31.6 billion of equity still to deploy.

The only other thing I'd note in relation to Macquarie Asset Management is that in our air finance business we entered into an agreement for the acquisition of the ALAFCO aircraft portfolio.

Turning to Banking and Financial Services, we had increases there in home loans up 4 per cent, business banking up 2 per cent, the deposits up 8 per cent, now at $A125 billion and the funds on platform also up 5 per cent, so we're seeing growth still across the BFS books, apart from the car loan portfolio that we continue to focus and streamline. But the rate of growth there has slowed.

Then turning to the markets-facing businesses, Commodities and Global Markets, as mentioned an exceptionally strong result in this third quarter across the commodities platform, particularly in relation to gas and power and oil in all regions. That was driven by both the trading results and physical execution and logistics, as well as risk management activity for clients and reflecting volatile market conditions that we experienced.

We also had a solid contribution from our financial markets business across foreign exchange, credit, futures, equities et cetera, and then we had a strong performance as well from our asset finance business, driven by TMT and Structured Lending. So, strong annuity driven revenue continuing across that platform.

Now Macquarie Capital, as we said, faced very different market conditions, so while we had $A92 billion of transactions completed, the revenue there was significantly down on the prior comparable period. Also, the investment related income was significantly down on the prior comparable period, given thesignificant realisations we had in the comparable periods. Now the Private Finance credit book grew to $A16 billion, and we continued to invest there with $A1 billion deployed in that book.

So, turning from the businesses then to our funding and capital position, sorry before that just touching on our global footprint, important to note this. Typically we've been generating about 30 per cent each from the Americas, EMEA and Australia over recent years, and 10 per cent from Asia. But you will have seen that the Americas contribution has continued to grow as a per cent quite a bit over recent years.

Given that, we will be hosting investors and analysts in the Americas in early March to have a deeper dive into our business footprint there and globally in the Commodities and Global Markets day in Houston there in the asset management business, with a day in Philadelphia and in Macquarie Capital with a day in New York. So, you'll get a deeper insight into those businesses then.

But now, as I said, turning to the balance sheet and capital position. Our funded balance sheet remains strong with our term funding comfortably exceeding our term assets, and during the period our deposits grew 7 per cent across Macquarie grew to $A130 billion, and we were also able to raise $A5.5 billion of term funding.

In terms of our capital position as well, we were $A12.5 billion at the end of the first half, that has stepped up notionally to $A12.5 billion with the earnings of the third quarter offset by the dividend. But of course we will have the APRA unquestionably strong, reforms taking effect from the first of this year and we're estimating a $A2.4 billion impact from that, which will bring our surplus down to $A10.1 billion.

The businesses were net neutral in terms of capital absorption over this quarter, with as you can see on this slide, Macquarie Asset Management absorbing capital both into co-investments and seed assets for our core and adjacent fund strategies. BFS also continued to absorb capital in the growth of the home loan and business banking portfolio, partly offset by the vehicle leasing.

In Commodities and Global Markets, we had a reduction in credit risk capital, driven by market movements in commodities, but that was partially offset byincreased market risk capital. Then in Macquarie Capital we had growth in infrastructure investments absorbing some capital. In terms of capital management activities over the period, on 18 January this year, Macquarie Bank Limited issued $US1 billion of tier 2 capital, and that's to meet APRA's loss absorbing capital requirements, so it's the ongoing response in relation to that.

So, with that our capital ratios remain comfortably above the Basel III minimum, so as you can see here on this slide, and in terms of regulatory update, nothing material that's new but we continue to work, as you can see there, with APRA, on a range of matters to continue to build the resilience of the Group, that includes the unquestionably strong embedding that I mentioned earlier, the ongoing work we're doing to strengthen the voice of the bank, and the APRA review of the non-operating holding company structures.

With that, let me turn to the outlook for the short-term. Starting with our annuity-style businesses, there's no change really in the outlook here from the end of the first half, where in Macquarie Asset Management we're saying that we expect base fees to be broadly in line, given the raising and the deployment in the private markets business and the impact of recent acquisitions in public investments, we should be substantially offset by the unfavourable market movement.

We also expect net other operating income to be significantly down, and that's due to the non-repeat of the Macquarie Infrastructure Company gain last financial year, partially offset by higher performance fees and we in the Green Investment Group, expect also the result to be significantly down given the material gains on realisation we had last financial year. And that we don't expect them to recur in this FY23.

Banking and Financial Services, as I mentioned growth in the loan portfolio deposits and platform volumes, but market dynamics will continue to drive margins and the rate of growth we have seen slowing. Then Macquarie Capital, no material change there, as we said the market conditions have meant the transaction activity, we expect to be substantially down on the record year we had last financial year, with market conditions weakening during FY23. Investment related income we expect to be broadly in line with last financial year, with increased revenue from the growth in the principal finance credit portfolio offset by lower revenue from asset realisations.