Macquarie Group Announced 1H18 Net Profit of $A1,248 million

Macquarie Group has announced a net profit after tax of $A1,248 million for the half-year ended 30 September 2017 (1H18), up 19 per cent on the half-year ended 30 September 2016 (1H17) and up seven per cent on the half-year ended 31 March 2017 (2H17).

Once again the Group has exceeded market forecasts, thanks to strong growth in performance fees from its annuity style businesses, this despite a fall in net interest income. Impairments fell. Their outlook for FY18 is also stronger.  More of their business is offshore than in Australia, so as the economic pace picks up in USA and Europe, they should benefit.

They gave their normal comprehensive briefing:

Net operating income of $A5,397 million for 1H18 was up three per cent on 1H17, while total operating expenses of $A3,693 million were down one per cent on 1H17.

Macquarie’s annuity-style businesses (Macquarie Asset Management (MAM), Corporate and Asset Finance (CAF) and Banking and Financial Services (BFS)), which represented approximately 80 per cent of the Group’s 1H18 performance, generated a combined net profit contribution of $A2,094 million, up 28 per cent on 1H17 and up 30 per cent on 2H17.

Macquarie’s capital markets facing businesses (Commodities and Global Markets (CGM) and Macquarie Capital) delivered a combined net profit contribution of $A568 million, down 18 per cent on 1H17 and down 25 per cent on 2H17.

International income accounted for 62 per cent of the Group’s total income.

Macquarie’s assets under management (AUM) at 30 September 2017 was $A473.6 billion, down two per cent from $A481.7 billion at 31 March 2017, largely due to net asset realisations in Macquarie Infrastructure and Real Assets (MIRA)5 and unfavourable currency movements in Macquarie Investment Management (MIM), partially offset by positive market movements.

Macquarie also announced today a 1H18 interim ordinary dividend of $A2.05 per share (45 per cent franked), up on the 1H17 interim ordinary dividend of $A1.90 per share (45 per cent franked) and down from the 2H17 final ordinary dividend of $A2.80 per share (45 per cent franked). This represents a payout ratio of 56 per cent. The record date for the final ordinary dividend is 8 November 2017 and the payment date is 13 December 2017.

Key drivers of the change from 1H17 were:

  • A one per cent increase in combined net interest and trading income to $A1,892 million, up from $A1,874 million in 1H17. The movement was mainly due to volume growth in the loan and deposit portfolios and improved margins in BFS, and a reduced cost of holding long-term liquidity in Corporate. This was partially offset by reduced interest income from Macquarie Capital’s debt investment portfolio and higher funding costs associated with an increase in principal investments, including the acquisition of Green Investment Group (GIG), as well as lower trading income in CGM as a result of lower market volatility.
  • A 17 per cent increase in fee and commission income to $A2,568 million, up from $A2,203 million in 1H17, due to increased performance fee income in MAM and higher fee income from the US debt capital markets business in Macquarie Capital due to increased client activity.

  • This was partially offset by reduced Life Insurance income in BFS after Macquarie Life’s risk insurance business was sold to Zurich Australia Limited in September 2016; lower mergers and acquisitions fee income in the US and Asia in Macquarie Capital; and reduced CGM brokerage and commissions income, mainly in equities due to continued low volatility across global equity markets and reduced brokerage commission rates due to the trend towards lower margin platforms.
  • A one per cent decrease in net operating lease income to $A469 million, down from $A476 million in 1H17, due to improved underlying income in CAF from the Aviation, Energy and Technology portfolios offset by foreign exchange movements.
  • Share of net profits of associates and joint ventures accounted for using the equity method of $A103 million in 1H18 increased from a loss of $A8 million in 1H17, primarily due to the improved underlying performance of investments held in Macquarie Capital.
  • Other operating income and charges of $A365 million in 1H18, down from $A673 million in 1H17. The primary drivers were lower principal gains in Macquarie Capital and CGM and the non-recurrence of the gain on sale of Macquarie Life’s risk insurance business to Zurich Australia Limited in 1H17 by BFS, partially offset by lower charges for provisions and impairments across most operating groups.
  • Total operating expenses of $A3,693 million in 1H18 decreased one per cent from $A3,733 million in 1H17, mainly due to reduced project activity in BFS, reduced employment expenses from lower average headcount, partially offset by transaction, integration and ongoing costs associated with the acquisition of GIG in Macquarie Capital.

Impairments fell from $280m (1H17) to $142m 1H18.

Staff numbers were 13,966 at 30 September 2017, up from 13,597 at 31 March 2017.

The income tax expense for 1H18 was $A448 million, a two per cent increase from $A438 million in 1H17. The increase was mainly due to higher profit before tax. The effective tax rate of 26.4 per cent was down from 29.4 per cent in 1H17 and broadly in line with the 2H17 rate of 26.9 per cent, reflecting the geographic mix and nature of earnings.

Total customer deposits increased three per cent to $A49.4 billion at 30 September 2017 from $A47.8 billion at 31 March 2017. During 1H18, $A8.2 billion of new term funding7 was raised covering a range of tenors, currencies and product types.

Macquarie’s financial position comfortably exceeds APRA’s Basel III regulatory requirements, with Group capital surplus of $A4.2 billion at 30 September 2017. This surplus was down from $A5.5 billion at 31 March 2017, following payment of the FY17 final dividend and FY17 Macquarie Group Employee Retained Equity Plan buying requirement, the ECS buyback and business growth, partially offset by 1H18 profit and movement in reserves. The Bank Group APRA Basel III Common Equity Tier 1 capital ratio was 11.0 per cent (Harmonised: 13.3 per cent) at 30 September 2017, down from 11.1 per cent (Harmonised: 13.3 per cent) at 31 March 2017.

The Bank Group’s APRA leverage ratio was 6.1 per cent (Harmonised: 6.9 per cent), LCR was 153 per cent and NSFR was 109 per cent at 30 September 2017.

The Basel Committee has delayed the finalisation of proposals to amend the calculation of certain risk weighted assets under Basel III. Any impact on capital will depend upon the final form of the proposals and local implementation by APRA.

APRA has delayed until at least 1 January 2019 the implementation of a new standardised approach for measuring counterparty credit risk exposures on derivatives (SA-CCR) and capital requirements for bank exposures to central counterparties. APRA has also announced that it does not expect to finalise a new market risk standard until at least 2020, with implementation from 2021 at the earliest.

APRA provided guidance around CET1 capital ratios for Australian banks to be considered ‘unquestionably strong’ and intends to release further details on how the new requirements will be implemented later this year. APRA has indicated11 that the implementation of the proposal will incorporate changes to the prudential framework resulting from the finalisation of Basel III. Based on existing guidance, Macquarie’s surplus capital position remains sufficient to accommodate any additional requirements.

To provide additional flexibility to manage the Group’s capital position going forward, the Board has approved an on-market buyback of up to $A1 billion, subject to a number of factors including the Group’s surplus capital position, market conditions and opportunities to deploy capital by the businesses. This buyback has received the necessary regulatory approvals.

Operating group performance

  • Macquarie Asset Management delivered a net profit contribution of $A1,189 million for 1H18, up 39 per cent from $A857 million in 1H17. Performance fee income of $A537 million, from Macquarie European Infrastructure Fund 3 (MEIF3), Macquarie Atlas Roads (MQA) and other MIRA-managed funds and co-investors, was up from $A170 million in 1H17. Base fees of $A795 million were broadly in line with 1H17 as investments made by MIRA-managed funds, growth in the MSIS Infrastructure Debt business and positive market movements in MIM AUM were partially offset by asset realisations by MIRA-managed funds, net flow impacts in the MIM business and foreign exchange impacts. Investment-related income was broadly in line with 1H17 and included gains from sale and reclassification of certain infrastructure investments. Assets under management of $A471.9 billion decreased two per cent on 31 March 2017.
  • Corporate and Asset Finance delivered a net profit contribution of $A619 million for 1H18, up 19 per cent from $A521 million in 1H17. The increase was mainly driven by increased income from prepayments, realisations and investment-related income in the Principal Finance portfolio and lower provisions for impairment, partially offset by lower interest income as a result of the reduction in the Principal Finance portfolio. The Asset Finance portfolio continued to perform well. CAF’s asset and loan portfolio of $A35.5 billion decreased three per cent on 31 March 2017.
  • Banking and Financial Services delivered a net profit contribution of $A286 million for 1H18, up 10 per cent from $A261 million in 1H17. The improved result reflects increased income from volume growth in the loan and deposit portfolios and improved margins. 1H17 included the gain on sale of Macquarie Life’s risk insurance business net of expenses including impairment charges predominately on equity investments and intangible assets, and a change in approach to the capitalisation of software expenses in relation to the Core Banking platform. BFS deposits12 of $A46.4 billion increased four per cent on 31 March 2017 and funds on platform13 of $A78.9 billion increased nine per cent on 31 March 2017. The Australian mortgage portfolio of $A29.9 billion increased four per cent on 31 March 2017, representing approximately two per cent of the Australian mortgage market.
  • Commodities and Global Markets delivered a net profit contribution of $A378 million for 1H18, down 23 per cent from $A490 million in 1H17. The result primarily reflects reduced income from the sale of investments, mainly in energy and related sectors, and lower volatility across the commodities platform resulting in reduced client activity and trading opportunities. This was partially offset by strong client flows and revenues from interest rates and foreign exchange, improved results across the equities platform, and lower operating expenses reflecting reduced commodity-related trading activity, reduced average headcount and associated activity, and realisation of benefits from cost synergies following the merger of Commodities and Financial Markets and Macquarie Securities Group. Macquarie Energy improved its Platts ranking to become the No. 2 US physical gas marketer in North America.
  • Macquarie Capital delivered a net profit contribution of $A190 million for 1H18, down seven per cent from $A205 million in 1H17. The result reflects reduced investment-related income and lower M&A fee income in the US and Asia, partially offset by higher fee income from debt capital markets in the US and lower provisions and impairment charges. During 1H18, Macquarie Capital advised on 152 transactions valued at $A73 billion including being defence adviser to DUET Group in response to the $A13.4 billion acquisition by Cheung Kong Infrastructure; acquisition of 100 per cent ownership interest in RES Japan, a Japanese subsidiary of Renewable Energy Systems Group, rebranded as Acacia Renewables and focused on developing a pipeline of onshore wind energy projects; and financial advisor and equity investor in the restructuring and acquisition of the 907MW Norte III combined cycle gas plant in Juarez, Mexico. During 1H18, Macquarie completed the acquisition of the UK Green Investment Bank plc from HM Government for £2.3 billion. The Green Investment Bank, rebranded as Green Investment Group, is one of Europe’s largest teams of green energy investment specialists, with expertise in project finance and development, construction, investment and asset management of green energy infrastructure.

Macquarie advised today that ex. RBA Chief Glenn Stevens will be appointed to the Macquarie Group Limited and Macquarie Bank Limited Boards as an independent director, effective 1 November 2017.

Macquarie launches ‘open banking’ regime

From InvestorDaily.

Macquarie has agreed to make its application programming interface (API) available to third party developers – a move that has so far been resisted by every other major bank. Open Banking has the potential to drive significant customer benefits, but may also lead to digital disruption.

Macquarie has launched its new ‘open banking platform’, which the bank says will give customers “control over the everyday banking data” as well as “the power to securely manage how they want to share it”.

As part of announcement, Macquarie will now give “approved” third party providers access to its API via the bank’s open developer portal and test sandbox, called devXchange.

“While consumers typically need to reveal their banking login details to use budgeting tools and similar services, Macquarie’s open platform means customers will never need to give their login details to a third party, creating a more secure way to access these services,” said a statement by the bank.

“Macquarie’s open platform also gives customers the power to manage access to their data in real time through the Macquarie banking app. Authorised third party providers will have read only access to that customer’s data through a secure token which then reads the data from Macquarie’s systems,” said the bank.

Macquarie head of personal banking Ben Perham said, “Our customers have been telling us they want to securely connect their information into their favourite accounting software, budgeting app and other innovative services they’re interested in. Macquarie’s open platform will make this possible.

“We’ve built a highly personalised digital banking experience, so empowering our customers to securely manage how they want to use their own data is the logical next step.

“APIs are being used by leading digital companies like Amazon and Google to transform consumer experiences, and we’re excited about the opportunities the technology will bring to financial services.

“We’re looking forward to working with third party providers and developers to drive new and more personalised solutions for our customers that tie in seamlessly with daily life.”

Macquarie 1Q18 Update – Tracking Well

The Macquarie Group 1Q 18 update shows the group is travelling well, with no significant on-off items in the quarter. The Bank Group APRA Basel III Common Equity Tier 1 capital ratio was 10.9 per cent at 30 June 2017, down from 11.1 per cent at 31 March 2017.

Macquarie currently expects the year ending 31 March 2018 (FY18) combined net profit contribution from operating groups to be broadly in line with the year ended 31 March 2017 (FY17).

APRA’s proposal to establish ‘unquestionably strong’ Australian banking sector capital ratios by 2020 would increase Macquarie Bank Limited’s minimum capital requirements by approximately $A1.4 billion.

The estimated annualised cost of the bank tax has the same effect as increasing Macquarie Bank’s Australian effective tax rate from 34 per cent to 41 per cent they said.

The Group’s short-term outlook remains subject to:

  • market conditions
  • the impact of foreign exchange; and
  • potential regulatory changes and tax uncertainties

The Australian mortgage portfolio of $A29.4 billion increased two per cent on 31 March 2017.

Macquarie Asset Management (MAM) had $A460.8 billion in assets under management at 30 June 2017, down four per cent on 31 March 2017, largely due to net asset realisations in Macquarie Infrastructure and Real Assets (MIRA), partially offset by favourable market and foreign exchange movements. MIRA’s equity under management of $A74.2 billion was down four per cent from $A77.2 billion at 31 March 2017. 1Q18 included performance fees from several funds including Macquarie Atlas Roads. During the quarter, MIRA invested equity of $A3.0 billion across four acquisitions and seven follow-on investments in infrastructure and real estate in five countries. Macquarie Investment Management was awarded over $A3.1 billion in new institutional mandates across nine strategies from clients in five countries and Macquarie Specialised Investment Solutions was awarded over $A800 million of new and additional infrastructure debt mandates.

Corporate and Asset Finance’s asset and loan portfolio of $A36.2 billion at 30 June 2017, was broadly in line with 31 March 2017. During the quarter, there were portfolio additions of $A0.9 billion in corporate and real estate lending across new primary financings and secondary market acquisitions. In addition, $A0.8 billion of motor vehicle and equipment leases and loans were securitised.

Banking and Financial Services had total BFS deposits6 of $A47.3 billion at 30 June 2017, up six per cent on 31 March 2017. The Australian mortgage portfolio of $A29.4 billion increased two per cent on 31 March 2017, funds on platform7 of $A79.1 billion increased ten per cent on 31 March 2017 largely due to the final migration of full service broking accounts to the Vision platform, and the business banking loan portfolio of $A6.7 billion increased three per cent on 31 March 2017. During the quarter, BFS entered into exclusive due diligence with Morgan Stanley to provide administration services and develop a new white labelled Wrap offering. BFS won Best Digital Banking Offering and Most Innovative Card Offering at the 2017 Australian Retail Banking Awards.

Commodities and Global Markets saw client hedging and trading opportunities remain steady across the commodities platform, and experienced continued strong customer activity in foreign exchange, interest rates and futures markets, which was driven by ongoing market volatility. CGM also experienced increased equity capital markets activity and market turnover in Cash Equities. During the quarter, CGM entered into an agreement to acquire Cargill’s North American Power and Gas business to expand the geographic and service coverage in key markets in the region. CGM also announced the merger of the Energy Markets and Metals, Mining and Agriculture divisions to form one commodities division called Commodity Markets and Finance.

Macquarie Capital experienced increased client activity in debt capital markets, while equity capital markets and M&A activity remained subdued compared to the prior corresponding period. In 1Q18, 97 deals were completed at $A45 billion, up on 1Q17 and broadly in line with 4Q17 (by value)8. The principal book performed in line with expectations. Macquarie Capital was ranked No.1 for global Infrastructure Finance financial advisory9. Macquarie Capital was also ranked No.1 for announced and completed M&A deals10 and No.1 for IPO and ECM deals in Australia10.

We are not a major bank: Macquarie

From Australian Broker.

Macquarie has decried its inclusion in the government’s bank levy, in a statement stressing its minor market share and low ranking in Australia’s banking ecosystem.

The comments come from the group’s submission to the Senate Economics Legislation Committee which held a hearing with the Australian Bankers’ Association (ABA), the big four banks, Macquarie, ME, Bendigo and Adelaide Bank and the Customer Owned Banking Association (COBA) on Friday (16 June).

The levy will have a “disproportionate impact” on Macquarie Bank, chief financial officer Patrick Upfold wrote in the submission paper.

“Macquarie Bank is not a ‘major bank’,” he said. “Macquarie Bank is predominantly a wholesale business and exporter of financial services.”

While the purpose of the levy has allegedly been to provide a more even playing field in a market where the five affected banks represent 80% of all credit provided, Upfold said that by itself Macquarie held less than 2% of total lending and advances in Australia.

“Putting this into perspective, Macquarie Bank’s Australian mortgage business is not the fifth largest in Australia but eighth, ranking behind ING, Suncorp and Bendigo Bank and just ahead of Bank of Queensland.”

The levy will increase the effective tax rate on the bank from 34% to 41% which was well above the 30% company tax rate, Upfold said.

“We remain surprised the Major Bank Levy applies to Macquarie Bank given our size, the benefit we bring to competition in the domestic retail market and the role we play in bringing export income into the Australian economy.”

Macquarie also suggested a number of changes to the levy including increasing the threshold level for banks to be eligible.

“The levy threshold has been set high enough to exclude regional banks whose domestic presence is larger than Macquarie Bank’s but low enough to ensure Macquarie Bank’s inclusion,” Upfold said.

“To achieve the stated objective of improving competition in the domestic retail market and to ensure Macquarie’s continued success in exporting financial services globally, the threshold should be raised to exclude Macquarie Bank.”

Macquarie Bank to address inadequacies within their wholesale FX businesses

ASIC has today accepted an enforceable undertaking (EU) from Macquarie Bank Limited in relation to the bank’s wholesale foreign exchange (FX) businesses, following an ASIC investigation.

ASIC is concerned that the bank failed to ensure that its systems and controls were adequate to address risks relating to instances of inappropriate conduct identified by ASIC.

ASIC Commissioner Cathie Armour said, ‘The wholesale spot foreign exchange market is one the world’s largest financial markets and the proper functioning of this market is of vital importance to the Australian economy.’

‘ASIC has now accepted undertakings from some of Australia’s largest market participants to put in place forward looking processes and controls to ensure that their foreign exchange businesses provide financial services honestly, efficiently and fairly.’

‘ASIC will continue to ensure that there can be ongoing confidence in how our financial institutions conduct themselves now and into the future,’ Ms Armour said.

ASIC identified the following conduct by employees of Macquarie in its spot FX business between 1 January 2008 and 30 June 2013:

  • On a number of occasions, Macquarie employees disclosed to external third parties confidential details of pending client orders including identification of a client;
  • On a number of occasions, Macquarie employees inappropriately disclosed to external third parties confidential and potentially material information about Macquarie’s trading activity associated with large pending AUD orders; and
  • On a number of occasions, when the market approached the trigger price of a stop loss order, Macquarie spot FX traders responsible for managing the order traded in a manner that may have been intended to cause the trigger price to trade when it might not have traded at that time.

ASIC is concerned that Macquarie did not ensure that its systems, controls and framework for supervision and monitoring were adequate to prevent, detect and respond to such conduct, which had the potential to undermine confidence in the proper functioning and integrity of the market.

Macquarie will develop a program of changes to its existing systems, controls, training, guidance and framework for monitoring and supervision of employees in its spot FX and non-deliverable forwards businesses to prevent, detect and respond to:

  1. inappropriate disclosure of confidential information to external market participants; and
  2. inappropriate order management and trading in respect of stop loss orders.

ASIC will appoint an independent consultant to assess the program and its implementation. The program will incorporate changes already made by Macquarie as part of ongoing reviews of its businesses.

Upon implementation of that program, for a period of three years, Macquarie will conduct an annual internal review of the program, which will be independently assessed, and provide an annual attestation from its senior executives to ASIC.

Macquarie will also make a community benefit payment of $2 million to The Smith Family to support The Smith Family’s financial services program aimed at improving young people’s understanding of money management.

ASIC encourages market participants to adhere to high standards of market practice, including those set out in the Global Code of Conduct for the Foreign Exchange Market, published by the Bank of International Settlements (BIS Global FX Code). The BIS Global FX Code provides a global set of practice guidelines to promote the integrity and effective functioning of the wholesale FX market. Phase 1 of the Code was published in May 2016, and Phase 2 is due for publication in May 2017.

ASIC is grateful for the assistance of international regulatory counterparts in progressing the investigation.

Background

Prior to accepting these EU from Macquarie, ASIC’s FX investigation has seen ASIC accept enforceable undertakings from each of the Westpac Banking Corporation, Australia and New Zealand Banking Group Limited, National Australia Bank Limited and the Commonwealth Bank of Australia (refer: 17-065MR and 16-455MR). The institutions also made voluntary contributions totalling $11 million to fund independent financial literacy projects in Australia.

The wholesale spot FX market is an important financial market for Australia. It facilitates the exchange of one currency for another and thus allows market participants to buy and sell foreign currencies. As part of its spot FX business, Macquarie entered into different types of spot FX agreements with its clients, including Australian clients.

Spot FX refers to FX contracts involving the exchange of two currencies at a price (exchange rate) agreed on a date (the trade date), and which are usually settled two business days from the trade date.

Non-deliverable forwards refer to FX forward contracts which, at maturity, are settled by calculating the difference between the agreed forward rate and a settlement rate (which is usually determined by reference to a benchmark published exchange rate). A FX forward contract is an agreement between two counterparties to exchange currencies at a future date at a rate agreed upon in advance.

Macquarie FY17 Profit Up 7.5%

Macquarie Group has announced a net profit after tax attributable to ordinary shareholders of $A2,217 million for the full year ended 31 March 2017 (FY17), up 7.5 per cent on the full year ended 31 March 2016 (FY16).

Profit for the half-year ended 31 March 2017 (2H17) was $A1,167 million, up 11 per cent on the half-year ended 30 September 2016 (1H17) and up 18 per cent on the half-year ended 31 March 2016 (2H16).

There was a nine per cent decrease in combined net interest and trading income to $A3,954 million, an 11 per cent decrease in fee and commission income to $A4,331 million, a five per cent increase in net operating lease income to $A921 million, whilst other operating income and charges of $A1,107 million in FY17 increased significantly from $A66 million in FY16. The primary drivers were increased gains on the sale of investments and businesses; and lower charges for provisions and impairments across most operating groups.  Total operating expenses increased two per cent whilst staff numbers were down.

Macquarie Group Managing Director and Chief Executive Officer (CEO) Nicholas Moore said: “Macquarie’s annuity-style businesses (Macquarie Asset Management (MAM), Corporate and Asset Finance (CAF) and Banking and Financial Services (BFS)), which represent approximately 70 per cent of the Group’s performance5, continued to perform well, with combined net profit contribution of $A3,249 million, up four per cent on FY16.

“Macquarie’s capital markets facing businesses (Commodities and Global Markets (CGM) and Macquarie Capital) also performed well with a combined net profit contribution of $A1,454 million, up 12 per cent on FY16.”

Net operating income of $A10,364 million in FY17 was up two per cent on FY16, while operating expenses of $A7,260 million were also up two per cent on FY16.

While Macquarie continued to build on the strength of its Australian franchise, its international income accounted for 63 per cent of the Group’s total income for FY17. Total international income was $A6,433 million in FY17, a decrease of five per cent on FY16.

Macquarie’s assets under management (AUM) at 31 March 2017 were $A481.7 billion, broadly in line with $A478.6 billion at 31 March 2016, due to favourable market movements and additional fund investments in Macquarie Infrastructure and Real Assets (MIRA), partially offset by a decrease in insurance assets and unfavourable foreign exchange movements.

Macquarie announced a 2H17 final ordinary dividend of $A2.80 per share (45 per cent franked), up from the 1H17 interim ordinary dividend of $A1.90 per share (45 per cent franked) and up from the 2H16 final ordinary dividend of $A2.40 per share (40% franked). The total ordinary dividend payment for the year of $A4.70 per share, is up from $A4.00 in the prior year. This represents an annual ordinary dividend payout ratio of 72 per cent. The record date for the final ordinary dividend is 17 May 2017 and the payment date is 3 July 2017.

Macquarie currently expects the year ending 31 March 2018 (FY18) combined net profit contribution from operating groups to be broadly in line with the year ended 31 March 2017 (FY17). The FY18 tax rate is currently expected to be broadly in line with FY17. Accordingly, the Group’s result for FY18 is currently expected to be broadly in line with FY17.

Operating group performance

  • Macquarie Asset Management delivered a net profit contribution of $A1,538 million for FY17, down six per cent from $A1,644 million in FY16. FY17 base fees of $A1,574 million were broadly in line with FY16. Base fee income benefited from investments made by MIRA-managed funds, growth in the MSIS Infrastructure Debt business and positive market movements in MIM AUM, largely offset by asset realisations by MIRA-managed funds, net AUM outflows in the MIM business and foreign exchange impacts. Performance fee income of $A264 million, predominately from infrastructure assets, was down from a particularly strong $A693 million in FY16. Investment-related income included principal gains from the partial sale of MIRA’s holdings in MQA and MIC, the sale of the trustee-manager of APTT as well as the sale of unlisted real estate and infrastructure holdings. Assets under management of $A480.0 billion were broadly in line with 31 March 2016.
  • Corporate and Asset Finance delivered a net profit contribution of $A1,198 million for FY17, up six per cent from $A1,130 million in FY16. The increase reflected the full year contribution of the AWAS and Esanda acquisitions as well as lower provisions for impairment, partially offset by the impact of lower loan volumes in the Lending portfolio, unfavourable foreign exchange and the sale of nine aircraft in the aircraft leasing portfolio. The AWAS and Esanda acquisitions continue to perform in line with expectations. CAF’s asset and loan portfolio of $A36.5 billion decreased seven per cent on 31 March 2016 due to the impact of unfavourable foreign currency movements, net repayments and realisations in the Lending portfolio and asset depreciation.
  • Banking and Financial Services delivered a net profit contribution of $A513 million for FY17, up 47 per cent from $A350 million in FY16. The improved result reflects increased income from growth in Australian lending, deposit and platform average volumes, as well as a gain on sale of Macquarie Life’s risk insurance business. This was partially offset by a loss on the disposal of the US mortgages portfolio, increased impairment charges predominately on equity investments and intangible assets, increased costs mainly due to elevated project activity as well as a change in approach to the capitalisation of software expenses in relation to the Core Banking platform. BFS deposits of $A44.5 billion increased ten per cent on 31 March 2016 and funds on platform of $A72.2 billion increased 24 per cent on 31 March 2016. The Australian mortgage portfolio of $A28.7 billion increased one per cent on 31 March 2016, representing approximately two per cent of the Australian mortgage market. NIM up across Australian mortgages and business lending portfolios,
    partially offset by lower NIM across business banking deposits.
  • Commodities and Global Markets delivered a net profit contribution of $A971 million for FY17, up 15 per cent from $A844 million in FY16. The result reflects an increase in investment-related income generated from the sale of a number of investments and a reduction in provisions for impairment compared to the prior year. This was partially offset by reduced commodities-related net interest and trading income compared to FY16 due to mixed results in power markets and base metals partially offset by increased client activity in precious metals. CGM continued to experience strong results for the energy platform, particularly in Global Oil and North American Gas and increased customer activity in foreign exchange, interest rates and futures markets due to ongoing market volatility. Equities was down on a strong prior year which benefited from strong equity market activity, particularly in China. Macquarie was awarded the 2016 Commodity House of the Year for the third consecutive year.
  • Macquarie Capital delivered a net profit contribution of $A483 million for FY17, up seven per cent from $A451 million in FY16. The increase was largely due to improved M&A Advisory in the US and Europe and DCM in the US and a decline in impairment charges partially offset by a decline in ECM income due to subdued equity market conditions in Australia. During FY17, Macquarie Capital advised on 417 transactions valued at $A159 billion including being joint lead manager, joint bookrunner and joint underwriter to Boral Limited’s ~$A2.1 billion equity raising to partially fund its acquisition of Headwaters Incorporated; financial adviser for a consortium led by Maeda Corporation for the privatisation of eight toll roads in Aichi Prefecture, Japan; financial adviser and debt arranger to a group of North American infrastructure investors on the acquisition of Cleco Corporation; exclusive financial adviser on Laureate Education’s $US400 million of convertible securities; capital raising and acquisition in conjunction with CGM of a 50 per cent Principal Investment in the 299MW Tees Renewable Energy Plant; and acquisition of a 25 per cent stake in the £1.6 billion, 573MW Race Bank offshore wind farm, also advising MIRA on the acquisition of a 25 per cent stake in the project.

Full year result overview

Chief Financial Officer (CFO) Patrick Upfold said: “Net operating income of $A10,364 million for FY17 was up two per cent on FY16, while total operating expenses of $A7,260 million were also up two per cent on FY16.”

Key drivers of the change from the prior year were:

  • A nine per cent decrease in combined net interest and trading income to $A3,954 million, down from $A4,346 million in FY16. CGM was impacted by limited trading opportunities in equity markets compared to FY16 which benefited from strong activity, particularly in China, as well as lower levels of commodities-related client activity and trading opportunities in energy markets compared to a strong FY16. Additionally, CAF was impacted by lower loan volumes in the CAF Lending portfolio and the full year impact of funding costs of the AWAS portfolio. Partially offsetting these declines was growth in average volumes and improved margins across the Australian loan portfolios in BFS, a stronger performance in foreign exchange, interest rates and credit markets products in CGM and the full year contribution of the Esanda dealer finance portfolio.
  • An 11 per cent decrease in fee and commission income to $A4,331 million, down from $A4,862 million in FY16. Performance fees were $A264 million in FY17, down 63 per cent on a particularly strong FY16 which benefited from significant performance fees of $A714 million. Brokerage and commissions income of $A813 million was down eight per cent from $A888 million, mainly in equities due to reduced client trading activity. Mergers and acquisitions, advisory and underwriting fees of $A963 million in FY17 was broadly in line with $A962 million in FY16 with a strong performance in mergers and acquisitions and debt capital markets fees partially offset by reduced fee income from equity capital markets activities, particularly in Australia due to subdued equity market conditions.
  • A five per cent increase in net operating lease income to $A921 million, up from $A880 million in FY16, mainly driven by the full year contribution of the AWAS portfolio acquisition in CAF, partially offset by unfavourable foreign currency movements for GBP denominated energy assets.
  • Other operating income and charges of $A1,107 million in FY17 increased significantly from $A66 million in FY16. The primary drivers were increased gains on the sale of investments and businesses; and lower charges for provisions and impairments across most operating groups with the largest decrease in CGM as a result of reduced exposures to underperforming commodity-related loans. Gains on the sale of investments and businesses included the sale of the trustee-manager of Asian Pay Television Trust (APTT) and the partial sale of holdings in Macquarie Atlas Roads (MQA) and Macquarie Infrastructure Corporation (MIC) by MAM, a significant gain from BFS’ sale of Macquarie Life’s risk insurance business to Zurich Australia Limited, as well as the sale of a number of investments in the energy and related sectors in CGM.
  • Total operating expenses increased two per cent, mainly due to higher employment expenses driven by increased share-based payments expenses relating to increased retained equity awards granted in previous years, higher performance-related remuneration expense largely driven by the improved overall performance of the operating groups and increased fixed remuneration due to a small increase in average headcount, partially offset by favourable foreign currency movements.

Staff numbers were 13,597 at 31 March 2017, down from 14,372 at 31 March 2016.

The income tax expense for FY17 was $A868 million, a six per cent decrease from $A927 million in FY16. The decrease was mainly due to changes in the geographic composition of earnings, with increased income being generated in Australia and the UK, and lower income in the US, combined with reduced tax uncertainties. These were partially offset by an increase in operating profit before income tax and the write-off of certain tax assets. The effective tax rate of 28.1 per cent was down from 31.0 per cent in FY16.

Strong funding and balance sheet position

“Macquarie remains well funded with a solid and conservative balance sheet, while pursuing its strategy of diversifying funding sources by continuing to grow its deposit base and accessing a variety of funding markets.” Mr Upfold said.

Total customer deposits increased by 9.6 per cent to $A47.8 billion at 31 March 2017 from $A43.6 billion at 31 March 2016. During FY17, $A10.5 billion of new term funding was raised covering a range of tenors, currencies and product types.

Capital management

Macquarie’s financial position comfortably exceeds APRA’s Basel III regulatory requirements, with Group capital surplus of $A5.5 billion at 31 March 2017, which was up from $A3.9 billion at 31 March 2016. The Bank Group APRA Basel III Common Equity Tier 1 capital ratio was 11.1 per cent (Harmonised: 13.3 per cent) at 31 March 2017, up from 10.7 per cent (Harmonised: 12.5 per cent) at 31 March 2016. The Bank Group’s APRA leverage ratio was 6.4 per cent (Harmonised: 7.3 per cent) and LCR was 168 per cent.

Macquarie intends to purchase shares, to satisfy the MEREP requirements of approx. $A378 million. The buying period for the MEREP will commence on 16 May 2017 and is expected to be completed by 7 July 2017. No discount will apply for the 2H17 DRP and the shares are to be acquired on-market.

Exchangeable Capital Securities buyback

Macquarie today announced that following the issue of $US750 million Macquarie Additional Capital Securities (MACS) hybrid capital in March 2017, it intends to buyback $US250 million Exchangeable Capital Securities (ECS) hybrid capital in June 2017. The ECS are Basel III – transitional Additional Tier 1 securities listed in 2012. Under the proposed transaction, a Resale of ECS will take place, whereby all ECS Holders will sell to a third party financial institution for par value on 20 June 2017 after interest has been paid. Macquarie Bank Limited (London Branch) will buyback ECS immediately following the Resale such that no Exchange to Macquarie’s ordinary shares will occur. A Resale Notice will be required to be delivered to ECS Holders shortly in accordance with the ECS Terms.

Regulatory update

The Basel Committee has delayed the finalisation of proposals to amend the calculation of certain risk weighted assets under Basel III. Any impact on capital will depend upon the final form of the proposals and local implementation by APRA.

APRA has delayed until at least 1 January 2019 the implementation of a new standardised approach for measuring counterparty credit risk exposures on derivatives (SA-CCR); and capital requirements for bank exposures to central counterparties (CCPs). APRA will consult again on these requirements in 2017. APRA has also announced that it does not expect to finalise a new market risk standard until at least 2020, with implementation from 2021 at the earliest.

APRA will give more detail around the middle of the year on how it proposes to address the Financial Systems Inquiry recommendation that Australian Authorised Deposit-Taking Institutions (ADI’s) capital ratios should be unquestionably strong.

APRA released final Net Stable Funding Ratio (NSFR) requirements at the end of 2016, however the exact application of certain elements of the standard remains under discussion. The NSFR and associated changes to APRA ADI Prudential Standard APS 210 will be effective from 1 January 2018. Macquarie Bank’s NSFR was greater than 100 per cent at 31 March 2017.

 

Macquarie Tightens Mortgage Underwriting Standards

From Australian Broker.

Macquarie Bank is about to bring in strict new credit rules forcing borrowers to disclose their household and discretionary spending in 12 different categories.

Fairfax Media reports that from today, borrowers will have to provide a detailed list of household expenditure including clothing, personal care, groceries, transport, utilities and other household rates.

Information about other expenses such as childcare, education, insurance, medical costs, investment property outlays, recreation and entertainment, telephone, internet and media streaming subscriptions will also be collected.

Applicants for interest-only loans will also have to supply a reason for the application and explain why they have opted for an interest-only loan as opposed to a principal and interest loan.

In processing these applications, brokers will also have to explain to borrowers how interest-only repayments work and what their impact is on principal and repayments once the interest-only term is finished.

Macquarie Update Says In Line With FY16

Macquarie Group provided an update on business activity in the third quarter of the financial year ending 31 March 2017 (December 2016 quarter).

Macquarie currently expects the year ending 31 March 2017 (FY17) combined net profit contribution from operating groups to be broadly in line with the year ended 31 March 2016 (FY16).

Essentially, Macquarie’s annuity-style businesses’ (Macquarie Asset Management, Corporate and Asset Finance and Banking and Financial Services) combined December 2016 quarter net profit contribution was up on the December 2015 quarter.

For the nine months ended December 2016, net profit contribution1 was slightly down on the prior corresponding period which benefited from strong performance fees in Macquarie Asset Management.

However Macquarie’s capital markets facing businesses’ (Commodities and Global Markets and Macquarie Capital) combined December 2016 quarter net profit contribution was down on the prior corresponding period largely due to subdued Equity Capital Markets (ECM) activity and the timing of transactions in Macquarie Capital.

For the nine months ended December 2016, net profit contribution was slightly down on the nine months ended December 2015 notwithstanding stronger activity across most of the businesses in Commodities and Global Markets except Securities, which benefited from strong Chinese equity market conditions in the prior corresponding period.

Macquarie Group’s financial position comfortably exceeds APRA’s Basel III regulatory requirements, with Group capital surplus of $A3.7 billion at 31 December 2016, in line with 30 September 2016. The Bank Group’s APRA Basel III Common Equity Tier 1 capital ratio was 10.5 per cent (Harmonised: 12.6 per cent) at 31 December 2016, up from 10.4 per cent at 30 September 2016. The Bank Group’s APRA leverage ratio was 5.3 per cent (Harmonised: 6.2 per cent) and average LCR was 174 per cent.

Here is a brief overview:

  • Macquarie Asset Management (MAM) had assets under management (AUM) of $A501.7 billion at 31 December 2016, up two per cent on 30 September 2016 predominately driven by positive foreign exchange and market movements. During the quarter, Macquarie Infrastructure and Real Assets raised $A1.4 billion in new equity, largely in Australian, Global and European Infrastructure funds; invested equity of $A1.9 billion including infrastructure in the US, Australia, UK and Mexico; and divested $A0.6 billion of assets in Germany and Mexico. Macquarie Investment Management was awarded $A1.6 billion in new, funded institutional mandates across ten strategies. Macquarie Specialised Investment Solutions continued to grow the Macquarie Infrastructure Debt Investment Solutions (MIDIS) business with total third party investor commitments of over $A6.1 billion and total AUM of $A3.5 billion.
  • Corporate and Asset Finance’s (CAF) asset and loan portfolio of $A37.9 billion at 31 December 2016 was broadly in line with 30 September 2016. Certain portfolios were impacted by unfavourable foreign exchange movements largely due to weakening GBP. AWAS and Esanda continue to perform in line with expectations. During the quarter, $A2.2 billion of motor vehicle and equipment leases and loans were securitised. The Lending portfolio had additions of $A0.6 billion across both primary and secondary markets equally. Notable realisations during the quarter included the exit of a toll road investment in Virginia in the United States.
  • Banking and Financial Services (BFS) had total BFS deposits5 of $A44.2 billion at 31 December 2016, up five per cent on 30 September 2016. The Australian mortgage portfolio of $A28.6 billion remained in line with 30 September 2016, while funds on platform of $A70.5 billion increased 14 per cent on 30 September 2016 largely due to the successful migration of the ANZ Oasis wrap super and investment assets onto Macquarie’s platform. The business banking loan portfolio of $A6.5 billion increased two per cent on 30 September 2016.
  • Commodities and Global Markets (CGM) was formed from the merger of Macquarie Securities Group and Commodities and Financial Markets to create an integrated, end-to-end offering across global markets including equities, fixed income, foreign exchange and commodities. The integration is progressing well. Strong results continued across the energy platform, particularly from Global Oil and North American Gas; and increased volatility in agriculture and base metals markets resulted in increased client hedging activity. Strong trading results were also experienced across financial markets businesses due to volatility associated with macro-economic events. Market conditions continued to impact client volumes in equity markets.
  • Macquarie Capital experienced solid levels of activity, particularly in infrastructure in Australia and the US, with 88 transactions valued at $A44 billion completed globally. Notable transactions included: exclusive financial advisor on the acquisition of a 50.4 per cent interest in the 99 year lease of Ausgrid for ~$A16.2 billion, the largest M&A transaction in ANZ in 2016 and largest infrastructure and utilities M&A transaction in ANZ6; advised Capital Stage on the €2 billion merger with CHORUS Clean Energy, creating one of Europe’s largest independent operators of solar and wind parks; financial advisor, lead left bookrunner and joint lead arranger on the acquisition financing for a portfolio of contracted thermal power plants in North America; and sole financial advisor and underwriter on MMG Limited’s $US512 million rights issue on the HK Stock Exchange.

 

Federal Court imposes multi-million dollar penalties on ANZ and Macquarie Bank

The ACCC says the Federal Court has imposed multi-million dollar penalties on Australia and New Zealand Banking Group Limited (ANZ) and Macquarie Bank Ltd (Macquarie) for attempted cartel conduct after action by the Australian Competition and Consumer Commission.

Following the filing of joint statements of facts and submissions by the parties, Justice Wigney imposed penalties of:

  • $9 million against ANZ in respect of its admission that it engaged in ten instances of attempted cartel conduct in contravention of the Competition and Consumer Act 2010 (CCA); and
  • $6 million against Macquarie in respect of its admission that it engaged in eight instances of attempted cartel conduct in contravention of the CCA.

The banks were also ordered to contribute to the ACCC’s costs.

“These penalties underline the seriousness of the conduct involved in these proceedings. Two significant Australian banks have admitted that on several occasions their traders communicated with other banks in an attempt to influence the ABS MYR Fixing Rate. This conduct had the potential to undermine the integrity of foreign exchange markets and undermine healthy economic growth,” ACCC Chairman Rod Sims said.

“Australia’s strong cartel laws apply equally across the economy, including in the banking sector.” Mr Sims said.

In his judgment, Justice Wigney stated:

“There could be little doubt that the attempted contraventions … were very serious… The conduct of the traders in question was deliberate and systematic.”

“Attempts by banks and other market participants to fix prices or financial benchmarks in the financial system should be regarded as particularly serious contravening conduct. It is essential that market participants and the public generally have confidence in the integrity and efficacy of the financial system.”

Justice Wigney also noted:  “The Australian public is entitled to expect that Australia’s major corporations act as exemplary corporate citizens wherever in the world they may operate.”

Background

Traders employed by a number of banks in Singapore communicated via online chatrooms about daily submissions to be made to the Association of Banks in Singapore (ABS) in relation to the benchmark rate for the Malaysian ringgit (ABS MYR Fixing Rate).

ABS benchmark rates are used as reference rates for settling NDFs. Non-deliverable currencies are not freely tradeable outside the domestic economy, so a benchmark rate must be set by banks submitting their views on the appropriate rate. That benchmark is used to enable trade in forward contracts.

During the relevant period, the ABS MYR Fixing Rate was derived from submissions made each day by a panel of banks.

Every trading day, each bank on the panel was required to submit a buy and sell rate for USD against the MYR. The ABS rules required that the submissions were made independently and based on the banks’ objective assessment of the market.

During 2011, ANZ and Macquarie traders attempted to make arrangements with other banks to make high or low submissions to the ABS MYR Fixing Rate. The rate would ultimately affect settlement payments for MYR denominated non-deliverable forward contracts (NDFs).

ANZ was a submitting bank for the MYR. Macquarie was not a submitting bank however often initiated discussions between traders and acted as a hub or coordinator between submitting banks. ANZ and Macquarie’s customers included Australian companies.

The ACCC estimates that the annual MYR NDF turnover in Australia was approximately $9 to 10 billion.

Similar conduct has been investigated and sanctioned in other markets.  The Australian Securities and Investments Commission is also engaged in litigation against several Australian banks regarding the setting of interest rate benchmarks.

ACCC takes proceedings against ANZ and Macquarie bank for attempted cartel conduct

The Australian Competition and Consumer Commission says it has today taken proceedings on a consent basis against Australia and New Zealand Banking Group Limited (ANZ) and Macquarie Bank Limited (Macquarie) in relation to alleged attempts to engage in cartel conduct.

accc-pic

Following cooperation by ANZ and Macquarie, the parties have agreed on the following facts to be presented to the Federal Court for its consideration:

  • a Macquarie trader, together with traders employed by ANZ and a number of other banks, all located in Singapore, communicated via private online chatrooms about daily submissions to be made to the Association of Banks in Singapore (ABS) in relation to the benchmark rate for the Malaysian ringgit (ABS MYR Fixing Rate);
  • on various dates in 2011, traders employed by ANZ and the Macquarie trader attempted to make arrangements with other banks that particular submitting banks would make high or low submissions to the ABS in relation to the ABS MYR Fixing Rate.

The ACCC alleges that on various dates in 2011, ANZ or Macquarie sought to influence the ABS MYR Fixing Rate published on that day, and thus attempted to contravene the cartel provisions of the Competition and Consumer Act 2010.

“These proceedings are a reminder that Australian cartel laws apply to financial markets, and capture cartel conduct by firms that carry on business in Australia, regardless of where that conduct occurred,” ACCC Chairman Rod Sims said.

“The ACCC recognises the integrity of foreign exchange markets plays a fundamental role in our market economy.”

ANZ has admitted to 10 instances of attempted cartel conduct and Macquarie to eight.Submissions to the Federal Court have been made as follows:

  • ACCC and ANZ have jointly submitted that ANZ pay a pecuniary penalty in the amount of $9 million and make a contribution to the ACCC’s costs; and
  • ACCC and Macquarie have jointly submitted that Macquarie pay a pecuniary penalty in the amount of $6 million and make a contribution to the ACCC’s costs.

Ultimately it is for the Court to decide whether penalties in these amounts are appropriate and the ACCC will not make any further comment regarding penalties until the Court makes final orders.

Background

ABS benchmark rates are used as reference rates for settling non-deliverable forward contracts (NDFs). Non-deliverable currencies are not freely tradeable outside the domestic economy, so a benchmark rate must be set by banks submitting their views on the appropriate rate. That benchmark is used to enable trade in forward contracts. Banks and other institutions primarily use NDFs for hedging and risk management.The ABS MYR Fixing Rate would ultimately affect NDF settlement payments.

During the relevant period, the ABS MYR Fixing Rate was derived from submissions made each day by a panel of banks. The ABS Rules required this be done independently and without reference to other submitting banks.

ANZ was a submitting bank for the MYR. Macquarie was not a submitting bank however it often initiated discussions between traders.

The ACCC estimates that the annual MYR NDF turnover in Australia in 2011 was approximately $9 to 10 billion. ANZ and Macquarie’s customers included Australian companies.