Macquarie : 2020 half year result management discussion and analysis

Management Discussion and Analysis

Macquarie Group

Half-year ended 30 September 2019

MACQUARIE GROUP LIMITED ACN 122 169 279

Notice to readers

The purpose of this report is to provide information supplementary to the Macquarie Group Limited Interim Financial Report

(the Financial Report) for the half-year ended 30 September 2019, including further detail in relation to key elements

of Macquarie Group Limited and its subsidiaries' (Macquarie, the Consolidated Entity) financial performance and financial position. The report also outlines the funding and capital profile of the Consolidated Entity.

Certain financial information in this report is prepared on a different basis to that contained in the Financial Report, which is prepared in accordance with Australian Accounting Standards. Where financial information presented within this report does not comply with Australian Accounting Standards, a reconciliation to the statutory information is provided.

Date of this report

This report has been prepared for the half-year ended

30 September 2019 and is current as at 1 November 2019.

The Macquarie name and Holey Dollar device are registered trade marks of Macquarie Group Limited ACN 122 169 279.

Explanatory notes

Comparative information and conventions

Where necessary, comparative figures have been restated to conform to changes in current year financial presentation and group structures.

References to the prior corresponding period (pcp) are to the six months ended 30 September 2018.

References to the prior period are to the six months ended 31 March 2019.

References to the current period and current half-year are to the six months ended 30 September 2019.

In the financial tables throughout this document '*' indicates that the absolute percentage change in the balance was greater than 300% or indicates the result was a gain in one period but a loss in another, or vice versa.

Independent Auditor's Review Report

This document should be read in conjunction with the Financial Report for the half-year ended 30 September 2019, which was subject to independent review by PricewaterhouseCoopers.

PricewaterhouseCoopers' independent auditor's review report to the members of Macquarie Group Limited dated 1 November 2019 was unqualified.

Any additional financial information in this document which is not included in the Financial Report was not subject to independent review by PricewaterhouseCoopers.

Disclaimer

The material in this document has been prepared by Macquarie Group Limited ABN 94 122 169 279 (MGL, the Company) and is general background information about Macquarie Group Limited and its subsidiaries' (Macquarie) activities current as at the date of this document. This information is given in summary form and does not purport to be complete. The material in this document may include information derived from publicly available sources that have not been independently verified. Information in this document should not be considered as advice or a recommendation to investors or potential investors in relation to holding, purchasing or selling securities or other financial products or instruments and does not take into account your particular investment objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information having regard to these matters, any relevant offer document and in particular, you should seek independent financial advice. No representation or warranty is made as to the accuracy, completeness or reliability of the information. All securities and financial product or instrument transactions involve risks, which include (among others) the risk of adverse or unanticipated market, financial or political developments and, in international transactions, currency risk.

This document may contain forward looking statements - that is, statements related to future, not past, events or other matters - including, without limitation, statements regarding our intent, belief or current expectations with respect to Macquarie's businesses and operations, market conditions, results of operation and financial condition, capital adequacy, provisions for impairments and risk management practices. Readers are cautioned not to place undue reliance on these forward looking statements. Macquarie does not undertake any obligation to publicly release the result of any revisions to these forward looking statements or to otherwise update any forward looking statements, whether as a result of new information, future events or otherwise, after the date of this document. Actual results may vary in a materially positive or negative manner. Forward looking statements and hypothetical examples are subject to uncertainty and contingencies outside Macquarie's control. Past performance is not a reliable indication of future performance.

01

Result overview

1.1 Executive summary

02

Financial performance analysis

1. Net interest and trading income
2. Fee and commission income
3. Net operating lease income
4. Share of net (losses)/profits of associates and joint ventures
5. Credit and Other impairment charges
6. Other operating income and charges
7. Operating expenses
8. Headcount
9. Income tax expense

03

Segment analysis

1. Basis of preparation
2. MAM
3. BFS
4. CGM
5. Macquarie Capital
6. Corporate
7. International income

04

Balance sheet

1. Statement of financial position
2. Loan assets
3. Equity investments

05

Funding and liquidity

3	5.1	Liquidity risk governance and management framework	47
	5.2	Management of liquidity risk	49
	5.3	Funded balance sheet	51
	5.4	Funding profile for Macquarie	52
	5.5	Funding profile for the Bank Group	56
	5.6	Funding profile for the Non-Bank Group	59
	5.7	Explanatory notes concerning funding sources
		and funded assets	61
9	06
12
151414
16	Capital
17	6.1	Overview	63
18	6.2	Bank Group capital	66
19	6.3	Non-Bank Group capital	68
	07
21	Funds management
7.1	Assets under Management	71
25
27	7.2	Equity under Management	72
29
32	08
36
34
	Glossary
	8.1	Glossary	74

39 09

41 Ten year history

44	9.1 Ten year history	80

01Result overview

1.1 Executive summary

1H20 NET OPERATING INCOME

$A6,320m

µµ8% on pcp

$Am					1H20 OPERATING EXPENSES
5,397	5,523	5,830	6,924	6,320	$A4,480m
					µµ
					9% on pcp
1H18	2H18	1H19	2H19	1H20

1H20 NET PROFIT

$A1,457m

µµ11% on pcp

$Am	1H20 ANNUALISED
RETURN ON EQUITY

1,248	1,309	1,310	1,672	1,457	16.4%
					µµ
					from 16.3%
					in pcp
1H18	2H18	1H19	2H19	1H20

1H20 net profit contribution(1) by activity

ANNUITY-STYLE				MARKETS-FACING
$A1,717m	~60% $A1,151m ~40%

Macquarie

Asset Management

~39%

Banking and

Financial Services

~13%

Commodities and

~8% Global Markets ~32%

Macquarie Capital

~8%

(1) Net profit contribution is management accounting profit before unallocated corporate costs, profit share and income tax.

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Macquarie Group Limited  Management Discussion and Analysis

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1.0	2.0	3.0	4.0	5.0	6.0	7.0	8.0	9.0
	Financial	Segment	Balance	Funding	Capital	Funds	Glossary	Ten year
Result
overview	performance	analysis	sheet	and liquidity		management		history
	analysis

MACQUARIE ASSET MANAGEMENTMACQUARIE CAPITAL

$A1,122m	32% on pcp	$A223m	¶¶56% on pcp
	µµ

Non-Banking Group

Banking Group

• Increased performance fees from MIRA-managed funds and co-investors
• Increased base fees primarily driven by favourable foreign exchange movements and investments made by MIRA-managed funds and mandates.

Partially offset by:

• Higher operating expenses mainly driven by foreign exchange movements and the full period impact of the GLL and ValueInvest business acquisitions completed in the prior corresponding period
• Decreased net operating lease income driven by the disposal of Macquarie AirFinance to a newly-formed joint venture, of which MAM has a 75% interest.

BANKING AND FINANCIAL SERVICES

$A385m	2% on pcp
	µµ

• Growth in BFS deposits, Australian loan portfolio and funds on platform average volumes
• Reduced average headcount mainly due to the realignment of the wealth advice business to focus on the high net worth segment.

Partially offset by:

• Lower wealth management fee income associated with realigning the wealth advice business to focus on the high net worth segment
• Increased costs associated with investment in technology to support business growth and to meet regulatory requirements
• Higher credit provisions in business banking loans and leasing.

• Lower fee and commission income due to lower debt capital markets fee income
• Lower net interest and trading income due to reduced interest income from the debt portfolio
• Higher credit and other impairment charges due to a small number of underperforming investments
• Higher operating expenses reflecting additional headcount and foreign exchange movements.

Partially offset by:

• Higher net income on equity and debt investments due to asset realisations in Europe particularly in the green energy sector.

COMMODITIES AND GLOBAL MARKETS

$A1,138m	32% on pcp
	µµ

• Strong results across the commodities platform from increased client hedging activity particularly in Global Oil, North American Gas and Power and EMEA Gas and Power
• Timing of income recognition on storage and transport agreements
• Improved foreign exchange, interest rates and credit results driven by increased client activity across all regions
• Improved equity trading and retail results primarily in Asian markets.

Partially offset by:

• Increased operating expenses driven by expenditure on upgrading technology infrastructure and increased cost of regulatory compliance.

Operating Groups update

In the current period, CAF's businesses were aligned to other Operating Groups, where they have the greatest opportunities in terms of shared clients and complementary offerings:

• CAF Principal Finance joined Macquarie Capital to bring together all principal investing activity and enhance our ability to invest directly and alongside clients and partners
• CAF Transportation Finance joined MAM, reflecting its evolution towards a fiduciary business following the sale of Macquarie AirFinance to a newly-formed joint venture
• CAF Asset Finance moved to CGM, reflecting a longstanding, shared focus on innovative financing solutions for corporates, some of which are already shared clients.

In addition, certain fiduciary businesses, such as the infrastructure debt business (MIDIS), moved from CAF Asset Finance in the Bank Group to MAM in the Non-Bank Group.

During half-year ended 31 March 2019, certain businesses were reorganised between Operating Groups:

• Macquarie's Australian vehicle finance business moved from CAF into BFS
• Macquarie Capital's global real estate business moved into MAM and merged with MIRA Real Estate. Comparatives have been reclassified to reflect this reorganisation between Operating Groups.

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Macquarie Group Limited  Management Discussion and Analysis

4

1.1	Executive summary
Continued
Profit attributable to the ordinary equity holder
$A1,457m
µµ
11% on prior corresponding period
				HALF-YEAR TO		MOVEMENT
			Sep 19	Mar 19	Sep 18	Mar 19	Sep 18
			$Am	$Am	$Am	%	%
Financial performance summary
Net interest income	790	762	998	4	(21)
Fee and commission income	2,874	2,865	2,661	<1	8
Net trading income	1,627	1,560	1,231	4	32
Net operating lease income	461	489	461	(6)	-
Share of net (losses)/profits of associates and joint ventures	(49)	(63)	7	(22)	*
Credit and Other impairment charges	(139)	(476)	(76)	(71)	83
Other operating income and charges	756	1,787	548	(58)	38
Net operating income	6,320	6,924	5,830	(9)	8
Employment expenses	(2,776)	(2,763)	(2,454)	<1	13
Brokerage, commission and trading-related expenses	(482)	(561)	(579)	(14)	(17)
Occupancy expenses	(201)	(234)	(207)	(14)	(3)
Non-salary technology expenses	(367)	(353)	(331)	4	11
Other operating expenses	(654)	(851)	(554)	(23)	18
Total operating expenses	(4,480)	(4,762)	(4,125)	(6)	9
Operating profit before income tax	1,840	2,162	1,705	(15)	8
Income tax expense	(376)	(505)	(374)	(26)	1
Profit after income tax	1,464	1,657	1,331	(12)	10
(Profit)/loss attributable to non-controlling interests	(7)	15	(21)	*	(67)
Profit attributable to the ordinary equity holders
of Macquarie Group Limited	1,457	1,672	1,310	(13)	11
Key metrics
Expense to income ratio (%)	70.9	68.8	70.8
Compensation ratio (%)	41.2	37.5	39.4
Effective tax rate (%)	20.5	23.2	22.2
Basic Earnings per share (cents per share)	430.1	494.5	388.3
Diluted Earnings per share (cents per share)	419.5	483.9	383.1
Dividend per ordinary share (cents per share)	250.0	360.0	215.0
Dividend payout ratio (%)	60.8	73.2	55.7
Annualised return on equity (%)	16.4	19.5	16.3

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Macquarie Group Limited  Management Discussion and Analysis

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1.0	2.0	3.0	4.0	5.0	6.0	7.0	8.0	9.0
	Financial	Segment	Balance	Funding	Capital	Funds	Glossary	Ten year
Result
overview	performance	analysis	sheet	and liquidity		management		history
	analysis

Net operating income

Net operating income of $A6,320 million for the half-year ended 30 September 2019 increased 8% from $A5,830 million in the prior corresponding period. Increases in Fee and commission income, Other operating income and charges and Net interest and trading income was partially offset by higher Credit and Other impairment charges and lower Share of net profits of associates and joint ventures.

Key drivers included:

Net interest and trading incomeFee and commission income

				8%					8%
	HALF-YEAR TO		µµ		HALF-YEAR TO		µµ
30 Sep 19		31 Mar 19	30 Sep 18	30 Sep 19		31 Mar 19	30 Sep 18
$Am		$Am	$Am	on prior	$Am		$Am	$Am	on prior
				corresponding					corresponding
2,417		2,322	2,229	2,874		2,865	2,661
	period		period

• Strong results in CGM across the commodities platform from increased client hedging activity particularly in Global Oil, North American Gas and Power and EMEA Gas and Power and timing of income recognition on storage and transport agreements. There was also a solid contribution from Agriculture, Metals and Mining
• Growth in BFS deposits and Australian loan portfolio average volumes in BFS.

Partially offset by:

• Reduced contributions from North American Gas Inventory management and trading following a strong prior corresponding period in CGM
• Lower interest income on the debt portfolio in Macquarie Capital
• The sale of an investment in Macquarie Pacific Funding (MPF) in BFS.

• Increased performance fees from MIRA-managed funds and co-investors in MAM
• Increased base fees primarily driven by favourable foreign exchange movements and investments made by MIRA-managed funds and mandates in MAM
• Increased mergers and acquisition fee income in Macquarie Capital.

Partially offset by:

• Lower fee income from debt capital markets in Macquarie Capital
• Lower wealth management fee income associated with realigning the wealth advice business to focus on the high net worth segment in BFS.

Net operating lease income

	HALF-YEAR TO		-
30 Sep 19		31 Mar 19	30 Sep 18	In line with
$Am		$Am	$Am	the prior
				corresponding
461		489	461
	period

• Lower income in MAM driven by the disposal of Macquarie AirFinance to a newly-formed joint venture with PGGM.

Offset by:

• The acquisition of rotorcraft assets during the prior period in MAM
• Higher secondary income from the Technology, Media and Telecoms (TMT) portfolio in CGM.

Credit and Other impairment charges

				83%
	HALF-YEAR TO		µµ
30 Sep 19		31 Mar 19	30 Sep 18
$Am		$Am	$Am	on prior
				corresponding
(139)		(476)	(76)
	period

• Higher Credit impairment charges due to a small number of underperforming investments in Macquarie Capital.

Share of net (losses)/profits of associates and joint ventures

	HALF-YEAR TO		
				significantly
30 Sep 19		31 Mar 19	30 Sep 18
$Am		$Am	$Am	on prior
				corresponding
(49)		(63)	7
	period

• Reduced income primarily due to investments in green energy projects in the development and construction phases including a small number of underperforming assets in Macquarie Capital
• Reduced income from the sale of a number of underlying assets within equity accounted investments in MAM.

Partially offset by:

• The share of net profits from a 75% interest in a newly-formed joint venture following the disposal of Macquarie AirFinance in MAM.

Other operating income and charges

				38%
	HALF-YEAR TO		µµ
30 Sep 19		31 Mar 19	30 Sep 18
$Am		$Am	$Am	on prior
				corresponding
756		1,787	548
	period

• Asset realisations in Europe, particularly in the green energy sector in Macquarie Capital
• Gain on sale and reclassification of investments and the sale of a non-financial asset in MAM.

Partially offset by:

• A change in the composition of Macquarie Capital's investment portfolio including increased expenditure in relation to green energy projects.

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Macquarie Group Limited  Management Discussion and Analysis

6

1.1 Executive summary

Continued

Operating expenses

Total operating expenses of $A4,480 million for the half-year ended 30 September 2019 increased 9% from $A4,125 million in the prior corresponding period with increases across Employment expenses, Other operating expenses and Occupancy, and Non-salary technology expenses, partially offset by a decrease in Brokerage, commission and trading-related expenses.

Key drivers included:

Employment expenses

	HALF-YEAR TO		µµ
30 Sep 19		31 Mar 19	30 Sep 18	13%
$Am		$Am	$Am	on prior
2,776		2,763	2,454	corresponding
	period

• Higher share-based payments expense mainly driven by the accelerated amortisation of prior years' equity awards to retiring Key Management Personnel
• Higher performance-related profit share mainly driven by the overall performance of the Operating Groups
• Higher average headcount driven by central service groups to support business growth, technology projects and ongoing regulatory compliance
• Unfavourable foreign exchange movements.

Brokerage, commission and trading-related expenses

	HALF-YEAR TO		¶¶
30 Sep 19		31 Mar 19	30 Sep 18	17%
$Am		$Am	$Am	on prior
482		561	579	corresponding
	period

• Reductions in brokerage across equities markets in CGM
• The sale of an investment in Macquarie Pacific Funding in BFS.

Non-salary technology expenses

	HALF-YEAR TO		µµ
30 Sep 19		31 Mar 19	30 Sep 18	11%
$Am		$Am	$Am	on prior
367		353	331	corresponding
	period

• Higher technology expenses from investment and support of business growth
• Unfavourable foreign exchange movements.

Other operating expenses and Occupancy

	HALF-YEAR TO		µµ
30 Sep 19		31 Mar 19	30 Sep 18	12%
$Am		$Am	$Am	on prior
855		1,085	761	corresponding
	period

• Increased business activity across the Consolidated Entity
• Unfavourable foreign exchange movements.

Income tax expense

Income tax expense for the half-year ended 30 September 2019 of $A376 million was broadly in line with $A374 million in the prior corresponding period. The effective tax rate for the half-year ended 30 September 2019 was 20.5%, down from 22.2% in the prior corresponding period and 23.2% in the prior period.

The lower effective tax rate was mainly driven by the geographic composition and nature of earnings.

Note on adoption of new Australian Accounting Standards

The September 2019 financial results reflect the adoption of AASB 16 Leases (AASB 16) on 1 April 2019. As permitted by AASB 16,

the Consolidated Entity has not restated previously reported financial periods. Refer to Note 1 Summary of significant accounting policies in the Financial Report for details regarding the Consolidated Entity's transition to AASB 16.

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Macquarie Group Limited  Management Discussion and Analysis

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