Macquarie : 2023 full year result transcript

TRANSCRIPTION

MACQUARIE GROUP LIMITED RESULT ANNOUNCEMENT

FOR THE YEAR ENDED 31 MARCH 2023

5 MAY 2023

	[START OF TRANSCRIPT]
Operator:	Thank you for standing by and welcome to the Macquarie Group Limited 2023
	Full Year Result announcement. All participants are in a listen-only mode.
	There will be a presentation followed by a question and answer session. If you
	wish to ask a question you will need to press the star key followed by the
	number one on your telephone keypad. I would now like to head the conference
	over to Sam Dobson, Head of Investor Relations. Please go ahead.
Sam Dobson:	Thank you very much and good morning, everyone. Welcome to Macquarie's
	2023 Full Year Results presentation. Before we begin I would like to
	acknowledge the traditional custodians of this land and pay our respects to
	their Elders past, present and emerging.
	So this morning you will hear from our CEO and Managing Director, Shemara
	Wikramanayake, and our CFO, Alex Harvey. On the line we also have our Group
	heads. At the end of today's presentation, as the Operator mentioned, we will
	have a Q&A session and we're looking to conclude by about 11:15. So with that
	I'll hand over to Shemara. Thank you.

Shemara Wikramanayake: Thanks very much, Sam, and welcome and good morning, everyone, from me as well. So, as usual, we will start this presentation by looking at the footprint of our business across our four operating groups and those are, as long-term investors will know, our Australian digital banking business, BFS, our global asset manager, Macquarie Asset Management, our global commodities and financial markets business and our global Macquarie Capital business. So these are specialist advisory and capital solutions and balance sheet investment business in our areas of expertise.

Across those four businesses we get very good diversification not just by geography but also by product exposure and they all respond differently in different markets. We get a lot of resilience in our earnings through cycles as a result and in this most recent cycle, which was conducive for particularly the

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commodities and global markets business with the market facing business to an extent in general, we had 59% contribution from the market facing businesses and 41% from the annuity style.

Now, supporting those four operating groups are four very important central service groups that ensure again that we deliver strong results through cycles and those are our legal and governance group and our risk management group that give us both strong second line review and also assisting in executing in terms of initiatives we take. Then our financial management group, which is responsible not just for our financial and regulatory reporting in our engagement with external stakeholders but also our funding and capital through cycles, and then lastly our corporate operations group that delivers our entire platform across technology, HR, premises, strategy et cetera.

Now, all those eight areas together in this last financial year delivered, as you saw, a record result of $A5.182 billion and that was up 10% on the previous financial year. The return on equity at 16.9% was down a bit on the 18.7% last year but that was principally due to much increased capital position with our capital surplus now materially higher than it was at the end of last year, and we'll touch on that as we go through the presentation.

1. won't dwell on the half-on-half changes but year-on-year the contribution from our operating group was also up nearly 10%. It was up 9% on the previous financial year and that was made up of the annuity style businesses being down 17%, principally due to some large one-off items last financial year. In Macquarie Asset Management, we had the Macquarie Infrastructure Corporation contribution and large realisation of green energy assets and in commodities and global markets we had the realisation of our industrial and commercial needs in business in the UK last year. The market facing businesses were up 38% on the last year and that was principally driven by the contribution from Commodities and Global Markets where we had elevated volatility and market price movements in commodities.

Now, overall, as I said, our net profit was up 10%. Our operating income was also up 10% and our earnings per share were up 6%. The dividend per share is up 21% at the $7.50 approved by our Board.

Our assets under management are also up 10% at $870.8 billion and I would note that we're now including our dry powder in assets under management for

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previous years as well as the current year to be consistent now with global peers. The big drivers of that increase were investments made in the private markets managed funds and foreign exchange movements and that was partially offset by market movements impacting the public investments business.

In terms of the geographic diversification of our income, Australia contributed 29%. So we had 71% coming from outside Australia, with the Americas being the largest contributor again at 78% this year. I would also note in terms of our now 20,500-plus head count, more than 51% of that is also outside Australia.

In terms of the trends of growth of income in all our regions, you can see on this slide the underlying trend is increased in all of our four regions. The Americas last year, as you will probably know, had a very large contribution from realisations in the Green Investment Group and some Commodities and Global Markets income.

Turning then to look at each of the four operating groups and their contribution over the last year, starting with Macquarie Asset Management. Macquarie Asset Management contributed 23% and that was down 23% on the previous year at just over $2.3 billion and, as I mentioned, the reason for that drop is principally because last financial year we had the Macquarie Infrastructure Corporation and the large Green Investment Group realisation contributions, which didn't repeat. Despite that, the underlying franchise is growing very well. In the Private Markets side we have record equity under management of over $A200 billion and we had record raisings of over $A38 billion compared to the record last year of $A27 billion and we have dry powder of nearly $A35 billion to invest as we potentially go into what could be a better investing environment. On the Public Investment side, the assets under management are down slightly and that is mostly driven by market movements plus the rotation from equity to fixed income that we've seen happen over this last year partially offset by foreign exchange. That business franchise has also stepped up a lot with the acquisitions made over the last financial year and I would note that 70% of its assets are beating the benchmark on a three-year basis.

Then turning to Banking and Financial Services, it contributed 12% over this last year as a net profit and it was up 20% on the previous year to just over $A1.2 billion earnings. That was driven by strong growth across the entire platform. The home loans were up by 21%, the business banking up by 13%, the funds on

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platform up by 4% and, importantly, our deposit book growing by about 30% to support all of that. A couple of things I would note is that in our growth in our books, not just home loans but all of them, we're very focused on high quality growth in terms of good credit and good returns and the average LVR at origination remained around 65% and the average dynamic LVR at about 55% for home loans. I would also note with the deposits the diversity of the sources from which we have our deposits.

Turning then to Commodities and Global Markets, this was the largest contributor to net profit contribution at 57% this year. That was up 54% from last year at just over $A6 billion of contributions. We had solid contribution consistent again from the asset finance business and also the financial markets business that grew their contribution and that was in areas like foreign exchange and interest rates where we benefitted from volatility and from client engagement and in the futures business a strong step-up from significantly higher interest and commission revenues. But the biggest contributor was the Commodities business where we had both strong Risk management income across areas like Gas and Power, Global oil and resources and a substantially increased contribution from Inventory management and trading, particularly given demand/supply dynamics impacting North American gas and power opportunities.

Then Macquarie Capital contributed 8% of our net profit contribution. That was down 48% at just over $A800 million and the main drivers there was that we had weaker market activity compared to a very strong prior year, which impacted the revenue and Capital solutions advisory and capital raising revenue. On the principal slide we had slightly lower investment income but we continued very good investing across particularly private credit and also across equity and had stronger private credit income underneath that. The private credit book is now at I think $A18 billion. We invested about $7 billion over the year. We saw a slowing in deployment in the second half, so probably about $A3.5 billion in the first half, $A2.5 billion in the second half as the environment was tighter and I should have mentioned in relation to BFS as well Alex will give more detail, but the growth in our home loan book also we saw slower in the second half than the first half.

Those results from the four operating groups are supported by a very conservative and strong funding and capital position and in relation to our fund

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and balance sheet that remains strong with our term funding continuing to comfortably exceed our term assets and over this last year deposits across the Group grew 33% to $A134.5 billion and we also issued another $A23.3 billion of term lending coupled with the $A48 billion plus that we did last financial year. We've done over $A70 billion of term funding in the last couple of years and, again, as Alex will elaborate, we're very strongly positioned now not to need to go to market for some time if that were the case in terms of meeting our funding needs.

On the capital side our APRA Basel III capital surplus has increased from the half year $A12.2 billion to $A12.6 billion at the end of the full year and that is after absorbing the $A2.4 billion of capital requirement due to the APRA Unquestionably Strong reform, and I would particularly note that our capital surplus at the end of last financial year was at $A10.7 billion. We're now at $A12.6 billion after absorbing $A2.4 billion of regulatory capital requirements.

Now, the drivers in this half in terms of increase in the capital have been clearly the earnings net of the dividend, but we also had $A1 billion of capital released from the business requirements and there's more detail of that you can see here where the biggest contributor was the $A1.7 billion of release we had from the Commodities and Global Markets as we had a reduction in credit risk capital due to lower commodity prices and exposures. That $A1.7 billion release was absorbed to some extent by the other businesses. Macquarie Asset Management absorbed about half a billion in terms of co-investment and seed investments to grow our offering in our franchise, and that was offset slightly by realisations in the green energy/green investment group area. In BFS we absorbed about another $A300 million of capital in growing our home loans and our business banking books, partially offset by run-off in the vehicle leasing. Then in Macquarie Capital we absorbed about $A500 million or $A600 million in investment, as I said, in the private credit lending activity but also in some targeted equity investments in our areas of expertise and focus in that business.

With that, we are ending the year with very strong regulatory ratios, well above the APRA Basel III minimums and I would particularly note our liquidity coverage ratio at the moment is sitting at 214%. Those ratios ordinarily, of course, run off unless there's issuance as the funding runs down, the liquid funding.

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I would also note in terms of dividends, as I said, that the Board has approved a dividend of $A4.50 40% franked for the year-end dividend and that results in a full year dividend of $A7.50 40% franked, which is up from the $A6.22 declared for the last financial year.

The last thing before I hand over to Alex is just updating on some of the Board changes that we've had recently. First of all, Sue Lloyd-Hurwitz, who will be well known to investors as the CEO, retiring CEO of Mirvac, will be joining our Board effective 1 June onto the Group Board and then following approval at the AGM will also become a director of the Bank Board. Then Nicola Wakefield Evans, who has been our longest serving director, has also confirmed that she will seek re-election at the AGM, which will happen in July, and I think she is expected to continue on our Board in 2024.

So with that, I'll hand over to Alex to take you through the results in more detail.

Alex Harvey:Thanks, Shemara, and good morning from me as well. As Shemara said, I will now take you through some more of the details of the financial results for March '23 and also some of the other aspects of financial management across the Group.

Starting with the income statement, and I thought I would start by looking at the second half in comparison with the first half and then move on to the full year. So from a second half viewpoint if you look at net operating income it was up 21% for the second half in comparison with the first half. The key drivers of that were a 50% increase in net interests and trading income, a $A506 million increase in fees and commission income, partly offset by a reduction in investment income and we talked about this at the half in terms of those realisations that were skewed to the first half of the year.

In combination with that, expenses for the half were up 16%, tax rate was slightly up based on the composition of income and as a result the Group delivered a profit of $A2.877 billion for the second half, which of course, is a record half.

Turning now to the full year result and bringing together the first and the second half, you can see operating income for the year was up 10%. That was driven by a 53% increase in net interest and trading income, offset by a 5% reduction in fee and commission income, a reduction in the investment related

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disposable proceeds during the year and a lower contribution from joint ventures and associates coming through the Group the full year. Expenses were up 12% for the period. The key driver there is really employment expenses. There's a few things happening there. We saw an average increase in headcount of 12% across the Group, skewed towards the other central service areas and to the Banking and Financial Services group. We also saw wage increases coming through the Group and the other thing and the other thing we see is an increased profit share in share-based payments expense, coming through consistent with the underlying performance of the Group. Effective tax rate up slightly from where we were at the full year FY22. So bringing that all together, an underlying net profit across the Group of $A5.182 billion, up 10% on where we were this time last year.

I'll now turn to each of the operating groups and give you a little more detail about the performance over the course of the year. So starting with the asset management business. You can see the net profit $A2.342 billion down 23% from where we were in FY22. And the key drivers there are lower proceeds associated with realisations across the Group. Particularly realisations through our Green Energy portfolio so fewer material realisations. The other thing we saw obviously is the non-repeat of the gains from the disposition of MIC in the US which came through in FY22. And we saw a step up in operating expenses associated with the platform. Those reductions were offset by a 75% increase in performance fees. Largely coming out of MEIF 4 in Europe and MIP III in the United States. And we also saw the non-repeat of acquisition related expenses associated with Waddell & Reed, AMP, and CPG through FY22. We've also set out the split from a base fee viewpoint. So base fees in the private market business, up 14%, up $A164 million. And that really reflects the strong period of investing. $A27.2 billion worth of investment made through the year. And that was almost offset by the reduction in base fees coming through our public investments business that relate to market movements and as Shemara said, the switching of portfolios away from equity investment portfolios towards fixed interest.

In terms of the underlying drivers, the assets under management up nearly $A871 billion at March '23. And as we said before, that now includes the dry powder which makes it consistent from a comparability viewpoint with where other firms are around the world.

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Turning now to the second of our annuity style businesses, the Banking and Financial Services business, a really pleasing result. Up 20% from where we were this time last year and you can see the drivers there. From a personal banking viewpoint, a $A206 million increase contribution. That really was driven by a 31% average growth in mortgage volumes over the course of the year, albeit slowing in the second half of the year as we foreshadowed at the half year results. We saw an increased contribution from our Business Bank, $A184 million. That reflects the growth in loan volumes. It also reflects the growth in deposit volumes and improving margins in that business. An increase of $A191 million in terms of the contribution from the Wealth channel in that business, reflecting a growth of 13% in terms of average volumes. Improved margins associated with those deposits and an improvement in average funds on the platform through the year. You see a step up in the credit and other impairment charges. There's a couple of things happening there. Firstly the macro-economic outlook has deteriorated relative to where we were. The other thing is we've weighted slightly more to the downside scenarios. And we also had, you might recall in the FY22 year, the release of provisions associated with the sale of the dealer finance business and the reduction in the car loan portfolio. So that didn't come through in FY23. You can also see the step up in expenses through the year - 21% step up in expenses. Really, expenses associated with driving the growth of the business, with the investment that the team is making in the data capabilities and the technology platform that supports the business both in terms of front office - customer experience, together with the capabilities necessary to meet the obligations that we have in that business. And we've also seen a step up in regulatory and compliance spend through the course of year. But really pleasing result, up 20% from this time last year.

In terms of the drivers, with exception to motor vehicle business, everything moving in the right direction in terms of growth in both loan assets, deposits to support the business, and also funds on the platform.

Now turning to the first of our market-facing businesses, the Commodities and Global Market business. Obviously a tremendous result, up 54% from FY22. Really reflective of the opportunities the business saw through the year to grow the customer franchise, and I'll talk a bit more about that in a moment, to provide solutions to those customers and obviously the market conditions provided opportunity to manage those customer positions on balance sheet

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and generate trading income for the Group. So really a tremendous result. We have seen those conditions taper off a little bit in the fourth quarter. Or our fourth quarter, the first quarter of calendar '23. In terms of the components of the movement, you can see commodities is up 82%. Risk management income for the year up 50% and that really reflects the work that the team is doing with customers, particularly in the Global gas, power and emissions business and the Global oil business and the Global resources business. We also saw a step up of $A1.6 billion in Inventory management and trading coming through there, reflecting those demand and supply imbalances that we've talked about, particularly in the North American market now for many results. Financial markets up $A114 million, a little under 10%. A really strong contribution from Financial markets particularly in the first half coming through as we saw lots of volatility in interest rates and FX markets. But there are opportunities to extend Credit in that business which we were very pleased to provide and provided opportunities to grow the revenue base. We didn't have the repeat of the gain on the disposal of the commercial and industrial meters business in the UK. And we also had a step up in expenses coming through the Group. About a 22% step up in expenses. Really associated with the investment that we were making in the platform to support the growth of that business and to support the obligations that that business has around the world in relation to regulatory compliance, data, and so on. So a really pleasing result for the Group.

Just as we've done in the past, hopefully the slides have helped contextualise some of the result over the period and starting with the chart that's on the screen now which is obviously indicative of some of the volatility we saw through the year. So this is the volatility we saw in European gas prices and in US gas prices. And you can see from about the middle of FY22 all the way through until the end of calendar '22, we saw a very volatile period. That provided opportunities for us to grow our customer base and provide solutions to those customers to help manage that volatility. It also provided good opportunities from a trading perspective for the Group. And as we talked about at the Operational Briefing, the third quarter in particular, exceptional trading results through CGM. And those have normalised if you like in the first quarter of '23, back towards where we saw prior to the first half of '22.

A chart that will be familiar to people obviously - on the right-hand side you can see the growth in customer numbers across CGM. Really pleasing to see that underlying customer franchise continue to grow and where the team seen

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opportunities particularly is in the European gas, power, and emissions market, in our agricultural sector, as well as our upstream resources. So there's been good growth in the customer numbers there. On the left hand side obviously that's reflected. Continued to be reflected in the operating income of the Group which is very much skewed towards income associated with the underlying client franchise. So the growing client franchise deals with the clients more often in more locations really driving the opportunities for the Group.

And then finally in terms of the capital position for CGM. On the left hand side you can see the capital position over the last few periods. You can see the reduction in credit capital from March '22 all the way to March '23. Reflective of prices coming down and volumes coming down over the course of that period. Market risk, as we've talked about through the year, stepped up a little bit as the size of the opportunity and the size of the business increased. So you can see market risk capital a little higher than what it was back in March '21 and previous periods. You can see the impact of those trading opportunities on the daily P&L chart on the right hand side of this page. Which is a reasonably familiar shape to what we've had in the last couple of years, albeit flatter and slightly more skewed further to the right of the Y axis. But still very much skewed to the positive which is reflective of the focus that the Group has around client activity and slightly higher in terms of the average daily P&L which really relates to the opportunity the team saw during the course of the year.

Now in terms of Macquarie Capital, the last of our business units. Macquarie Capital, a more challenging period, down 47% for the year, just over $A800 million worth of contribution and you can see where the drivers are there. The fee and commissioning come down 27% over the period. Investment related income - lower contribution than the prior year and obviously skewed to the first half of the year. Operating expenses up both in terms of continuing to invest in those sectors where we have really big capability across the world. So great opportunity I think for us to grow there. Also increased investment in the platform to support the business activity. Partially offset by an increase in the contribution from the private credit portfolio. In average terms, the private credit portfolio us up just over $5 billion. Consistent sort of margin profile through that business. That increase in contribution is partly offset by an increase in the ECL contribution. Both reflective of the macro environment and the slightly higher weighting to the downside scenarios. But also reflective of a

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