Macquarie : 2023 half year result transcript

TRANSCRIPTION

MACQUARIE GROUP LIMITED RESULT ANNOUNCEMENT

FOR THE HALF YEAR ENDED 30 SEPTEMBER 2022

28 OCTOBER 2022

	[START OF TRANSCRIPT]
Operator:	Thank you for standing by and welcome to the Macquarie Group Limited 2023
	half year result. 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 hand the conference over to Sam
	Dobson, Head of Investor Relations. Please go ahead.
Sam Dobson:	Well, good morning, everybody, and welcome to Macquarie's first half 2023
	result presentation. Before we begin this morning, I would like to acknowledge
	the traditional custodians of this land, the Gadigal people of the Eora Nation
	and pay our respects to their Elders past, present and emerging. For those in
	the room, if you could please mute your phones before we start, that'd be great.
	As discussed we'll hear from both our CEO, Shemara Wikramanayake and our
	CFO, Alex Harvey on the results, and there will be an opportunity for you to ask
	questions following that. We'll start in the room and then we'll go to the lines.
	With that, I'll hand over to Shemara to go through the result. Thank you.

Shemara Wikramanayake: Thanks, Sam, and welcome, good morning, everyone, from me as well. As usual, we'll kick off our half-year results by just noting the footprint of the business that we have and as we've shared many times, we have a very good, diversified portfolio of businesses across four Operating Groups. We have two annuity- style businesses, Banking and Financial Services (BFS), our Australian Banking and Financial Services business, and our global asset manager, Macquarie Asset Management (MAM). Then we have two global -markets- facing businesses in our Commodities and Global Markets (CGM) and our Macquarie Capital business.

These businesses give us good diversification through the cycle and resilience. In the environment we just had, we had an equal contribution from each of the annuity-style and the markets-facing activities. Now, those operating

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businesses are supporting by four important support groups: our Risk Management Group, our Legal and Governance Group, our Financial Management Group and our Corporate Operations Group.

All of our Group heads, I think, are represented either in the room here today or dialled in. So if you have questions, they will be here to speak to you.

So turning to the results for the first half, as you can see, we delivered a result of $A2.305 billion. That was up 13 per cent on the first half of last financial year and down 13 per cent on a very strong second half last financial year. The return on equity was 15.6 per cent, which is commendable in this environment.

Looking at the contribution from the Operating Groups, in terms of the result versus the first half last year, they were up 15 per cent and that was principally due to contribution from the markets-facing groups, which were up 35 per cent on that period. Looking at them versus the strong second half, as I mentioned last year, they were down 17 per cent with the annuity-style and the markets- facing being down on that very strong period.

Indeed, if we look at it over a longer period, and that's the last five halves, you can see the operating income and the profits and the earnings per share kept stepping up until the second half last year in which we had some very strong realisations and asset sales. So the result for this half is down slightly on that.

Our assets under management, as you saw at the beginning of this financial year, stepped up quite a bit with the two large acquisitions we did in the public investments area. In this half to September, they're up 3 per cent. The main driver there is investments being made in the private markets business and the benefits of foreign exchange movements, partially offset clearly by the movement in markets, particularly equity markets.

Then looking at the diversification of our income by region, you can see there the Americas were 38 per cent of our income, EMEA 24 per cent, Asia 10 per cent and Australia 28 per cent. You may recall last year the Americas had stepped up to 48 per cent, because of some very large one-off gains in the Americas, but I think this is showing a trend that we've been foreshadowing for a while, which is that the percentage contribution from the Americas and the EMEA region will continue to grow, particularly relative to Australia.

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That's while Australia, as you can see on this slide, continues to grow in absolute terms, but the fact is we're quite mature in a small market here, whereas in North America and EMEA - or in the Americas more generally and EMEA, we are a small representation at the moment in very big markets. As we grow a little bit there, the percentage grows more materially than the Australian.

Now, looking at each of our Operating Groups and their contribution through this period at a high level, Alex will take you through more detail in a minute, but the asset management business, Macquarie Asset Management, contributed 31 per cent of our income in this last half year at $A1.402 billion. That is up 28 per cent on the prior comparable half.

Some features to note are in the private markets business, the equity under management is now at a record $A188.5 billion, having raised also a substantial record raising of over $A20 billion in this half, $A22 billion. We have dry powder of $A30 billion as we go into the next period. I'd also note that the Green Investment Group was brought over into the asset manager last year, as you may recall. That integration is going well. We've launched our offshore wind platform, Corio, in this period.

In the public investment side, the assets under management at $A520.7 billion are down 3 per cent. The main driver there, as we said, is market movements partially offset by foreign exchange. So a good contribution from the asset manager. Also, the Banking and Financial Services Group, 13 per cent of our income, up 20 per cent on the prior comparable period at a $A580 million contribution.

You can see there that every line of the business has continued its organic growth with our home loan portfolio up 13 per cent now at just over $A101 billion. Business banking, up 7 per cent at $A12.3 billion and we had inflows into our funds on platform, but they were down slightly due to market movements.

Now, I note also the quality of the book there in terms of the LVR at which we're able to grow our home loan portfolio also remains very strong. All of that growth is supported by, again, a big step-up in deposits, where we've had - the deposits grown now to $A116.7 billion.

Turning then to the market-facing businesses, commodities and global markets. The largest contributor in this half, 43 per cent of our income, and a result of $A1.996 billion, which was up 15 per cent on the prior comparable period. We

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had good solid contributions in the asset finance business, even though you may recall at the end of last year we divested the UK industrial and commercial Meters business, which took the book from $A6 billion down to $A5.7 billion, but a solid contribution there.

Then in our financial markets and our commodity markets businesses, we saw volatility driving increased client need and activity, an opportunity for us to step up and support our customers. So in financial markets that drove good results in increased earnings in foreign exchange, also futures and the financing activities in equity, derivatives and trading. In the commodity markets, we had an increase in terms of our revenue from risk management across all of power and gas, resources, global oil.

In the inventory management and trading income area, we did see gains from the gas and power business, but that was offset by the timing of income recognition in storage and transportation contracts.

Then Macquarie Capital contributed also 13 per cent of our income in this last half, down 12 per cent at $A595 million. The big factor there obviously is that activity levels are much lower in this environment and that's meaning that fee revenue is lower across areas like mergers and acquisitions, advice and capital markets advice. Having said that, our principal investment book has continued to grow, sitting now at $A18 billion. Particularly in private credit we've grown that book now to $A15 billion and we're having increased income from the credit side and we had some good realisations in this first half, particularly in real estate and in our digital infrastructure businesses.

So that's the contribution from the four Operating Groups. That was supported as ever by a strong funding and capital position, and you can see here that our funded balance sheet remains strong with our term funding still comfortably exceeding our term assets. We were able to raise $A15.4 billion of term funding in this half on top of the over $A48 billion that we raised in the last half. So we're well-positioned with our term funding. As you can see, we're sitting now with all of that funding over $A100 billion of cash and liquids.

In addition to that, I mentioned our customer deposits, the BFS team, have been growing very well and we're at $A122 billion now of deposits, up 20 per cent. So, good funding position and, also in terms of capital, a strong position

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where our Basel III surplus has gone from $A10.7 billion up now to $A12.2 billion.

Drivers of that clearly were the earnings in the first half offset by the dividend that we paid, a hybrid issuance that we did, contributing $A800 million and then the net absorption of capital in the businesses, which as you can see was not massive in this period. So in Macquarie Asset Management, there was $A400 million going into ongoing supporting the organic growth of that business; either seed assets for funds or co-investment into the new funds.

BFS continued to absorb capital in the growth of its mortgage book, its business banking book. In CGM, we had a release of capital and that's really counterparty credit capital that we're holding and driven by market movement. Then in Macquarie Capital, we had some investments; I mentioned we're growing the credit book in principal finance, and also some digital infrastructure investment.

Now, the large absorption of capital was in FX movements, which is offset by our foreign currency translation reserve. We also are sitting with strong regulatory ratios, well above the Basel III minimums, as you can see there. Given that result and where we're sitting with capital and funding, the Board has declared an ordinary dividend of $A3.00 for the half year. That is a 50 per cent payout ratio.

So with that, I'll hand you over to Alex to take you in more detail through the performance of the businesses and come back to talk about our outlook.

Alex Harvey:Thanks, Shemara, and good morning, ladies and gentlemen. As Shemara said, I'll now take you through more of the detail on the financial results for the first half and then talk about some other aspects of the Group over the last six months.

So starting now with the income statement, you can see here operating income for the half up 11 per cent from where we were in the first half ended 30 September 2022. Key drivers there, a 39 per cent increase in net interest and trading income, reflecting the growth in the loan books across the Group, together with the strong trading conditions that we saw.

You can see a 56 per cent increase in investment income and that reflects disposals that we saw across our green energy portfolio, the real estate assets within Macquarie Capital and the digital infrastructure assets. Those were

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partially offset by a reduction in fee and commission income, down $A420 million and a lower contribution from the share of joint ventures and associates.

Operating expenses were up 11 per cent also for the half, versus the first half of last year, and the key drivers there really were the increase in employment expenses reflecting higher average headcount in this half versus the first half of last year, wage inflation coming through together with higher profit share expense and share-based payments expense reflecting the underlying performance of the Group.

The income tax effective tax rate for the half was up at 24.3 per cent, so the bottom line, just over $A2.3 billion, up 13 per cent from where we were in the first half of FY22.

Turning now to more of the detail for the individual Operating Groups. Starting with the asset management business, you can see profit for the half up at $A1.4 billion, up 28 per cent from the first half of last year. Key driver there was the increase in investment-related income coming through largely from the disposal of the assets in Green Investment Group that we transferred into Macquarie Asset Management during the half, net of the gains that we saw in the first half from the disposal of the Macquarie Infrastructure Corporation (MIC) assets in the first half of last year. So a step-up in investment-related income on a net basis.

Expenses were down during the period, largely reflecting the fact that we have one-off costs associated with the acquisitions, particularly Waddell & Reed in the first half of last year. You can also see base fees up $A16 million. There's a couple of things that are worthwhile highlighting there. The private markets- based fees were up 12 per cent. We obviously had favourable foreign exchange movements coming through. They were partly offset by the market moves across our public investments business, together with outflows across some of our equity portfolios and the public investments component of that business.

In terms of the underlying drivers, our assets under management are obviously key. On the left-hand side there, you can see the private markets space. A really good period of investing, nearly $A23 billion of additional assets under management through the investment activities across the platform in the first half.

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Favourable FX, so pushing up the assets under management by $A36.9 billion. On the right-hand side there you can see the market moves over the first half offset or mostly offset by the FX effect that we had coming through on the public investment side as well.

Turning now to the banking and financial services business. Obviously a really strong result, $A580 million, up 20 per cent from the first half of last year. That really reflects the growth in the loan books. It also reflects the recovery in margins that we're seeing coming through that business. In terms of the segments, personal banking up $A119 million. That reflects an average - a 30 per cent average growth in loan volumes in our mortgage business.

Although we did see a moderation of the growth in those loan volumes towards the second half of the first half in FY23, a really strong result from the mortgage perspective. On the business bank, up $A55 million, so we saw a growth in the loan books. We also saw a growth in the deposits. We had better margins and better margins on the deposits coming through that business.

Wealth management income up $A76 million, reflecting the growth in deposits and improved margins on deposits coming through that business. Then you can also see the step-up in expenses. We've talked about this for a while now. The team in BFS is investing heavily in the platform, increasing headcount to support the growth that we're seeing coming through there, increased investment on the technology side to make sure the platform supports the digital business that Greg Ward and the team are running down there and obviously, investment that we're making across our regulatory obligations and compliance obligations. So you saw that coming through for the first half as we foreshadowed.

In terms of the underlying drivers of the business, home loans are up, business loans are up, deposits are up. We saw a partial reduction in the platform. Assets, obviously that's mainly market moves coming through over the first half. You can see the fall-off in car loans there, remembering that we sold obviously the dealer finance book in particular in the second half or we completed the sale of the dealer finance book in the second half of FY22.

So turning now to the first of the markets-facing businesses. The commodities and global markets business, up just under $A2 billion worth of contribution for

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the half, a really strong result. Obviously we had strong conditions across most of the platform in CGM for the first six months of the year.

Turning to the component parts, you can see commodities up $A635 million, about 50 per cent up on where they were for the first half of last year. Pleasingly, we saw a step-up of $A547 million in the contribution from the risk management aspect of that business. That's where we're providing derivative solutions to clients. We've had an expanded client base there. Obviously we saw strong conditions, lots of volatility, lots of transaction activity in the first half.

We particularly saw good contributions across gas and power and that's obviously become much more of a global business, so we saw contributions across all regions in the gas and power business. We saw an increased contribution from the resources segment there together with global oil.

On the inventory management and trading, up $A20 million from the first half of last year. We saw good trading gains, particularly through the North American gas and power business, offset by that timing of income recognitions associated with the transport and storage assets that are used in that business, both in North America and also in Europe.

We had pleasing results from the financial markets perspective, up $A263 million, just over 70 per cent increase from that business last year. And that's obviously FICC, futures, credit markets - that sort of business in our CGM business. Up $A263 million, a 70 per cent increase.

Obviously we saw lots of transaction activity through the first half. The other thing we saw and I think would be very familiar to people is volatility in FX markets and interest rates.

We saw a lot of volatility particularly through the first half of the year in that business and the business was able to provide solutions to help clients manage that risk over the course of the first six months of our year.

Investment income down $A523 million. That largely reflects the gain that we saw in the first half of FY22 from the disposal of the industrial and commercial meters business in CGM.

And you can see expenses up over the period. Again, reflecting an increase in - slight increase in head count. In average terms, the head count is up about 5 per cent. We also saw - we see the investment that the team has made in the

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technology platform to support the business together with the investments being made in regulatory and compliance obligations in that business.

In terms of the underlying drivers, again, a chart hopefully that's familiar to people. You can see in the top right-hand side there. You know, the key driver to this business obviously is client numbers. Actually being able to provide services to more clients in more regions more often. And we see that continuing through the first half of FY23.

You can see that reflected in the underlying operating income. The underlying client business driving the big step up in operating income for CGM for the first half.

And from a capital perspective, I'm sure people recall, March 2022 was quite an elevated level of capital in CGM. That's remained pretty consistent from period to period. Although we did see a spike in capital usage, particularly in the middle part of the half with energy markets across the world.

In terms of Macquarie Capital, a more subdued period. Not surprising obviously with transaction volumes. So if you look at where we are for the first half, $A595 million of contribution. And you can see the component parts there. Fee and commissioning come down 23 per cent from the first half of last year. And that's both from an M&A perspective together on the capital market side.

Operating expenses up through the period. Again, the investment that the team is making in the platform to support the growth of the business going forward. And those two are partly offset by an increase in investment related income. And it was good to see the disposals coming through. the real estate assets that Macquarie Capital have on their balance sheet together with the digital infrastructure assets that the team has been working on and building over the last couple of years. We also saw an increased contribution from the principal finance portfolio, up $A89 million in terms of the contribution for the first half of FY23.

As I mentioned, one of the key things for Macquarie Capital is the capital we have alongside our clients there. And you can see what's going on in this chart. Up from $A3.6 billion to $A4.1 billion at 30 September 2022. And the primary mover there I guess is the increase in debt that you see coming through, together with the increase in digital infrastructure and the team has found some additional investment that they've been able to make in Philippines Tower

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portfolio over the course of the half. So it was good to see that coming through and obviously that capital partnership should pay off into future periods.

So that's the operating groups. I might now turn to a couple of other aspects of the financial result for the half. One of the things that we have been doing over the last few years is investing significant amounts in the platform to support the type of organisation we want to be, to support our ability to grow going forward, and obviously to meet the obligations that we have across the Group.

So we set out a couple of slides here which illustrate some of where that expenditure is occurring. And firstly, maybe to start with the regulatory compliance slide. Up 41 per cent from where we were in first half of FY22.

There's a couple of aspects there. You can see an increase in regulatory change and project expense is up 60 per cent from the first half of 2022. Some key programs of work there. We're doing end-to-end capital and liquidity transformation across the Group.

We're obviously working on our APRA remediation program that we talked about before. And we're continuing to uplift the focus on non-financial risk across the Group.

Now, some of that finds its way into business as usual spend. And so you can see that up 33 per cent from the first half of FY22. Obviously there's an ongoing obligation to meet our obligations.

Also some of that project spend that we see, that translates into ongoing business as usual expenditure, coming through our regulatory compliance efforts.

Then on the bottom part of the chart, you can see the technology spend over the last few years. Up an annual growth to 12 per cent over the last four or so years.

A significant investment is being made to support the growth for business. In particular, and there's obviously lots of activity here, but in particular, the team is making a significant investment in data and in data analytics, in end-to-end straight through processing, and all the way to cyber. And of course, increasing the use of cloud capability across the Group.

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