Macquarie : 2023 third quarter trading update - transcript

TRANSCRIPTION

MACQUARIE GROUP LIMITED

THIRD QUARTER FY23 TRADING UPDATE

7 FEBRUARY 2023

	[START OF TRANSCRIPT]
Operator:	Thank you for standing by and welcome to the Macquarie Group Third Quarter
	Trading Update. All participants are in a listen only mode, there will be a
	presentation followed by a question-and-answer session. (Operator
	Instructions). I would now like to hand the conference over to Mr Sam Dobson,
	Head of Investor Relations. Please go ahead.
Sam Dobson:	Thank you, thank you very much, thanks for joining us and welcome to today's
	third quarter FY23 trading update. A slight change from our usual process of
	giving an operational briefing as we are hosting a US analyst investor tour, as
	you're aware. So, today we'll hear from our CEO, Shemara Wikramanayake,
	who'll give you the update on the third quarter and then we'll open up for
	questions. Thank you very much.

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

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

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

Then we have our Commodities and Global Markets business where we have a

strong base in commodities and financial markets that continues to grow 1

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

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

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

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

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

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

2022 amount, sorry, broadly in line with where we finished the last quarter with 2

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

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

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

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

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

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

Now Macquarie Capital, as we said, faced very different market conditions, so while we had $A92 billion of transactions completed, the revenue there was significantly down on the prior comparable period. Also, the investment related income was significantly down on the prior comparable period, given the

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significant realisations we had in the comparable periods. Now the Private Finance credit book grew to $A16 billion, and we continued to invest there with $A1 billion deployed in that book.

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

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

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

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

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

In Commodities and Global Markets, we had a reduction in credit risk capital, driven by market movements in commodities, but that was partially offset by

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increased market risk capital. Then in Macquarie Capital we had growth in infrastructure investments absorbing some capital. In terms of capital management activities over the period, on 18 January this year, Macquarie Bank Limited issued $US1 billion of tier 2 capital, and that's to meet APRA's loss absorbing capital requirements, so it's the ongoing response in relation to that.

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

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

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

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

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	We don't expect material realisations in the fourth quarter of 2023, but as I just
	mentioned, we're continuing the balance sheet deployment in both debt and
	equity.
	Then in Commodities and Global Markets, As we said, subject to market
	conditions which do make forecasting difficult, the commodities income has
	benefited from strong trading conditions in FY23 year to date and is expected
	as a result to be substantially up on FY22, including the impact of timing of
	income recognition on gas and power and transportation and storage contracts.
	We also expect an increased contribution from the financial markets platform
	across client and trading activity and continued contribution, as I also
	mentioned, from asset finance. Then in terms of compensation ratio and
	effective tax rate, we expect those to be within the range of historical levels.
	That overall short-term outlook, of course, remains subject to a range of
	factors, particularly in the current environment market conditions, including
	global economic conditions, inflation and interest rates, significant volatility
	events and the impact of geo-political events.
	In addition to that, the completion of period end reviews and completion rate of
	transactions, the geographic composition of income and the impact of foreign
	exchange and potential tax or regulatory changes and uncertainties. Because of
	that, we continue to maintain a cautious stance with a conservative approach
	to capital, but still a good, strong surplus. Conservative approach to funding
	and liquidity that should position us well to respond.
	Over the medium-term, as we've said consistently, we think we are well
	positioned to deliver superior performance, given as I mentioned at the
	beginning, our deep expertise across a diversified range of specialist capabilities
	supported by our ongoing program to identify cost saving initiatives and
	efficiency, ongoing technology investment across the Group, strong and
	conservative balance sheet and our proven risk management framework.
	So, with that I'll hand back to Sam to take your questions, thanks.
Sam Dobson:	Thanks, Shemara. We will now open up the lines for questions, so I'll hand over
	to the operator from Chorus Call.
Operator:	Thank you. If you wish to ask a question, please press star 1 on your telephone
	and wait for your name to be announced. If you wish to cancel your request,
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please press star 2. If you're on a speaker phone, please pick up the handset to ask your question. Your first question comes from Andrew Triggs with JP Morgan, please go ahead.

Andrew Triggs:(Andrew Triggs, JP Morgan) Good morning and thank you. A couple of questions, please, on the commodities business. Firstly, how much of the outstanding commodities performance this quarter is related to risk management versus the inventory management trading line?

Alex Harvey:Hi, Andrew. Obviously, we provide that in more detail in our full year results as we get through to May, so we haven't disaggregated it for the purpose of this update. As you know, the business is primarily a client-facing business and servicing clients through a range of products. One of the things that we do obviously is make markets for clients, so disaggregating the trading component or the inventory management and trading component from the rest of the business. It's not something that we're doing in this three quarter update.

Plainly, as we said in the comments that Shemara just made, the market, the trading conditions for the business have been strong through the third quarter and were strong through the nine months. So, we benefited from the volatility that we've seen, particularly in recent times across the gas and power business both in the US and Europe, the oil business and also in the early part of the year through FX and interest rates.

So, we will, as we usually do at the full year result, when we provide the audited financials, provide a little more detail on that, but that's where we are for now.

Andrew Triggs:Thank you, and just to follow up there. If I go back to the half, there was maybe a tone of caution had set in around the potential opportunities in this business given markets are said to be well stocked for winter in both Europe and the US. Could you elaborate perhaps on what changed over the quarter? Was this all driven by bottlenecks in the market? Or was it weather related? Maybe just what does volatility momentum look like heading into Q4 please?

Shemara Wikramanayake: If I could start on that and then I'll hand back to Alex. But as you know, the business footprint is diversified across many regions as well as products, so Europe was one factor, but North America obviously had a lot of volatility as well through this third quarter through their winter. The CGM business today is bigger in North America than it is in Europe. North America as well is very

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diversified, there are multiple markets there, there's the Permian region, there's Southern California, there's some Mid-con, there's the Huntington Region, Pacific et cetera.

So, the CGM result as mentioned in our statement here, basically was diversified across all regions. In Europe specifically obviously TTF had risen very high during last year and then Europe had a milder winter. It always did have reasonable storage coming into this winter, so TTF has come off. For us the bigger issue is volatility, and as long as there's movement, that is something that benefits the CGM business.

But as Alex said, ultimately we're trying to patiently adjacently grow the franchise into multiple regions and products, and the result was contributed to from many, many regions, not just what happened in Europe.

Andrew Triggs:Thanks, and how do things look headed into Q4?

Shemara Wikramanayake: Very hard to predict, sadly and as we said in the result, it's subject to market conditions. As we head into Q4, ultimately the base franchise we're confident we'll deliver results, but we can't predict things like demand. We've brought in a lot in Europe this winter, so the storage situation is better at the end of winter than we expected in Europe, but it's still tight as we go into next year and next winter for Europe.

	North America, hard to call, there's been a short extreme weather event in the
	north east happen, but that was very short term. Generally prices are coming
	off and the situation is a little bit more benign at this stage, but sadly it's very
	hard to call what the market conditions could be in a short term.
Andrew Triggs:	Thank you.
Operator:	Your next question comes from Jonathan Mott with Barrenjoey. Please go
	ahead.
Jonathan Mott:	(Jonathan Mott, Barrenjoey) Thank you. Just following on from the same around
	the commodities business and I understand conditions were very strong and
	volatility is what you need to make good money in the commodities business,
	but I wanted to get a feel for the direction of the price. We're seeing Henry Hub
	and the other benchmarks come down substantially; I think Henry Hub's down
	70 per cent, 75 per cent. Volatility is good but when the notional value of the
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contract and the commodity falls, does that reduce the opportunity to make money from each trade? Just because the notional value as well and in a lower commodity price environment, trading opportunities and revenue opportunities should in theory be lower than they are in a higher environment. I understand volatility is great and that we're here to make money, but just when the prices are so much lower, does that make it harder next year?

Alex Harvey:Thanks Jon, maybe I'll take that one. I mean just the first point and we've obviously made this point before for some time, I mean the key driver to business is really this growth of the customer franchise, so the idea being that we're growing our customers, we're dealing with customers in multiple regions, we're dealing with them more often, we're trying to put relevant product in front of them to help them manage their exposures, we're trying to extend capital and it make sense to do that trying to provide market access to people. So the real driver of the business is obviously that growing customer franchise.

As we've said before, obviously the business also tends to be long volatility, so where the volatility exists, that generally provides good opportunities for the CGM franchise. The reason for that is, to a large extent obviously that volatility reflects an environment where our clients are wanting to manage risk more actively, so that provides opportunity to actually deal with those clients on a more regular basis and as I said, we tend to be long volatility and so we're managing that exposure on our balance sheet, that environment tends to be better for CGM. So that's really the key driver.

I mean obviously in terms of absolute prices, to some extent if absolute prices are coming down and that's sort of reflecting in transaction activity, then plainly that might have an effect on how often we're dealing with clients. If we're extending financing, for instance, on a receivables basis, if the actual price is lower, than the return you're making for the extension of that financing will obviously be, or at least the absolute dollar amount will obviously be lower.

But really the key thing I think to focus on, Jon and if you look at what happened in the third quarter, had, as you said, Henry Hub coming off but you had some reasonable dislocation based on demand and supply in the US, which provided great opportunity for us to work with our clients and obviously opportunity on the trading income side for the business and the inventory management side for the business. Equally in Europe, if you look at what

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happened, the Dutch contract, which we talked about before, I think we're sort of a third lower if you compared on a spot basis for 30 September versus 31 December, so the price came down, but there was continued volatility and that provided opportunity for the business to actually transact and help clients manage those directional movements in price.

So generally speaking, customer franchise volatility is good, obviously absolute dollar amounts in terms of things like extending financing, when the prices are lower the return from that extension of financing or the absolute dollar return is lower. But generally what we're looking for is transaction activity which really drives the business.

Jonathan Mott: Thank you and just following on from that, as the price came down, it was warm, people probably took the opportunity to lock in some contacts. Was there any element of pull forward where customers thought, hey prices have come down, this is a great opportunity, I'm going to lock in longer term and therefore you had great opportunities with the customers, but effectively it was a pull forward? Do you get a feeling that that happened in the quarter to just generate such an enormous amount of money?

Alex Harvey:Yes, so what we saw, I mean obviously just to broaden it for a little bit and as Shemara said in her introductory comments, we saw different conditions in different parts of the world. So in North America, for the sake of the example, what we saw particularly through the quarter was reasonable dislocations. We saw significant dislocations between certain regions in the US and that provided opportunity for us to service clients and it provided opportunity for us on the trading and inventory management side as well.

In Europe, I think what was saw - and we talked about this at our half year result, we actually felt that the prices through the first half of the year had obviously reached record highs. We actually felt that the gas situation in Europe was actually more benign than the market was reflecting at the time, but that provided opportunities in the first half for the business to actually transact with customers. As the market came off in the last quarter, the business did see opportunities to work with clients, to lock in prices at lower rates and so whether it was a bring forward or just, I guess, the market reacting to the circumstances they see on a daily basis, we did see quite a lot of transaction, customer activity, in Europe, particularly in the third quarter.

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