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Fundamental View
AS OF 15 Dec 2022Macquarie was tested during the global financial crisis, but managed to steer through the crisis without reporting net losses; in fact it hasn’t reported a loss in its 50+ years of existence. A strong balance sheet mitigated liquidity problems, but its banking unit had to turn to Australia’s central bank for support.
The group has an impressive track record of managing risks and achieving good returns, and has built capabilities in a number of areas. Divestments are controlled based on the market environment. More recently, it has been a beneficiary of market volatility in the commodity space. Its Australian mortgage book has also shown strong but sensible growth.
Business Description
AS OF 15 Dec 2022- Macquarie grew out of the Australian business of Hill Samuel Australia, commencing operations in 1969. Macquarie Group Ltd (MGL) is the holding company and listed entity, under which there is the banking group Macquarie Bank Ltd (MBL) which consists of the Banking & Financial Services (BFS) and Commodities & Global Markets (CGM) businesses, and a non-banking group which consists of the Macquarie Asset Management (MAM) and Macquarie Capital (MC) businesses.
- From the 1990s, the group has been associated with the "Macquarie Model" which focused on identifying cash-generating infrastructure assets & packaging them into funds that could be sold, with Macquarie taking fees as banker, arranger and asset manager.
- The global financial crisis prompted it to diversify its operations which it did through acquisitions of asset managers including Delaware Investments in the US and Blackmont Capital in Canada, boutique investment bank Fox-Pitt Kelton and specialists such as Tristone Energy (Canada). More recently, it acquired US asset manager, Waddell & Reed in April 2021, which added around US$76 bn of assets under management.
- MAM has AUM of ~A$796 bn, mostly in "traditional" funds management but also including its specialist infrastructure and real assets funds.
Risk & Catalysts
AS OF 15 Dec 2022Macquarie has sizable exposures to credit and equity risk and so could be adversely impacted by falls in asset prices. In addition, volatile/weak markets could impede its ability to exit some of its investments. Its earnings profile partially depends on exits and therefore is lumpy in nature. So far it has managed this risk well.
As a relatively small group operating mainly in wholesale markets, it is vulnerable to a liquidity freeze, but it mitigates this through running a well-matched and liquid balance sheet.
It is a global leader in infrastructure investments and is well positioned for the green transition. It has been a strong beneficiary of volatility in commodity markets, a testament to its risk management capabilities.
Its banking unit, MBL, has been subject to enforcement action in Apr-21 by APRA over the incorrect treatment of some intra-group funding arrangements resulting in a A$500 mn operational risk overlay being applied as well as LCR and NSFR add-ons.
Key Metrics
AS OF 15 Dec 2022| AUD mn | 1H23 | 2H22 | 1H22 | 2H21 | 1H21 |
|---|---|---|---|---|---|
| Operating Income | 8,927 | 9,799 | 8,034 | 7,332 | 5,966 |
| Operating Expense/Operating Income | 62.9% | 58.3% | 63.1% | 62.8% | 71.5% |
| Net Profit | 2,305 | 2,663 | 2,043 | 2,030 | 985 |
| ROAE | 15.6% | 19.6% | 17.8% | 9.5% | 9.5% |
| Total Impairments/Op Profit | 8.6% | 6.8% | 7.8% | 2.8% | 26.3% |
| Annuity Business Profit Contribution | 43.3% | 44.7% | 39.6% | 38.3% | 60.7% |
| MBL CET1 Ratio (APRA) | 12.8% | 11.5% | 11.7% | 12.6% | 13.5% |
| MBL Liquidity Coverage Ratio | 172% | 175% | 179% | 174% | 176% |
CreditSights View
AS OF 05 Jun 2023Macquarie has had a strong record of profitability since its inception. Its specialised funds management business focused on infrastructure is a global leader. It manages risks and returns effectively, and in FY22-FY23 had been a significant beneficiary of O&G and power price volatility. The Australian banking business has gained marketshare. Large investment disposals from Asset Mgmt and Macquarie Capital led to a record year in FY22, and strong commodities outperformance led to another record year in FY23. Capital is adequate and ALM is conservative. Being APRA regulated is a huge plus. Senior issuace is largely at the group level while capital is at the bank level. Senior spreads are in line vs our chosen comps and so we move the issuer back to Market perform. Our preferred trade is T2.
Recommendation Reviewed: June 05, 2023
Recommendation Changed: May 08, 2023
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