Macquarie Group Limited (MQG) Earnings Call Transcript & Summary

Brian Johnson, Jefferies. Two questions. Many years -- so 2 questions. The first one is, many years ago, and this held Macquarie in particularly good stead during the GFC when the earnings still fell. But when it came to risk, it used to be very much about earnings at risk. The other model is capital at risk, which means that you could tolerate quite significant losses. I'd just be intrigued, is Macquarie still run with the constraint being an earnings at risk measure, or capital at risk? And then the second one I had, in one of the most comical things of all time, I'd encourage everyone to grab out the Westpac: Pillar 3 and read about their 3 lines of defense and how they manage reputational risk, et cetera. I'd just be intrigued, how can we be confident that the disclosures made at the front of the Pillar 3 can truly be relied upon?

Yes. Okay. So just dealing with the first one in terms of in terms of earnings and capital at risk. I think for some time, we've said earnings and surplus capital. We carry a surplus for many reasons, but one of which is to provide a buffer against adverse market conditions. And so nothing has changed on that front. We're continually operating stress tests to test that, to test that we do hold sufficient capital and that we're looking at the composition of our earnings to make sure that our earnings are resilient through all kinds of market cycles and downturns. So there's been nothing -- no fundamental change in that front. We have put more resources into that space. And I think we're getting better at the work that we perform on that front. And I can't say that I've looked at Westpac's Pillar 3 disclosures. So I can't really comment on that. I've just outlined to you the 3 lines of defense model that we operate. And you just heard from some of our business leaders about how risk culture is truly embedded within the institution. So I've given you a pretty good feel for why we could operate effectively. Ultimately, however, I think it's kind of our history, which I think can give you comfort that Macquarie has an appropriate approach to risk. And I think on that front, I think our record speaks for itself.

Ed?

It's Ed Henning from CLSA. You talked about the need for ongoing increase in people in risk. Can you just touch on the technology side, what you're doing there? And can technology play a role in reducing the cost going forward in the risk department?

Yes, it certainly can play a role. And indeed, does play a role. We work hand in glove with certain Nicole's team in terms of applying technology to minimize the cost of, for example, compliance. However, some of that technology still needs to develop and evolve. And so there is a lot of manual processes. And there's still a need for human -- a lot of human touch at multiple points. And I can give you an example of that. For example, something like monitoring surveillance, we're very focused on voice technology. But voice technology hasn't hit the point where it is entirely reliable because it's still -- we're still going from voice to text. So we are using some of that technology, but we're compensating for the deficiencies in that technology with the use of people. So we'll undoubtedly see an increase in the use of technology over the years to come. But I'm not sure that that's going to necessarily mean that headcount won't increase over the journey.

We have time for one more question. [ Michelle ]?

This is a very basic question. How do you source people for the risk team? Like, if I wanted to work in risk, what degree and qualifications will I have? And do many people that work in risk move back and forth in the businesses, just like Shemara was saying, other people had opportunities to do?

Yes, look, it's a really good question. We really want -- I'm a true believer in diversity and a whole range of fronts. One of the things I say to my direct reports is, "Don't report someone who's -- who -- don't go and hire someone who's exactly like you because we actually want to have that multiple perspective, people with different backgrounds, who are able to kind of challenge things, which are new and actually challenge the status quo." So we're constantly out there looking for all types of people. I don't think I can kind of summarize it in one form. I gave you a bit of a hint before. I think we've got geologists. We've got engineers. We've got people that come from medical backgrounds. So it's a diverse range of people that we, ultimately, we look for. But the characteristics that I like to see in people is that willingness to challenge, that independence of -- and that independence that follow are some of the key characteristics that I would look for.

And we said that people move back and forth all the time. We talked about people have moved into risk roles. But our 2 heads of the investment bank at the moment, Michael Silverton, who's here, and Dan Wong, started their life in RMG. Allan Moss was head of RMG and became CEO. So as far as we're concerned, it's a fantastic training ground for understanding the business. But we really value people going both ways.

Yes. I should add to that, that it's a real focus of mine that we do like people in RMG going out into the businesses. Whilst we're sad to see them go from RMG, they're picked up within a business unit, and that helps educate the business unit on risk and it helps give the business unit the perspective of where the Risk Management Group is coming from. At the same time, I'd like to see people from the business unit, I'm obviously one of those people that have come from the business unit, come into the risk group and actually be in that commercial lens to risk-making, our risk-making decisions. So I think as we get the best result, we get that movement coming both ways.

All right. One more. Matt?

Matt Wilson, Evans & Partners. How does the role of MD and CEO influence the risk appetite of the group? And how has it sort of evolved through Allan, Nicholas and yourself? Because you all start at different points in the cycle. You all come from different sort of expertise. How does your judgment at the end of the day influence the ultimate decision?

Yes. Okay. Look, interestingly, we actually had all our former CEOs back in November for a panel to talk to our executive directors at our 50th anniversary. And I think all of the directors that were there said they were really struck by the consistency of the attitude going right back to when Stan Owens set the business up of the way we've -- culture under which we've operated, which is trying hire the best people, create a framework that empowers them all to go and look for opportunity in their communities where we can bring our skills but then very much be accountable for the disciplined execution of that and act with long-term integrity in terms of making sure we add more value to communities and all stakeholders and we [ cost ]. And that's been core to our culture through all of our CEOS. There have been different market cycles we've all operated through. Tony Berg was there in the deregulation of the '80s. Allan was there post the '91 global recession through a period of strong growth. Nicholas took over at the GFC and rode through the recovery from that. And I've come in at the market environment we have now. We all had different styles as well, but it's been fundamental that we had the same focus on opportunity, accountability, integrity. So whilst we empower people to go and be entrepreneurial, take some risks, fail, look for opportunity, we very much say everyone who works at Macquarie, all 15,700 people, are accountable for risk management and accountability and integrity. So that's been consistent for 50 years.

Yes. I think this without -- just a more general comment that there's been no sudden movement. We've evolved. Our business evolves. So it's we take cautious steps, I think, when we move into new areas. A good example of that is our green energy business where we've started off relatively small and got to really understand the risk involved in that business. So I think that's an important point to remember that there's no kind of sudden sort of moves into new areas. And the second thing is that there's a lot of longevity in the senior management team and within the Board. And longevity, ultimately means that you'll have scar tissue from many of those kind of market cycles that Shemara has referred to in the past. So that all -- that's very much still there within the management team.

Okay. That's great. Thanks. Mary and Patrick, I'll ask you to step down the stage.

Greg, Ben, Dean and Sean, if you can come up, we'll hear from BFS. As Greg and the team are coming up, we will play a short video for BFS, and then we'll focus on the slides of BFS plus staff. [Presentation]

Fantastic. Let me add my welcome to that of my colleagues. A little video there showcasing some of the experiences we provide to our customers. We think their market-leading experiences that they have, the very important relationships that our customers have with us. And the way they view those relationships, we have relationships going back nearly 40 years with customers and our client retention rates are very, very high. And the other thing I think you see in that video is the mindset of our people. Customer obsession is really at the forefront of the way they operate. They have a growth mindset and an innovative mindset. And we think that sets us up really, really well. In terms of BFS, lots of you all know this business. A very successful business, we think, now operating wholly in Australia. Financial services, both Wealth Management and Banking Services, 1.5 million clients and growing significantly. We operate through 3 channels, and you'll hear shortly from the channel heads. So personal banking, business banking and wealth management. So very familiar, I think, in terms of the nature of those operations. And we leverage a very sophisticated technology platform across all of those businesses, and that has been instrumental and key to our growth. In terms of the history of this business, you can see that there, and perhaps surprisingly, this goes back a long, long time. So 1980 with the establishment of the CMT, so 40 years ago and still a very successful product today. We know that today, of course, as the CMA, the cash management account. You can see on this slide, the early establishment of the business bank back in 1985 when we got our banking license in some of the earliest segments in that business. In the early '90s, we started in the home loan business. And back then, of course, it was an originator securitized business, so not really a balance sheet business as it is today. And in the late '90s, the Wrap platform, which has gone on to be the leading platform in this market. Fast forward a number of years, and I joined this business in 2013 and the time we relaunched our strategy. And what I saw at the time was an opportunity to make use of technology which was available, which could significantly change the experiences and the way we service the clients. So no longer did it seem necessary have a very large branch presence to build scale in this business. So that was a real game changer. And so we set about a new strategy. And I'll talk about some of the features of that strategy in this deck but in mainly just under 3 headings. The first one was to really put clients at the center of everything that we do. And that has been pivotal. We worked out that more than price and more than anything else, clients stay with firms -- are attracted to firms based on the experience they have. So client experience is at the center of our strategy. The second part was to earn trust through excellent risk management. We had a tough lesson in 2013 with the enforceable undertaking and we learned then the importance of strong risk management and strong governance. So risk is at the center of everything we do. And the third was to make this big investment in technology to enable us to build a business with scale and to provide those experiences to clients. You can see there on the bottom there, the profit over the last 5 years or so. So the strategy has been working well for us, and we think sets us up going forward. I'd say, the first part of our focus is on client experiences. Now I'm sure all businesses and all retail financial services businesses say they are focused on their clients, and they're all about client service. But it really is different here. This is absolutely at the center of everything we do. Whenever we think about a change or a new product or a change of process, the first thing we ask and want to understand is, what does it look like to the customer. We encourage all our staff to be customers. We want them to understand firsthand the experience that they're building and what it's like to use that product. I'm a customer. Of course, I know Shemara is a customer. Alex is a customer. And we encourage our staff customers to be vocal about their experience. It's -- they're a very tough judge of the characteristics of the product. We don't just rely on that and we don't presume to know what customers want. So we use a range of measures to understand the experience customers are having with us. You heard on the video, human-centered design. That's one of the techniques we use. We have voice of customer work that we do but there are a range of analytics that we run ourselves to have a better sense of the experience customers have, and we then make heavily database decisions in all of the changes. So with the changes that we make, the new products, the changes of features are fact-based driven on real knowledge about what customers are experiencing, and it is very, very powerful because we know we're spending our money in the right areas. With this focus on clients and them being at the center of what we do, we want to make sure that their experience is always positive, and there are no bad experiences so that their best interests are looked after. There's been a number of industry changes over the last while. And often, what you will see is that we have moved ahead of the industry in terms of these changes to make sure that the products operate in the best interest of customers. So we were the first to remove ATM fees. We were the first to have an open banking platform so customers had more control of their data. We were the first to ban gambling transactions on credit cards to make sure we were protecting vulnerable customers. We stay very close to industry groups, to regulators and to our customer lobby groups to make sure that we evolve the business in a very proactive way. We don't just wait for rules to change. The other thing we've got, of course, is a very strong risk culture. You heard Patrick talk about that before. There is a really strong governance and accountability culture within Macquarie, as you heard Patrick explained. The tone from the top is very, very present at Macquarie. The tone from the Board. You saw Peter, the Chairman, on the video, and Peter's here today. He's very present in the business as are the Board, the tone from the top is very present as it is from Alex and Shemara and Patrick and the other leadership team. So we then have a very experienced senior leadership team. And that senior leadership team have a long tenure at Macquarie. So this is a team that's been operating the business for a long period of time. When they make decisions, they're making them for the long-term, in the best interest of clients, in the best interest of the business because they will be here over the long-term to work through any issues that arise. So it's a very, very senior team. We've kept up our investment in terms of compliance and in terms of risk. We find ourselves well positioned in terms of changes coming out of the Royal Commission. There were no specific findings against Macquarie and we've been proactive in changing our business, as I mentioned on the previous slide, for changes that we think will come through the industry. And finally, the governance measures here and the need to be a risk professional aren't just at the senior level. With every person in the business, regardless of their role, they have risk management KPIs that we assess a couple of times a year and constantly, in fact, and there is a very strong consequence management framework if they don't meet the very high standards that we set of our people in this area. The next part I'll talk about is the simplification of our operations. What we recognized was we could really win here if we focus on a limited number of things. So we understood what we're doing and we do those well. And so we spend a lot of time closing offices and operations that didn't have the scale or the payback that we might want. We exited a whole range of noncore businesses. We combined businesses to get operational efficiencies. And just recently, we put the finance leasing business into BFS for similar reasons. And you see there a discontinuation of a range of products, simplification of our pricing structures and other arrangements we have in place where clients deal with us and a significant decommissioning of our systems. All of this, making it a much more simple business to operate, which means we get more things right. It's simpler to manage. We make less mistakes, it's easier to control risk and it becomes more efficient. And we see some of that efficiency coming through in our cost story. What you see here is the cost over the last 5 years or so. And they're basically flat. They went up in the last year as we brought across the motor vehicle finance business. The buffer that the -- the costs have remained flat. And what that's meant is that we've been able to invest more money proportionately in technology whilst keeping costs flat, and that technology investment is allowing us to grow at scale. And on that right-hand chart there, you see the line is our funds under management, our loan assets and our platform assets have been increasing and our staff numbers are not increasing. So we are building scale and I expect this graph to look similar as we play forward over the next couple of years. Volumes going up, cost base not going up. And this is just an example of some of the technology investments that we've made. There are literally hundreds of features and investments under this. I just picked out some of those. The key thing, I think, was in 2013, we decided to do a full digital transformation. So rebuilding the tech stack from the bottom up: new infrastructure, new environment, new applications, new core banking system, everything from the ground up. And that has brought tremendous benefits. And you're seeing that now paying off in the home loans space, and Ben will talk to that in a little while. We've had great leverage from those investments in our digital assets and our environments and also that core banking system. We're turning our attention now to the wealth platform. So we are re-platforming the wealth platform. That's the first time in 20 years. So that's a significant upgrade, and will bring with it tremendous benefits, I think, in terms of our wealth business. And likewise, in our business banking business, they haven't had significant technology upgrades, and we are leveraging the investments we've made on the personal banking side across to business banking, and I expect us to get the rewards there as well. In the interest of time, I might just jump over the next slide. We are a little bit behind, but this is just some of the technology stack that we have. Some tremendous functionality here. I can see Justin, who runs our IT team, Nicole is in the audience. We have a superb tech team and product team. And we really do have some leading technology here and a lot of it, the first time it's been seen in financial services has been at Macquarie. And I think we're very sophisticated in terms of our cloud strategy as well and much more advanced than what you'll see in the industry. I'll hand over now to the channel heads. You can see here the way the business is structured. We go-to-market through 3 channels. Again, this customer obsession and this focus on customers. So it's the 3 channels, which face the market and face our customers, and you'll hear from the channel heads. And then we are supported by our product teams, our IT teams, our operations teams, our risk teams and so forth across all those platforms. Today, I have Ben here. Ben runs the Personal Bank. Ben joined Macquarie 23 years ago, and has worked in the Macquarie Capital business and the Asset Management business, both here in Australia and in the U.S., and joined BFS in 2013 and has been a big driver behind the overall BFS strategy. But importantly, the Personal Banking business. Dean's been with Macquarie for, I think, 25 years, wholly in the business bank and has been running the business bank for about the last 5 years. And Sean joined us back in 2011 after a career at ANZ, running the private bank, high net worth business in Asia, and time also at BT, and has been a big part of the driver behind our platform growth. I'm going to pass over to you, Ben.

Hello. You can see here that we've grown our home loan book by $14 billion over the last 18 months. And since the middle of 2017, we've been increasingly focused on our Macquarie-branded loans. We ceased originating all-new white-label loans about a year ago. Because of the strong growth that we're seeing in our book, it's weighted towards more recent originations, with 2/3 of the book having been originated in the last 3 calendar years. Our application volumes more than doubled in 2019, which we attribute to our focus on delivering a superior client experience. One dimension of client experience is the time it takes to approve loans, and it's particularly important in the broker channel where we originate 90% of our new business. Brokers tell us that we have the best approval times in the market. We're consistently at least twice as fast as the industry average. And that's a result of our multiyear investment in people, technology and processes and a willingness to invest ahead of time and build scale and capacity for a much larger business than we had. You can see that scalability in the top right chart. We were able to maintain our industry-leading processing times in 2019, even while our application volumes more than doubled. At the same time as winning more new customers, we've also been focused on delivering outstanding client experiences for our existing customers. And you can see in the bottom right-hand chart that's had a dramatic impact on the number of customers leaving us with our external refinance rate from Macquarie-branded loans now in line with market and improving every month. Our strong growth is happening in the context of a very prudent, indeed, conservative risk appetite. We've moved ahead of the industry over the last 5 years to implement tightening measures. For example, in May 2015, we were one of the first lenders to start buffering other debts. That means our servicing calculator added a margin of safety on the interest rate of a client's other debts that they were not refinancing with us. We think that moving early to implement tightening measures laid the foundation for the step change in market share that we saw in 2019. Another example of our prudent risk appetite was our strategic decision in July 2017 to reward customers who have more equity in their homes. We were the first lender in the market to introduce a separate pricing tier for customers with at least 30% equity in their homes. And for 2 years, we were the only lender in the market with that strategy of focusing on lower-risk loans. You can see it's had a dramatic impact on the mix of clients we're attracting and the business that we're writing. In this financial year, 56% of our new volume has been at a loan-to-value ratio of below 70%, and we write almost no business or very little business above an 80% LVR. At both ends of that spectrum, we compare favorably to market. On the top-right chart, you can see that loan-to-value ratio is highly correlated to arrears rates so we're confident that our strategic focus on having a very prudent risk appetite means that we're building a better quality loan book, both our 30-plus and 9-plus arrears rates are materially better than the industry. This page presents another lens on how we've repositioned the business over the last 5 years. You can see the change in our mix of flow over -- our mix of business over time. And when you look at our recent flow, you can see that we're attracting a higher proportion of owner-occupied clients than the industry. Our average loan size has increased to about $600,000 for new business. And our overall portfolio is more weighted to the Eastern states than the underlying population. I'm now going to hand over to my colleague, Dean Firth, who runs our business bank.

Well, thanks, Ben, and good morning, everybody. The business bank has been built on a strategy of specialization, and that specialization has really been focused around a segment strategy. As you can see on this slide, there are 11 segments that we're specifically focused on. 8 segments are relatively mature in the context of our offering and 3 we would consider to be emerging. As a consequence of this segment strategy, what we're able to do as business bankers is put the same bankers, and the same teams in front of the same business every day of the week. And as a consequence, we build really great insights and knowledge about what's important to that business, not just their financial requirements but their business requirements. And as a consequence, we believe that we can innovate and provide very unique propositions into the marketplace. I think the best way to articulate that is by way of example. We very early recognized that the collection of rent was an issue for our real estate agent clients. So we developed a product called DEFT. DEFT was the first outsourced provider in terms of invoicing, receiving and reconciling the collection of rent for our real estate agents. It did a number of things. It removed cash from their office, it automated a process and it improved their operational efficiency. But that was only really part of the equation. The money had flowed from the tenant to the trust account. We then had to get the payment from the trust account to the landlord. And at the time, real estate agents were really reconciling line-by-line with landlords. So with the knowledge that we gleaned from the client interviews that we've been doing, we understood that business management systems that they are operating on were pivotal to their operational efficiency. So we built integration between our payments platform, our banking platform and the property management systems that our real estate agents were operating on to automate this transaction from tenant all the way through landlord. So that delivered operational efficiency once again into the back office of our clients and actually dropped profit into their bottom line. But that was really the accounts receivable side of our clients' business. We then put our mind to the accounts payable side. So each property throws off about 25 bills a year, gas, electricity, energy, rates, the electrician, the plumber, the painter. And as a consequence, we had big manual processes happening inside of our clients' businesses. Once again, we built automation between our accounts receivable process, our accounts payable process and automated that within our clients' back office. And finally, and more recently, we've taken the product attributes of DEFT to develop a product called Auction Pay. So if you were to go to an auction and buy a property from an agent that actually banks with Macquarie, you don't need a bank check. You just use Auction Pay and that removes the check and the paper process from our clients' back office and makes them more efficient again. It's this process that we've taken to every one of the segments that we bank, which we believe demonstrates a real understanding of our clients' needs, not just from a financial services perspective, but from a business services perspective. And internally, our mantra is endeavor to be more than a bank to our clients and make them really critical in the way that they run their business on a day-to-day basis. Small business typically don't have the resource to build these technology solutions. So we partner and collaborate with our clients to make that possible. That really goes to the heart of our client retention rate. Our churn is low. Our client retention rate over the last 5 years is running at 93% and it's not been below 90% for 20 years. Our growth in lending volumes is at 11%, that's from December '18 to December '19. And importantly, deposits represent more than 60% of our balance sheet, running at 1.6:1. It has also underwritten 100% growth in our loan and deposit books from relatively small bases over the last 6 years, and the outlook is very -- looking very positive. This is just a bit of a deeper dive as it relates to what we do from a business deposits perspective. We haven't just built this integration with real estate agents. We've built this integration with every one of the segments that I referenced earlier. And this integration, combined with the payments platform that we have, is delivering a unique proposition to our clients. You can see that our deposits are weighted towards property services. But as we build out our propositions into other segments, we can see great opportunity there. And as evidenced by the slide on the bottom right there, our deposit growth year-to-date from December '18 to December '19 is 6%, with the predominance of that growth coming from the emerging segments that I mentioned earlier. This slide goes to the composition of our loan book. You can see at the top there that our loan-to-value ratio is conservative and that our level of realized losses is low. We think that goes to the heart of understanding the businesses that we're lending money to, not just against bricks and mortar, but against their working capital assets. On the bottom left side, you can see that 44% of our exposure is against the business themselves. And I can tell you that small business owners love the fact that we recognize the sweat equity that they're building in their business on a daily basis. And finally, the composition of our loan book is changing as we build out into emerging markets. Finally, vehicle finance, and Greg referred to this earlier. This is the business that transferred from CAF into BFS recently, just over 12 months ago. Half of this business actually sits within Business Banking. We look at the dealer finance as another segment that we provide finance to, both them and to their clients. And then the consumer component of the vehicle finance business sits within Ben's business, which is really the consumer and the Novated side of what we provide from a vehicle finance perspective. Thank you, and I'll now pass you over to Sean.

Thank you, Dean, and good morning, everyone. I'd like to spend the next few minutes talking about our wealth management business, a business that's had a long-term commitment to the advice market in this country, both in terms of the thousands of advice businesses that we serve in the open market and, of course, our own advice business. So this commitment actually dates back, as Greg alluded to earlier, to more than 40 years ago now with the launch of Macquarie Cash Management Trust or Cash Management Account as we now say, or CMA. Today, the CMA is approaching $30 billion in funds under management and is used by thousands of investors around the country, including more than one self-managed -- more than 1 in 3, I should say, self-managed super fund accounts in Australia have a Macquarie CMA, still known for its service proposition and leading functionalities such as data connectivity for financial advisers. In fact, we leveraged our cash management capability to launch Macquarie Wrap some 20 years ago now. Our Wrap is the second largest wrap platform in the market with over $90 billion in funds on platform in excess of 20% market share. Still growing strongly today from a net flows perspective, with $3.3 billion in net flows for the 12 months to September '19 last year. And since inception, we've continued to enhance the capabilities of our Wrap platform. Our managed accounts capability, for example, being a more recent enhancement, seeing very good growth. But we know the advice market is changing. So advice businesses around the country are rethinking their business model and their service model, with around 1/3 of them expected to make a change in the coming 12 months. We believe the expertise we've gained and the capabilities we've delivered over the last 40 years position us well to partner with advisers to help them navigate this change. So we're very focused on delivering exceptional client experience. And that's really important to us in terms of advisers and clients. We're investing in our people and our technology and using human-centered design techniques to very much co-create solutions for advisers and clients. We're replatforming our Wrap platform, very much focused with cloud-based open architecture technology to integrate within an adviser's business or an adviser's ecosystem. We're also leveraging our core banking platform from a CMA perspective. Re-platforming provides a whole range of benefits actually for advisers and clients, including greater, if you like, international capability from a Wrap perspective and real-time banking from a CMA perspective. That doesn't just provide benefits to advisers and clients, it also helps us continue to get the benefits from scale in our own business. Now we're not just investing in our core platforms, we're also investing in our digital interfaces. So our Adviser Online capability, which helps advisers run more efficient businesses. We're integrating our award-winning e-banking and mobile banking technology so clients can see their wealth and banking in the one place. We're always looking for opportunities to innovate. Our Digital Portfolio Manager capability is an example of that, which enables advisers to manage clients' investments more efficiently by automating investment recommendations, advice documentation and portfolio implementation. We're very much investing for the future. Moving now to our private bank. In an evolving advice market, we chose to be very specific on the segment we focused on in our own advice business. We brought together our private bank and private wealth business to focus clearly, focus our growth strategy on the high net worth segment. Certainly, this was a natural -- or logical evolution for us in that business. We've been serving high net worth clients for many years now, albeit not exclusively. We believe that very much a segment-focused strategy represents a significant growth opportunity for us as we bring the best of Macquarie to high net worth families. We now have a very focused business that's very well awarded business as well and serving the needs of clients very, very well. So in summary, we believe that our long-term commitment to the advice market in this country over the last 40 years and the expertise we've gained during that time, combined with the fact that -- of our continued investment as a result of our scale and the strength of Macquarie's brand and balance sheet, will continue to benefit advisers and clients, enable us to make the most of opportunities available in a very much evolving market. Thank you, and I'll hand back to Greg.

Thanks very much, Sean. Well, as you can tell, we think we're very well placed for growth. We're expecting growth going forward across all 3 of the channels in all parts of our business. Sam, in the interest of time, I'll hand back to you. I'm not sure that we've got time for questions, but let me hand back to you.

Thanks, Greg. We'll just take a couple of questions. Matt?

Matt Wilson, Evans & Partners. When we look at the numbers on Page 44, you're sort of, on average, you're 10% the size of an average major bank. Yet you spend more than 1/3 of what they do on average on technology. You've clearly got the best technology. As we've heard today, you can price risk and you don't have a back book to protect. There's huge inertia rents that sit in the sector. How are you holding yourself flat because you've got this tremendous opportunity and all the tools and expertise to grab it?

Yes. No, well, we share your sentiments that we're well positioned. We think we do have the best technology. We don't have anywhere near the old platforms to sort of worry about. I think this is why we're seeing the sort of growth that we've seen. The Wrap business will soon be the largest Wrap business in the market. The mortgage business is growing significantly. The business bank business is growing significantly. So we think there's lots of upside here. And importantly, as you see on this slide, we're trying to do it in a way where we pace our investment, and we could sort of accelerate a little bit but we think we're growing at a manageable pace.

Jon? Let's take one more.

Just a quick one. You said at the very beginning in the operating update, volume growth is fantastic. We can see it, we see it in the [ operating stats ] every month. You also talk about margin and the margin pressures there. There was another comment here today about margin. Can you talk about how margin is performing? And how you expect that to go, especially as you continue to focus on premium product, as Matt talked about, is a very competitive space and the industry margins continue to be driven down?

Yes. The key margin pressure we've seen is on the deposit side, I think, with the rate cycle going down, and that's eroding some of the margin in terms of the sort of the mortgage product. In business banking, margins are about the same as they were in business banking, likewise, in leasing and probably the mix of business in leasing for us is changing a little bit. So our margin is up a little bit in leasing. The biggest margin compression we've seen is in the Wrap business. There's been a lot of lot of pressure there coming from, again, the deposit side, but also there's a lot of competitive pressure in terms of fee rates there. On the mortgage side in terms of the credit margin, that looks okay. That looks okay. So if we were to think to a standard, sort of, transfer price, then the margin is sort of okay, but the -- well, the deposit margin is coming down. So the overall margin is down a little.

And the volume growth will offset the NIM pressure, you'd still expect revenue growth coming through?

Yes. Yes, as you've said, the volume is very strong in mortgages, particularly in the last quarter, but it has been all year. And it's been very consistent in business bank the whole period.

All right. The last one, Andrew, as long as it's a quick one.

Just a quick question on funding. So obviously, 40% annualized home loan growth, very strong. You did a PUMA series late last year, I think it was almost a $3 billion deal. How many of those do you need to run per annum to keep NIM in check, I guess?

Yes, we're very fortunate. We've had this very substantial deposit base. We had more deposits than loans for a long period of time, and deposits are still growing significantly. And as Dean has shown, we have a whole range of new segments that we can grow deposits. We'd like to accelerate deposit growth. As you say, we did a $2.88 billion securitization issue. That was the largest non-major deal ever done. We've done some unsecured issuance. Our funding markets are very attractive. We're underrepresented in the term deposit side. And frankly, we're underrepresented in transaction and savings accounts where the growth for us is only about $80 million a month. So there's a range of mechanisms for us to lift the deposit side and the technology suite that we've brought to bear is primarily on the mortgage side. I think as we shift our focus to enhancing the deposit offerings, I think, we'll see deposits start to increase, and we'll be able to fund that growth.

Just in the interest of time, we'll leave it there. I'll come back to you, Brian.

BFS, if we can have you out of the stage. Thank you very much. We'll have the CGM team come up, Nick, Cindy and Simon. And as Nick and the team come up, we'll play a short video on CGM. [Presentation]

Good morning, everyone. What a fantastic video. I think it really clearly demonstrates that link between our staff, our customers and the solutions that we're providing them on a daily basis. Today, I've got the pleasure to talk to you about the core elements that define Macquarie's CGM business. Shortly, I'll be joined 2 of my colleagues, who run 2 large, yet diverse businesses within that platform. CGM is a client-focused business. We have deep, long-standing client relationships. Our staff have specialized strong technical expertise across a broad range of geographies and products. Our business lines are diversified, resulting in a strong and stable earnings base. And finally, risk management overlays every decision that we make and is core to everything that we do. Once again, customers are the most important element of our business. We have over 5,000 unique customer relationships, each having exposure to either a financial or commodity market or a requirement for some kind of capital. They include sophisticated investment managers, producers and consumers of commodities. Each year, our customer base continues to grow. 85% of our client revenue is generated from existing relationships, demonstrating the core strength of our customer franchise. This leads to a confidence to be able to forecast future activity levels, helping us make sound investments and decisions when it comes to things like staff, products and markets. Our customer relationships are well diversified over a full spectrum of products and services with limited concentration in any given sector or product. Given how important our customers are to our core business, we often ask them about their experiences, like we did in the video, like we've done through human-centered design processes as our colleagues in BFS and other parts of Macquarie have. Some of the insights that they share with us include, they appreciate the bespoke offering that's tailored specifically to their needs. We make them feel like they are our only client. They respect our strong understanding of the market, which results in a shared partnership experience. And finally, they tell us that they buy Macquarie for our people. And this is an offering that has evolved over many years. This is a really interesting slide and a lot of data on the slide. But I think it really clearly demonstrates the evolution of this business over the past 40 years in partnership with our clients into a broad range of products and markets. Some of this activity has resulted in businesses that are niche, and some of it has resulted in businesses with scale. This is further evidenced by industry recognition. In the past 12 months alone, our businesses have been recognized as Natural Gas/LNG House of the Year, Asian Electricity & Environmental Products House of The Year and Energy Research House of The Year. This results in scale across some of our business lines. Our futures business is ranked #1 on the ASX. Our North American gas business has grown to be the second largest in that market. And our asset finance portfolio has grown to be over $8 billion in notional value. So over the 40 years, our clients have been at the forefront of our portfolio. We have evolved into different geographies where our clients are located and where their risks need to be managed. This has resulted in coverage across 50 offices in 27 countries. One of our more recent expansions has been into gas trading in Mexico City where the domestic gas industry there has recently deregulated. This was a journey that took us 12 years in the making, waiting for the right time to identify it to enter that market. When our customers demonstrated that the need was there and we deemed that the regulatory environment was appropriate, we were able to move quickly, one and the first in the industry to do so. Our people have a broad range of skills and specialist technical expertise. Over 2,500 of our staff are tailored to solve our customers' risk management, capital and logistical challenges. Some of those specialist skills include logistical experts who help us manage the movement of commodities from where they are produced to where they are consumed. Meteorologists who forecast weather patterns that impact commodity prices on a daily basis. And data scientists and quant PhDs who help us interpret the wealth of data we accumulate on a daily basis. This combination of a diverse customer base, broad geographic reach and deep client relationships results in a strong and stable earnings base. One of the least understood aspects of the CGM business is that 65% of our portfolio represents recurring income from either annuity business lines like lending, leasing and financing or from repeat revenue that comes from our stable client base. In fact, when we analyze the CGM business lines further, and more specifically, our commodities business lines, we find that between 60% and 70% of those business activities have either very low or no correlation between them. So when volatility does drop in one of our sector portfolios, it is likely offset by increased activity in another business line. A good example of this was last financial year, we saw reduced volatility and subsequent reduced customer activity in our global oil businesses. This was offset in our portfolio by an increase in volatility and subsequently customer activity in our North American, European gas and power businesses. So this correlation results in a lower risk of volatility for our earnings base. So let's talk about risk a little bit further. When I'm talking to investors, they often ask me what keeps me awake at night. And invariably, it will come down to some kind of discussion about risk. Whether that be geopolitical tension in the Middle East, the impact on global demand and demand of oil or the coronavirus or the impact of technical -- technological disruption on our markets, risk management is a factor in every decision that we make. This experience has been accumulated over half a century of managing risk across our organization, resulting in a mature and consistent control environment, governed by Macquarie's risk management principles. This includes managing our global risks right down to managing out independent granular risks. As we've heard from Patrick and Shemara, we have a very strong second line of review and challenge that comes from our central RMG function. And we are all focusing on the worst case outcomes in every decision that we are making. There is a really strong focus on risk culture across CGM, in much the same way that, that focus permeates all other parts of Macquarie. Every individual in our business is held accountable for all aspects of risk management. If you were to ask any of our colleagues across New York, Singapore, Geneva or Houston, every one of those individuals will tell you that they are each held accountable for all aspects of risk management, including credit risk, market risk, operational risk, nonfinancial risk and conduct risk. This manifests itself in not only our ability to manage our own risks but to partner with our customers to manage theirs. As I mentioned earlier, we have a lot of diversity across all of our businesses. Roughly 60% of our revenue is generated from commodities, a further 25% from our financial markets activities and 15% from our asset finance activities. Today, I would like to introduce you to 2 of our business heads who run commodities and financial businesses. Firstly, we have Cindy Khek, who has joined us here from Houston. She runs our North American -- she co-heads our North American gas and power business. Cindy joined us from an acquisition back in 2005 and has well over 20 years' experience in managing risks and relationships across that industry. After that, we'll hear from Simon Wright. Simon has been with the firm for over 30 years and runs our Fixed Income and Currencies business. Simon has been at the forefront in driving the growth of that business over the last 2 decades. Cindy?

Thanks, Nick, and good morning. I'm delighted to be here today in Sydney. North American Power, Gas & Emission is very much a people business. Many individuals in our trade team have over 20 years of experience and senior team member that worked together for over 14 years. We have strong expertise in specific markets and regions and we have very high retention rate, which is unique in our industry. Our long tenure and continuity as a team underpins our strong Macquarie risk culture and has enabled us to build a seamless round-the-clock client and market coverage. This evolution of our business growth didn't happen overnight. Our growth has been a steady and continued organic growth, strategic acquisitions and seamless integrations over the last 15 years. I'll touch on the most significant ones of those now. Like many of my long-standing colleagues, as what Nick mentioned earlier, I joined the company in the acquisition, in my case, through Macquarie's purchase of Cook Inlet Energy trading business in 2005 based in California. As part of a diverse minority-owned gas trading company, Cook Inlet's legacy continues to be an important part of the Macquarie business today, especially through a strong footprint established in California natural gas markets and disciplined risk management culture. Between acquisitions, we maintain our focus on organic growth. For example, as we integrated Cook Inlet's business, the team was building out the East Power team through a patient, client-led and physical approach to create the significant business we have there today. Macquarie subsequently acquired Constellation in 2009, then one of the largest natural gas marketers. Integrating the teams to one Central Houston location that now forms our regional headquarter with over 400 staff. Our most recent acquisition was in 2017, where we successfully integrated the Canadian gas team in Calgary and its Southeast, Texas and West Power team in Minneapolis. Each acquisition and the steady organic growth was additive to the platform that provides a full coverage of North American gas and power business that we have today. Our business is very much physical in nature, which means we don't look like our industry peers. Our position in North American market is supported by a strong emphasis on deep-dive analytics through which we actively manage on over 80 natural gas physical system, including pipelines, storage facility and local distribution companies. As you can see on the slide, where it's highlighted in blue, we physically ship and find ways to optimize on over 80% of all major interstate pipelines with at least average receipts of 0.5 Bcf a day. We accomplish this mainly through leased physical assets. And our peak physical volume hit 13 Bcf just this year. And to put that in perspective, total North American natural gas production is 90 Bcf as of December 2019. Patrick and Nick earlier talked about ownership of risk. And our business is no different than the rest of CGM and Macquarie. All of our activities are underpinned by a strong Macquarie framework and culture, and every one individual are accountable across all aspects of risk analysis, and risk is owned at the business level. With our extensive physical coverage, we have built a diverse and long-standing client base comprising more than 500 counterparties, they include producers, utilities, power generators and marketers. Many of these clients have worked with us for many years, and benefit from the mix of our analysis, expertise and the physical presence market reach that I described. Turning to the macro and how we're responding. We have witnessed massive shifts in the natural gas market over the last 5 to 10 years. These rapidly changing markets present continued opportunities for our business. Although the shale natural gas revolution began more than a decade ago, we -- our production continues to climb. Not only has overall production has grown, the geographic distribution of production have shifted dramatically. With the northeast region growing the most over that time frame, it has moved from an importer to a net exporter to other regions in this time frame. Today, the U.S. has built 6 world-scale LNG facilities from 0 just 4 years ago. In total, exports out of the U.S. have increased over 355% in the last 5 years. As a result of these rapidly changing supply and demand dynamics, interregional flow across North America has completely reversed, new bottlenecks have appeared and disappeared, while the amount of storage available to absorb the supply and demand dynamics has actually declined. So what does this mean for our business? Given this constantly changing landscape, both producers and consumers have a greater need to manage their energy products and to understand the implication for price volatility as well as physical flow logistics. With our long-tenured and experienced team and extensive physical coverage of North American power and gas grids, we believe we are well positioned to service our clients' needs and continue to see -- help them navigate the uncertainty and volatility of ever-evolving market. Thank you. I'll hand it over to Simon Wright.

Thank you, Cindy. Thank you, Nick. My name is Simon Wright, and I'm the Division Director of the Fixed Income and Currency business. I've been looking after this business in its many evolutions and iterations for over 20 years. What I can tell you is true today has been true in the last 20 years is that we are a client-led business model. Our primary focus is based upon finding client- or market-based solutions for our clients and then managing the result and risk of that activity. In terms of coverage, we are all things FX, both G10 and emerging markets, operating out of all the major centers. With regards to rates markets and products, we choose not to engage as deeply in all markets. We basically pick those markets where we have a competitive advantage. In the credit markets, ex U.S., we are largely focused on the structured end of that market around origination, structuring, distribution and trading of asset-backed securities, particularly around mortgages in the ANZ and EMEA. With regard to clients, we find our capabilities resonate with corporates, private equity, real money, leverage money, a little of activity around money service brokers and some high net worth. As you've heard today, risk management is key. It is key for us and it always has been at the center of everything we do. Our risk management team and -- are basically our product managers. A lot of managers, our regional managers have, on average, tenure of over 18 years, and all are very well schooled in our risk management systems and our risk management culture. Growth and evolution has largely been in 2 stages for us. In the 1990s and the 2000s, we were very much an Australian-led business model, operating in our domestic markets, focused on the primary market that is talking to end users directly, and then servicing the international market much more than the secondary markets that is talking to those institutions and brokers servicing their end clients. But post 2008, there was a change. We had to change our focus. We had to change our strategy in response to those changing market dynamics. We basically sought to target those primary markets offshore. In doing this, we knew we had to basically hire local origination capability and then harness it and couple it with long-standing Macquarie DNA risk management capability and product capability. We focused on the Americas, Japan, EMEA and Asia. As a result, we are now servicing in excess of 250 private client relationships. As can be seen by the graph on the top right-hand corner, we're experiencing and enjoying year-on-year incremental growth, regional diversity, and revenues are marked by low volatility. Looking at 3 stages of this evolution. What is true to all of them is we put our client outcomes first. Starting with U.S. and Canada. We focus primarily on private equity and corporates, and our clients here have benefited from our ability to partner with Macquarie Capital and build out our complementary skills to provide a much more holistic client experience. In Japan, our experience had been around -- through joint ventures and partnering with banks and brokers. But in 2011, we basically originated a small local team to focus on local corporates. And what we developed and achieved was a diverse range of corporates, multigenerational corporates with strong balance sheets in industries as diverse as education, shipbuilding, electrical and food importation. In EMEA, again, we hired local. We found people who knew their markets, knew nuances, cultural ties, those sorts of things and part of the Macquarie capability and risk management. Here, again, client base has been diverse: fish stock importers, steel fabricators, timber importers, agribusinesses, asset originators. And what has been a real win for us through this whole evolutionary process has been our ability to harness and leverage our experiences in one region and make them portable to another client sector. For example, we designed and executed the term FX hedge with volume variability based upon underlying jet fuel price in North America -- for a North American client. We took this idea and made it portable to Japan, where we're talking to a shipbuilding client with the same FX-type exposure and was linked to copper pricing because of the demand for copper wire. In both instances, these were first for our clients, and it solved a problem for both of them and gave us real leverage. From an outlook perspective, we have lots of room to grow. Our coverage model is only partway complete, and with the current strategy yielding stable incremental growth, we're very much focused on the continued maturation of the strategy. Thank you.

Thanks very much, Simon. So as you've heard, CGM is acutely attuned to the evolving market opportunities and well positioned to take advantage of them as they present themselves. When we think about these potential areas of growth, we can categorize them in 2 ways. The first one is areas that are adjacent to where we are already operating, have expertise and market relationships. So this could include the investment in disruptive technologies such as blockchain, participating in the replacement of aging energy infrastructure or expanding into new geographies, including growing our FICC business in Asia, the Americas and Europe, as Simon has just talked about, or indeed, growing our SAF platform deeper into Europe, including expanding our smart meters portfolio and our solar business. All the way, we are looking to capture new classes of customers with this expansion. Secondly, we see a really exciting opportunity in the transition to a low carbon economy. Macquarie and CGM understand the global energy footprint. We understand gas, we understand electricity, we understand oil and renewable markets. We also understand how to move energy, both in domestic markets and international markets. We think this uniquely positions us to capitalize on the opportunities that will relate to the energy transition. This includes participation in the LNG markets where demand is forecast to triple over the next 10 years or the emergence of hydrogen as a new energy class, and finally, the production of renewable energy where we find ourselves collaborating very, very closely with other areas of our organization. We're currently pursuing an interesting opportunity alongside an independent crude producer. We're looking at a program that will capture the carbon where that carbon is emitted, and ultimately, when we will use that in an enhanced oil recovery project. That carbon will then be permanently sequestered into the ground, resulting in a carbon-neutral production of a barrel of oil. Also, we're experiencing high growth in demand from our clients for voluntary carbon offset schemes. So we're working with those clients on bundling the offset schemes with other commodities, and indeed, creating new asset classes. For example, we're talking to a customer about a jet fuel-bundled supply contract with an offset, so that's -- we will provide a single one-stop solution for that customer. There's also the opportunity where we are talking to a customer about development of a carbon-neutral aircraft where the total life -- expected lifetime emissions of that plane are calculated and offset at delivery. So the cost can be built into the CapEx of the aircraft, debt finance and then amortized over the working life of that aircraft. And finally, we're discussing with a major rideshare company to include an offsetting button in their app to allow customers to elect to offset their carbon footprint at the time of purchasing their ride. The commonality across all of these opportunities is that we are partnering with our clients as they transition. So as you can see, it's a really exciting time for CGM. 65% of our earnings are derived from recurring business lines. We're well diversified across customer revenue and geographies, with the majority of our business lines having very low or no correlation with each other. And finally, as we've just discussed, we see significant upside and potential to grow into adjacent spaces to the ones that we're already operating in or to partner with our clients as they transition to a low-carbon economy. Thank you.

All right. Thanks, Nick. We've obviously gone a little bit over time, so thanks for your patience. In the interest on time, we'll just take a couple of questions. We're obviously catching up with investors over the next couple of days. So if we don't get to your question now, we will then.

So Richard?

Richard Wiles, Morgan Stanley. Nick, you went through a period where you made quite a few acquisitions between about 2007 and 2011 or '12. And then in the last few years, you've only made one. Do you think from here, there's going to be more acquisition opportunities? Or has the business become so diverse and so big that it's primarily organic from here?

Look, I think the business is quite diverse, and we have built a significant franchise over the course of that period. But we are constantly reviewing potential acquisition opportunities as a normal course of business. Over the course of the journey, there were many acquisition targets that we looked at which weren't appropriate, and we continue to do that as a normal course of business. So we'll find out when those opportunities -- we find the opportunity that we think represents the right opportunity for us, both from a cultural perspective and all other aspects of the opportunity.

And just a follow-up question. Given the changing dynamics and the growth in the U.S. market, do you think it becomes a bigger proportion of your total revenue and earnings over time, North America, rather than just the U.S.?

We feel, as we talked about earlier in the presentation, that we've got good diversity across all of our business lines. And we are exporting technology developed in the U.S. to other markets that we're operating in, and we are seeing significant increase in customer franchise, particularly in places like Europe.

Brendan?

It's Brendan Sproules from Citi. I was just going to ask about the transport and storage opportunities that you've had. You've had quite a step-up in the revenue, I think, about this time 12 months ago. Can you talk about the outlook for that in -- across the business?

The -- again, when we review our business and the performance of the business, the majority of our activity is customer-led, and sometimes it will come in one business line versus another business line. Specifically as it relates to the transport business and the storage business, we're constantly seeing opportunities present themselves as the market evolves. I think Cindy did a good job of demonstrating just how we see changes in the U.S. market in terms of where energy is produced and where it needs to be consumed, and that is constantly evolving. And what we do is provide the solution to our customer, where our customers need to get that energy from where it's produced, now the other side of our customers need to consume it. Our job is to get it from where it's produced to where it's consumed. And whilst there's a need for our customers to do both those things, we think will be opportunity.

All right. If there's no further questions, thank you very much for attending. Thanks to all our presenters. Very interesting presentations, and we'll catch up with you in the next couple of days. Thanks very much.