Macquarie Group Limited (MQG) Earnings Call Transcript & Summary

Great. As is customary, we'll hear from both our CEO, Shemara Wikramanayake; and our CFO, Alex Harvey on the results, and there will be an opportunity for you to ask questions. Following that, we'll start in the room, and then we'll go to the lines. With that, I'll hand over to Shemara to go through the results. Thank you.

Thanks, Sam, and welcome. Good morning, everyone, from me as well. And as usual, we'll kick off our half year results by just noting the footprint of the business that we have. And as we've shared many times, we have a very good diversified portfolio of businesses across 4 operating groups. We have 2 annuity-style businesses, which are BFS, our Australian Banking and Financial Services business and our global asset manager, Macquarie Asset Management, and then we have 2 global market-facing businesses in our Commodities and Global Markets and our Macquarie Capital business. And these businesses give us good diversification through the cycle and resilience. And in the environment we just had, we had an equal contribution from each of the annuity-style and the market-facing activities. Now, those operating businesses are supported by 4 important support groups, our Risk Management Group, our Legal and Governance Group, our Financial Management Group and our Corporate Operations Group. And all of our group heads, I think, are represented even in the room here today or dialed in. So if you have questions, they will be here to speak to you. So turning to the results for the first half. As you can see, we delivered a result of $2.305 billion. That was up 13% on the first half of last year and down 13% on a very strong second half last financial year. The return on equity was 15.6%, which is commendable in this environment. Looking at the contribution from the operating groups, in terms of the result versus the first half of last year, they were up 15%, and that was principally due to contribution from the market-facing groups, which were up 35% on that period. And looking at them versus the strong second half, as I mentioned last year, they were down 17% with the annuity-style and the market-facing being down on that very strong period. And indeed, if we look at it over a longer period, and that's the last 5 halves, you can see the operating income and the profits and the earnings per share kept stepping up until the second half last year, in which we had some very strong realizations and asset sales. And so, the result for this half is down slightly on that. Our assets under management, as you saw at the beginning of this financial year stepped up quite a bit, with the 2 large acquisitions we did in the public investments area. And in this half to September, they are up 3%. The main driver there is the investments being made in the private markets business and the benefits of foreign exchange movements, partially offset clearly by the movement in markets, particularly equity markets. And then looking at the diversification of our income by region, you can see there the Americas with 38% of our income; EMEA, 24%; Asia, 10%; and Australia, 28%. You may recall last year, the Americas had stepped up to 48% because of some very large one-off gains in the Americas. But I think this is showing a trend that we've been foreshadowing for a while, which is that the percentage contribution from the Americas and the EMEA region will continue to grow, particularly relative to Australia. And that's while Australia, as you can see on this slide, continues to grow in absolute terms, but the fact is, we're quite mature in a small market here, whereas in North America and EMEA -- in the Americas more generally and EMEA, we are a small representation at the moment in very big markets. And as we grow a little bit there, the percentage grows more materially than the Australian. Now, looking at each of our operating groups and their contributions through this period at the high level, Alex will take you through more detail in a minute. But the Asset Management business, Macquarie Asset Management contributed 31% of our income in this last half year at $1.402 billion. That was up 28% on the prior comparable half. And some features to note, in the Private Markets business, the equity under management is now at a record $188.5 billion, having raised also a substantial record raising of over $20 billion in this half, $22 billion. And we have dry powder of $30 billion as we go into the next period. I'd also note that the Green Investment Group was brought over into the asset manager last year, as you may recall, that integration is growing well. We've launched our offshore wind platform, Corio, in this period. In the Public Investments side, the assets under management at $520.7 billion are down 3%. The main driver there, as we said, is market movements, partially offset by foreign exchange. So a good contribution from the asset manager. Also the Banking and Financial Services Group, 13% of our income, up 20% on the prior comparable period at a $580 million contribution. And you can see there that every line of the business has continued its organic growth, with our home loan portfolio up 13% now at -- just over $101 billion. Business Banking, up 7% at $12.3 billion, and we had inflows into our funds on platform, but they were down slightly due to market movements. Now, I'd note also the quality of the book there in terms of the LVR at which we're able to grow our home loan portfolio also remains very strong. And all of that growth supported by, again, a big step up in deposits where we've had the deposits growing now to $116.7 billion. Turning then to the market-facing businesses, Commodities and Global Markets, the largest contributor in this half, 43% of our income and a result of $1.996 billion, which was up 15% on the prior comparable period. We had good solid contribution from the Asset Finance business. Even though you may recall at the end of last year, we divested the U.K. industrial and commercial meters business, which took the book from $6 billion down to $5.7 billion, but solid contribution there. And then in our Financial Markets and our commodities -- Commodity Markets businesses, we saw volatility driving increased client need and activity and opportunity for us to step up and support our customers. So in Financial Markets that drove good results in increased earnings in foreign exchange, also futures and the financing activities in equity derivatives and trading. And in the Commodity Markets, we had an increase in terms of our revenue from risk management across all of power and gas, resources, global oil. In the inventory management and trading income area, we did see gains from the Gas and Power business, but that was offset by the timing of income recognition in storage and transportation contracts. And then Macquarie Capital contributed also 13% of our income in this last half, up -- sorry, down 12% at $595 million. And the big factor there, obviously, is that, activity levels are much lower in this environment. And that's meaning that fee revenue is lower across areas like mergers and acquisitions, advise and capital markets advise. Having said that, our principal investment book has continued to grow, sitting now at $18 billion, particularly in private credit, we've grown that book now to $15 billion, and we're having increased income from the credit side, and we had some good realizations in this first half, particularly in real estate and in our digital infrastructure businesses. So that's the contribution from the 4 operating groups, that was supported, as ever, by a strong funding and capital position. And you can see here that our funded balance sheet remains strong with our term funding still comfortably exceeding our term assets. We were able to raise $15.4 billion of term funding in this half on top of the over $48 billion that we raised in the last half. So we're well positioned with our term funding. And as you can see, we're sitting now with all of that funding over $100 billion of cash and liquids. In addition to that, I mentioned our customer deposits, the BFS team have been growing those very well, and we're at $122 billion now of deposits, up 20%. So good funding position and also in terms of capital, a strong position, where our Basel III surplus has gone from $10.7 billion, up now to $12.2 billion. Drivers of that clearly were the earnings in the first half offset by the dividend that we paid, hybrid issuance that we did contributing $800 million and then the net absorption of capital in the businesses, which, as you can see, was not massive in this period. So in Macquarie Asset Management, that was $400 million going into ongoing supporting the organic growth of that business, either seed assets for funds or co-investment into the new funds. BFS continued to absorb capital in the growth of its mortgage book, its business banking book. In CGM, we had a release of capital and that's really counterparty credit capital that we're holding and driven by market movements. And then in Macquarie Capital, we had some investments I mentioned, we're growing the credit book in Principal Finance and also some digital infrastructure investments. Now, the large absorption of capital was in FX movements, which is offset by our foreign currency translation reserve. We also are sitting with strong regulatory ratios well above the Basel III minimums, as you can see there, and given that result and where we're sitting with capital and funding, the Board has declared an ordinary dividend of $3 for the half year, that is a 50% payout ratio. So with that, I'll hand over to Alex, to take you in more detail through the performance of the businesses and come back to talk about our outlook.

Thanks, Shemara, and good morning, ladies and gentlemen. As Shemara said, I'll now take you through more of the detail on the financial results for the first half and then talk about some other aspects of the group over the last 6 months. So starting now with the income statement. You can see here, operating income for the half up 11% from where we were in the first half of '22. The key drivers there were a 39% increase in net interest and trading income, reflecting the growth in the loan books across the group, together with the strong trading conditions that we saw. You can see a 56% increase in investment income, and that reflects disposals that we saw across our green energy portfolio, the real estate assets within Macquarie Capital and the digital infrastructure assets. And those were partly offset by a reduction in fee and commission income down $420 million and a lower contribution from the share of joint venture associates -- joint ventures and associates. Operating expenses were up 11% also for the half versus the first half of last year. And the key drivers there really were the increase in employment expenses, reflecting higher average headcount in this half versus the first half of last year. Wage inflation coming through, together with higher profit share expense and share-based payments expense reflecting the underlying performance of the group. The income tax -- the effective tax rate for the half was up at 24.3%. So the bottom line, $2.3 million -- just over $2.3 billion, up 13% from where we were in the first half of FY '22. Turning now to more of the detail for the individual operating groups and starting with the Asset Management business. You can see profit for the half up at $1.4 billion, up 28% in the first half of last year. Key driver there was the increase in investment-related income coming through largely from the disposal of the assets in the Green Investment Group that we transferred into Macquarie Asset Management during the half, net of the gains that we saw in the first half from the disposal of the MIC assets in the first half of last year. So, a step-up in investment-related income on a net basis. Expenses were down during the period, largely reflecting the fact that we had one-off costs associated with the acquisitions, particularly Waddell & Reed in the first half of last year. And you can also see base fees, up $16 million, and there's a couple of things that are worthwhile highlighting there. The Private Markets base fees were up 12%. We obviously had favorable foreign exchange movements coming through and they were partly offset by the market moves across our Public Investments business together with outflows across some of our equity portfolios in the Public Investments components of that business. In terms of the underlying drivers, assets under management, obviously, key on the left-hand side there. You can see the Private Markets space, a really good period of investing nearly $23 billion of additional assets under management through the investment activities across the platform in the first half. Favorable FX, pushing up the assets under management by $36.9 billion. On the right-hand side there, you can see the market moves over the first half offset or mostly offset by the FX effect that we had coming through on the public investment side as well. Turning now to the Banking and Financial Services business, obviously, a really strong result, $580 million, up 20% from the first half of last year. And that really reflects the growth in the loan books. It also reflects the recovery in margins that we're seeing coming through that business. In terms of the segments, Personal Banking, up $119 million. That reflects an average -- a 30% average growth in loan volumes in our mortgage business. Although we did see a moderation of the growth in those loan volumes towards the second half of -- or the first half in FY '23, really strong result from the mortgage perspective. On the Business Bank, up $55 million. So we saw a growth in the loan books. We also saw a growth in the deposits and we had better margins and better margins on the deposits coming through that business. Wealth Management, income up $76 million, reflecting the growth in deposits and improved margins on deposits coming through that business. And then you can also see the step-up in expenses and we've talked about this for a while now. The team in BFS investing heavily in the platform, increasing headcount to support the growth that we're seeing coming through there, increased investment on the technology side to make sure the platform supports the digital business that Greg and the team are running down there. And, obviously, investment that we're making across our regulatory obligations and compliance obligations. So you saw that coming through for the first half as we foreshadowed. In terms of the underlying drivers of the business, home loans up, business loans up, deposits up. We saw a partial reduction in the platform assets. Obviously, that's mainly market moves coming through over the first half. And you can see the fall off in car loans there, remembering that we sold, obviously, the dealer finance book, in particular, in the second half. We completed the sale of the dealer finance book in the second half of FY '22. So turning now to the first of the Markets-Facing businesses, the Commodities and Global Markets business, up just under $2 billion worth of contribution for the half, a really strong result. Obviously, we had strong conditions across most of the platform in CGM for the first 6 months of the year. Turning to the component parts, you can see commodities up $635 million, about 50% up on where they were for the first half of last year. Pleasingly, we saw a step-up of $547 million in the contribution from the risk management aspect of that business, that's where we're providing derivative solutions to clients, we've had an expanded client base there. Obviously, we saw strong conditions, lots of volatility, lots of transaction activity in the first half. And we particularly saw good contributions across Gas and Power and that's obviously became much more of a global business. So we saw contributions across all regions in the Gas and Power business. We saw an increased contribution from the Resources segment there together with Global Oil. On the inventory management and trading, up $20 million from the first half of last year. We saw good trading gains, particularly through the North American Gas and Power business, offset by the timing of income recognitions associated with the transport and storage assets that are used in that business both in North America and also in Europe. Really pleasing results from the Financial Markets perspective, up $263 million, just over 70% increase from that business last year and that's, obviously, FIC, futures, credit markets, that sort of business in our CGM business, up $263 million, a 70% increase. Obviously, we saw lots of transaction activity through the first half. The other thing we saw, I think, will be very familiar to people is, volatility in FX markets and interest rates. We saw a lot of volatility, particularly through the first half of the year in that business and the business was able to provide solutions to help clients manage that risk over the course of the first 6 months of our year. Investment Income down $523 million that largely reflects the gain that we saw in the first half of FY '22 from the disposal of the industrial and commercial meters business in CGM. And you can see expenses up over the period, again reflecting an increase in -- a slight increase in headcount and average term to headcount is up about 5%. We also saw -- we see the investment that the team is making in the technology platform to support the business together with the investments being made in regulatory and compliance obligations in that business. In terms of the underlying drivers, again the chart hopefully it's familiar to people. You can see on the top right-hand side there. The key driver in this business, obviously, is client numbers actually being able to provide our services to more clients in more regions and more often and we see that continuing through the first half of FY '23. You can see that reflected in the underlying operating income, the underlying client business driving the big step-up in operating income for CGM for the first half. And from a capital perspective, I'm sure people will recall March '22, was quite an elevated level of capital in CGM, that's remained pretty consistent over -- from period-to-period. Although we did see a spike in capital usage, particularly in the middle part of the half with energy markets across the world. In terms of Macquarie Capital, a more subdued period. Not surprisingly, obviously, with transaction volumes. So if you look at where we are for the first half, $595 million of contribution and you can see the component parts there, fee and commission income down 23% from the first half of last year and that's both from an M&A perspective together with on the capital market side. Operating expenses up, through the period. Again, the investment that the team is making in the platform to support the growth of the business going forward. And those 2 are partly offset by an increase in investment-related income. It was good to see the disposal is coming through the real estate assets, the Macquarie Capital have on the balance sheet together with the digital infrastructure assets that the team has been working on building over the last couple of years. We also saw an increased contribution from the Principal Finance portfolio, up $89 million in terms of the contribution for the first half of FY '23. As I mentioned, one of the key things for Macquarie Capital is the capital we have alongside our clients there and you can see what's going on in this chart, up from $3.6 billion to $4.1 billion at 30 September and the primary move up there, I guess, is the increase in debt that you see coming through together with the increase in digital infrastructure investment, the team has found some additional investment that they've been able to make in the Philippines to our portfolio over the course of the half. So it was good to see that coming through and, obviously, those -- that capital investment, capital partnership should pay off into future periods. So that's the operating group. So I might now turn to a couple of other aspects of the financial result for the half. One of the things that we have been doing over the last few years investing significant amounts in the platform to support the type of organization we want to be, to support our ability to grow going forward and, obviously, to meet the obligations that we have across the group. So we set out a couple of slides here which illustrates some of where that expenditures occurring and firstly, maybe to start with the regulatory compliance slide, you've seen this before, up 41% from where we were in the first half of FY '22. There's a couple of aspects there. You can see an increase in regulatory change and project expenses, up 60% from the first half of '22. Some key programs of work there. We're doing end-to-end capital and liquidity transformation across the group. We're obviously working on our APRA remediation program that we've talked about before and we're continuing to uplift the focus on non-financial risk across the group. And some of that finds its way into business as usual spend. And so, you can see that up 33% from the first half of FY '22. Obviously, there's an ongoing obligation to meet our obligations. Also, some of that project spend that we see, that translates into ongoing business as usual expenditure coming through our regulatory compliance efforts. And then on the bottom part of that chart, you can see the technology spend over the last few years, up an annual growth rate of 12% over the last 4 or so years, a significant investment being made to support the growth of the business, in particular, and there's obviously lots of activity here. But in particular, the team is making a significant investment in data and in data analytics, end-to-end straight-through processing and all the way to cyber and, of course, increasing use of cloud capability across the group. Now, in terms of the central support areas, another area we're investing heavily over the last few years. You can see here the expenses up FY '22, nearly $2 billion in the first half of '23, $1.26 billion of expenditure across Corporate Operations and what COG is doing apart from running the operations of the group, particularly focused on data, data analytics, automation, machine learning, helping us actually meet our obligations, but also position ourselves to grow. From a Financial Management perspective, modern financial management thinking about real-time analytics to support the groups. And then from a risk management perspective, you can see the focus around non-financial risk and an uplifting our capability to manage risk across the organization. So there is a very significant investment that we're making to support the platform, further embed and strengthen the foundations of the group, enable better risk management. And, of course, the other thing that is very important is enabling the groups actually to nimbly move towards new opportunities to actually change and adapt and actually see opportunity coming forward. All these investments we're making in the central support groups are important to do that. During that period of time, of course, what we've been able to do is deliver an average return on equity over that same period of time of about 16%. So, we're able to continue to deliver despite the increase in costs and, of course, what we think we are doing is setting up the business to be well positioned for the future. In terms of the balance sheet, Shemara mentioned it, obviously, very consistent story, a solid conservatively positioned balance sheet. Pleasingly, we saw the opportunity to raise $15.4 billion worth of term funding over the course of the half. That was split pretty evenly between term funding for the bank and term funding for the group. The diversity of issuance is something we've talked about before. We continue to look for new pockets of funding to support the efforts of the group. Obviously, from weighted average life, the term funding is quite long-dated, supporting the activities of the group. In terms of the deposit story, up at $122 billion worth of deposits, up 19% from the half. And I think what's really pleasing about this story, in particular, is what's happening in BFS, expanding the product portfolio, tailoring products to meet the customer demand. And over the course of this half, we saw a really good step-up in our transaction in savings account. That account actually is something we introduced, I guess, about 2.5 years ago, so that's now growing nicely. The other thing we saw is the opportunity to grow our retail term deposit portfolio. In terms of the loan, the lease portfolio, up 11%. You can see that the key drivers there, home loans at the top of the page, really driving the step-up. And the other thing we've seen during the half is the increase at the bottom of that stack, really in the corporate and other lending which is the private credit business -- largely the private credit business that Macquarie Capital has been growing over the last few years. From an equity perspective, up $1 billion on where we were for '22. I guess, the main thing to point out there probably is the used by MAM of the balance sheet, the Asset Management business of the balance sheet, putting their foot on seed assets that we see, which will ultimately make their way into new mandates and new products for customers in that Private Market business. In terms of the regulatory update, lots of things going on. I mentioned that, obviously, previously, a couple of things to point out here. Firstly, in relation to the new capital standards, they obviously become -- they become enforced at the 1st of January, been long time coming. We're obviously pleased that process is now complete. We're obviously well-advanced in terms of our preparation for that and have been holding capital aside for those changes for some time. The other thing I might point out is just that the work that we're doing with APRA in relation to the MBL remediation program, a really important piece of work. Obviously, the end result of that program is improved processes, improved systems, improved frameworks. And finally, we think it will further strengthen the risk culture across the organization. And in terms of the bank capital ratio, very strong at 12.8%, as is the liquidity position in terms of the LCR itself but also the unencumbered liquid assets and cash that we have on the balance sheet over $75 billion. And finally, for me, in terms of capital management, just a couple of things to mention here. During the period, out of the group, we're able to issue a new hybrid raising $750 million. We're also able to do a Tier 2 issue out of MBL raising $850 million. So, we appreciate the support that we get from investors across each of those areas. And the final thing to mention for me, in terms of the interim dividend, the Board has resolved that no discount will apply for the first half '23 dividend reinvestment plan and that we intend to acquire shares on market to satisfy any applications under that plan. So with that, I'll hand back to Shemara. Thanks.

Thanks, Alex. So, I'll take you through the outlook now starting, as usual, with the short-term outlook. And as you know, we look at this by each of our operating groups. So, first of all, Macquarie Asset Management. We're expecting the base fees in this business to be broadly in line with last financial year and that's because the investing that we're doing in the Private Markets and the acquisitions that we've done on the Public Investment side are largely substantially being offset by the market movements that we've had over this financial year so far. In terms of net other operating income, we expect that to be significantly down on last financial year because we won't have the repeat of the large contribution we had from Macquarie Infrastructure Company despite the higher performance fees we expect, which were partially offset there. And similarly, with the Green Investment Group, we had some very large realizations last financial year. So we expect this year's contribution there to be significantly down. Again, despite the material gains from realizations we had in the first half of the financial year, we don't expect that to recur in the second half. Then with Banking and Financial Services, we expect growth in the loan portfolio deposits and platform volumes to drive earnings, but as Alex mentioned, we're seeing a slowing in the rate of growth there. We also expect market dynamics to continue to drive margins and we also expect higher expenses as we continue to invest in areas like volume growth, technology and regulatory requirements and we will have ongoing monitoring of provisioning in that business. Macquarie Capital, subject to market conditions, as we noted, transaction activity is expected to be substantially down on a record year last financial year with market conditions, as you've seen, weakening in this financial year. Investment-related income, we expect to be broadly in line due to the increased revenue from the growth as we mentioned in our private credit book in Principal Finance, but offset by lower revenue from asset realizations. And again, Alex and I mentioned, we had some good realizations in the first half of that business but we don't expect that to recur in the second half of the financial year. And as we both mentioned, we're continuing to deploy the balance sheet in that business in credit and equity. And then in Commodities and Global markets, we expect increased income from the Commodities business compared to last financial year after taking account of the impact of timing of income recognition in our Gas and Power, Transportation and Storage contracts and we also expect an increased contribution from Financial Markets across our client and trading activities and you've seen that in the first half as well and then continued contribution from the Asset Finance business. At the corporate level, we expect the compensation ratio and the tax rate to be in line with historical ranges and outcomes. Now, that short-term outlook as ever remains subject to a number of factors and some of the ones that apply at the moment are clearly the market conditions, which include the global economic conditions, inflation and interest rate, outcomes, significant volatility events and the impact of geopolitical events we're seeing playing out. It also is subject to the completion of period-end reviews and the geographic composition of income, impact of foreign exchange and potential tax and regulatory changes and other uncertainties. And so, we continue to maintain, as you've seen, a cautious stance with our conservative approach to capital funding and liquidity which we think positions us well for all environments, but particularly the current environment. And turning to the medium-term, we continue to believe that we're well-positioned through, as I mentioned at the beginning, the diversification of our footprint across business lines, across geographies, supported by our ongoing investment in our platform but in a disciplined way in terms of managing our cost base, our strong and conservative balance sheet and our proven risk management framework, and you can see that play out in terms of the returns we've delivered. Alex mentioned a 16% average over the last 5 years across the group. In our annuity-style businesses over the last 16 years, we've delivered an average 22% ROE and have done that again in this first half. And in our market-facing businesses, we've delivered an average 16% over the last 16 years and 20% in this most recent half. And even after our $12.2 billion surplus capital, as we mentioned, we've delivered a 15.6% ROE in this half. So with that, I will hand back to Sam to take questions.

Great. Thanks, Shemara. So as I said, we'll start with questions in the room and then we'll go to the phone lines. Jon, just at the front if we can...

Jon Mott from Barrenjoey. A question on Slide 30, so if you can pull that up. On the Commodities business, on the left-hand side, it shows really good growth coming through, especially seeing that come through from the Commodities Risk Management side continuing to grow period after period. I understand the volatility has been very good for that business in the last little while, but given that the environment unlikely to reduce volatility, given global events that you called out, as well as the decarbonization leading to some pressure on sustainability of energy over the next little while, why wouldn't we see that continuing to grow, you tend to always try to be conservative and say, how it's great period. You can see the light green box there has continued to grow. It's hard to see why that would turnaround anytime soon. And then a follow-on question is, if you then look at the inventory management and trading, I understand that the box at the very top, it goes up and down, and as timing and we've heard about that many times, but it tends to be very seasonal and you're coming off a very low period in the first half. Why is it so seasonal? And why wouldn't that recover into the second half, which would potentially offset some reduced volatility that's coming through from other parts of that business? So it seems like this business is pretty well set-up.

Yes. Thanks, Jon, for that couple of questions. And I think you're right that ultimately, medium-term, we're growing a franchise here where we're increasing the markets in which we operate the customers, producers, consumers, et cetera that we support. And as you've seen, we've grown from North America into our franchise growing in Europe, into Asia. So over time, that's what we're focused on is patiently, adjacently growing the franchise. Having said that, we call it a market-facing business because in any particular period, it's going to be impacted by the activity levels and the volatility persisting. Now, that may look seasonal when you look at the last 2 financial years, but actually it can vary completely and we had a very active first half of our financial year this year with the issues, for example, if you look at the European gas and power market, what went on there, TTF went up to 350 unheard of with the curve having sat at 20 to 30. That's now abated a lot, Germany is sitting with 96% storage as we now go into the winter. We're having slightly warmer temperatures. So things have come off a lot, in fact, the price spot was negative. So ultimately, the level of market activity within any period, it's not really seasonal, can really impact both risk management service income but also our inventory management and trading, but medium-term, we're looking to really keep growing those franchises you say especially with energy transition, et cetera. With the inventory management and trading, we did highlight, Alex mentioned as well, that the storage contracts in European gas and power do mean that we had basically timing of income recognition impacts that should come back this financial year. Nick is sitting in the front row, I might let Nick add to that. Nick, if you have anything you want to elaborate on? But, I guess, my overall comments, medium-term growing a franchise, short-term environment impacts.

Yes, look, I'd reiterate what you're saying there, Shemara, in terms of -- the focus that we've had over time in terms of investing in growing the franchise, particularly in terms of the client servicing nature of the business. And we do think that over time, the services that we provide will be important for the client base, particularly as we work through the transition and we're establishing the business to be able to adopt -- to evolve and adapt to the needs of the customers as they change. And indeed, a lot of the conversations that we have with our clients on a daily basis are about these types of subjects. So we'll continue to invest in that. In terms of the inventory management question, to Shemara's remarks earlier, whilst it may appear at times that this can be seasonal, what we have seen over the course of the last half is truly exceptional conditions and they have subsided. So not only what we've seen in Europe, but we've also seen something similar happen in the U.S., where if we just look at the benchmark price for natural gas in the U.S., which is Henry Hub, we went all the way up to $10 and back down to $5 twice. And heading into the U.S. winter, inventory levels are very healthy and also our production levels. So the market seems to be well placed going into the Northern Hemisphere winter.

Brian at the front.

Brian Johnson, Jefferies. Perhaps I could ask that same question in a slightly different way to wrap some numbers around it. If we have a look at the difference between the economic accounting and the accounting, it periodically seems as a big gap that widens which unwinds over the subsequent periods. I'd just be interested in the total size of that unrecognized balance sheet asset and the timing that we should think that it unwinds over, because it's like a hidden reserve, I'm guessing it unwinds over 2 years. And the second one, if I may, is that, when we have a look at the bank balance sheet, it is extraordinary how much liquidity you've got there. So we can see the LCR is not really 175%. It's 180-something because you guys take out the CLF, your peers don't. You've got a massive balance of unencumbered balance sheet liquidity, everything you see just sees it's long duration funding. Should we be thinking that this is an opportunity just to raise more deposits or it's telling us about future growth? Or is it, in fact, telling us something about what happens to global liquidity going forward?

I'll briefly comment and then hand over to Alex. But yes, the accounting versus economic impact, Alex can take you through the details but the timing of the reversal of that can vary depending on whether it's storage in Europe, transportation contracts in Americas, et cetera. So Alex can give you a bit more color on that. In terms of the liquidity, we are sitting with big liquidity at the moment. But as you know, we run prudent balance sheet throughout the cycle and we're in very uncertain economic times at the moment. So our view is, if we can be returning a 15.6% ROE and sit with the surplus capital we have in the prudent termed out funding we have, we think it beholds us through this next cycle to be positioned for upsides and downsides with sitting with that particularly strong balance sheet.

Just on the sort of timing of income recognition on the storage and transport. There's a lot of variables in that. I mean, obviously, spread moves are one thing. So that, obviously, sort of is a factor. Then how those spread moves over time, as spreads move over time. And so, that's not something that -- and then, I guess, the third thing is, as a portfolio of contracts that we have access to a pipeline or storage because we have access to and we're often doing new deals, new power lines or new transmission capability. So there's a lot of variability in that particular line. What we've done, obviously, Brian, is try to -- without sharing -- because there's a lot of moving parts there, without sharing the detail of all those moving parts because some of them are obviously future forecast of what happens with prices, just pull all of that together from our viewpoint with all of we know and saying, look, if you look at the commodities income, we expect it to be up, including the impact of what's happening with income recognition around gas and storage and transport contracts. We think that's a better way to think about. They are, obviously, an important part of the business. There is a -- we have a really, I think, strong business is based on both our physical presence and our financial presence. It gives some accounting versus economic mismatches. But overall, we look at it, we think that the full-year guidance is a better way for you guys to think about how that might mean from a group perspective. I think Shem covered the liquidity point very well, obviously, and I agree with what she said. I mean, a few things. Market conditions in the -- in -- through last year, obviously, very supportive. So if we look at -- we raised $48 billion of term funding last year. I mean, just to put that in perspective, ordinarily you would have seen us raise $25 billion to $30 billion of term funding a year, so were opportunities for us to -- because of the market conditions both lengthen the maturity of the balance sheet and also take advantage of the conditions that we found, we obviously continue that over the first half. That seem to make economic sense anyway to do it. I mean, there's a few other things that are happening. If you look at the growth of Greg's business, obviously, essentially deposit growth funding that business and we're getting in front of that deposit growth and all the growth of the mortgages through raising the deposits. You've got the TFF that needs to be refinanced in a couple of years time. So getting in front of that exercise makes sense. You've got the CLF being withdrawn from the market, Brian. So I think it's -- I'd read it in -- I'd put it in the context of the broader story, which is from a group viewpoint, the underlying philosophy is conservative, strong balance sheet, be prepared for, I don't know what the future holds, but make sure you try to get in front of it. So, I think it's probably that.

Andrei?

Andrei Stadnik from Morgan Stanley. I wanted to ask 2 questions, maybe I'll ask them together just in the interest of time. In terms of MAM and the Green Investment Group in particular, there was almost -- there was $1 billion investment-related income in this half. But it doesn't look like there were a lot of major green fund launches to offset this. So how are you thinking about change in the mix of revenue in that business going forward? Are you doing enough in terms of green fund raises? And then my other question on costs. How you think about cost flexibility, in case revenues do stay subdued for a little bit longer? We note that Waddell & Reed and E&P Capital integration costs will fall away, but are there any other cost factors you're thinking about?

Thanks. So, starting, Andrei, first with the question on the Green Investment Group, we moved it over to the Asset Manager last year, as you know, at the end of last year and there is several billion of balance sheet there, which we will continue to either run-off and realize principal gains or bring over to the seed assets for funds. And so, you'll see some realizations, but gradually we'll shift much more to base fees and performance fees. Now, in MAM, we already had the MGREF series of funds, the global renewable energy fund so we done Fund 1 and Fund 2. What we found by bringing the Green Investment Group across is the deployment stepped up a lot because the pipeline of investments they access by having this [indiscernible] stepped up a lot. And MGREF 2 has got invested a lot quicker and hence, we're launching to MGREF 3, which is a more mature energy fund. In addition to that, we're raising an energy transition fund. The acronym for that is MGETS. And so that's out on the road, and that's going very well. It's meeting good demand. What we intend to do as we do with all our asset management business is, be very disciplined about the size of these funds. So we've seen others raise very big energy transition fund. I think we're going to pace ourselves and keep raising, reflecting our ability to get really well invested, because for us, that's the biggest thing is to be delivering superior return to investors on each of these funds and gradually build a very big franchise there. So I think the team have very good capacity to invest that we don't want to go beyond their capacity, while they're also realizing assets. Then -- in terms of costs, we do say that we're disciplined on costs, and we thought it was important to share that we are still investing a lot in our cost base, even though we say we're disciplined, we want the business to be really strong and resilient. And as Alex mentioned, we're investing in areas like automating our end-to-end processes and making them more robust in non-financial risk responses, regulatory compliance. But at the same time, in our businesses, we're constantly looking at how we can be most efficient. So as you say, there's big cost savings from the integration of Waddell & Reed and also A&P happening. In the investment bank, we're constantly looking at where we position the business to drive efficiency. Greg is sitting here in the front, and I know you're investing a lot Greg in BFS, but at the same time, both you and Nick sitting there are constantly looking at how we can do things more efficiently. I don't know if you have a couple of examples you might want to share in terms of as you grow. Could we just give Greg a mic as well, just to give you, Andrei, a sense of everybody is owning return on, not just capital, but OpEx investments.

Yes. Thanks, Shemara. As you say, big investments in regulatory compliance and all the emerging rules there, and that's super important to a business like this, enormous investments in cyber and fraud management and so forth. And we've seen just how important that is. So we continue to invest. But in the business bank, an origination platform and our online banking capabilities for the business bank. And of course, we're upgrading the platform in -- on the wrap side as well, so more solutions. So there's a lot of investment.

And I think your cost-to-income ratios are actually improving.

They are gradually improving, particularly in some areas, but offset by some of these investments. And of course, we're not building for the business to be current size, we're trying to build and scale this business to be much, much bigger.

John, John Storey?

It's John Storey from UBS. I appreciate the detail on the costs, so thanks for that slide. I got a question on FX sensitivities. And just trying to understand what the results would look like on a constant currency basis. Obviously, you provide what the revenue is and where it comes from, but I would be interested just to get a sense on bottom line constant currency earnings. And then the second question I have is around capital allocation. BFS obviously continues to grow very strongly. I wanted to get a sense, obviously, the BFS ROE is a little bit lower. So just get some insight into the ROE and how the Group thinks about continuing to support that division?

I might answer the first question, and then I'll hand over to Alex for the second. Basically, the way we look at ROEs, we have hurdles for every business line we're in, not just at the operating group level, but underlying in the operating groups for each division we're in. So if we're doing private credit in Macquarie Capital as opposed to private equity, we will have benchmark returns that we think we need to reward us for the risk, and if they're hitting those benchmarks, and we're happy to support those businesses. So for BFS, we have a hurdle, if BFS is beating that hurdle, which we'd happily comfortably is, we're happy to deploy more capital. Now in MAM, which is a low capital-intensive business, we have much higher ROE. So the Group ROE is a blend of all of those ROEs of the various businesses. And we're not prescriptive about what mix and weighting we want. We have -- we try to invest in all of them, so they're all growing together. But ultimately, the Group ROE is a result of where the mix is across those businesses. But in each of them we're very disciplined in what we need to put a dollar in not just man, but in public investments versus in real estate, versus in private credit.

Thanks, John, for the question on FX. The -- I mean, obviously, as you've seen from the slides previously, if you look at the 70% of the income offshore, then we -- as a relationship, 10% depreciation on way or appreciation will drop about 7%. So that's sort of the general rule. I mean the first half was relatively unaffected from an FX viewpoint because if you think about it's a bit of a mixed story, the Aussie has obviously depreciated against the U.S., but the pound has been pretty weak, the euro has been pretty stable. So if you think about the diversity of the business, the FX story across the Group is a pretty muted one other than the U.S. I mean the other thing, obviously, is FX generally from a revenue viewpoint, it's mainly affecting the, I guess, the flow type businesses. If you think about the Asset Management business, particularly the public investment side, it obviously affects that where you've got regular flow of income where we're doing transactions. We obviously swap it back into Aussie dollars, effectively the day the transaction star. So relatively muted effect, I mean, it would have been, I don't know, less than 1% or 2% in terms of the bottom line from an FX perspective. We hedge our capital, as Shemara talked about before, and you can see that movement coming through the foreign currency translation reserve, so that we got a depreciation Aussie against the U.S., you obviously want to make sure your capital is balancing the risk-weighted assets you against your U.S. portfolio, but other than that, I guess that's the answer to the question.

And I think as our foreign income grows, we try to match our funding as well in those currencies. But basically, we haven't adjusted for FX rates, and the odd has been up to parity and down to AUD 0.50 over the years, but we've still managed to deliver these mid-teens ROEs through…

It's a 1% to 2% pre-profit share, pre-tax.

Yes, yes.

We've got a few questions on the line, so we might go to the phone line, please.

Your first question comes from Andrew Lyons with Goldman Sachs.

Just a question on your outlook. You've noted that while realizations in MAM and MacCap was strong in the first half. They appear to be largely done for the year with certainly much lower levels expected in the second half. And therefore, your divisional guidance would appear to imply a reasonable step-down in NPAT for 2H versus the first half. So to the extent that this is a fair characterization, can you perhaps just talk to the extent to which the expected step down in realizations in the second half is cyclical or structural? And therefore, what it might mean for looking into FY '24 and beyond?

Yes. Thanks, Andrew, for that. The realizations in both Macquarie Capital and Macquarie Asset Management are lumpy, because basically we're realizing assets that whatever the time is to get the best return for that asset. So if we have to wait 3 years, we wait 3 years, if it's worth doing now, we do it now. So as you've seen historically, there's been quite a bit of lumpiness. In Macquarie Asset Management, we mentioned that the performance fees will probably be higher in the second half than the first. It's just the timing of when the assets are realized, but we had a big Green Investment Group realization in the first half. And when we look at the pipeline of when the best time is to keep running off that Green Investment Group balance sheet, we don't see things to that extent that we'd realize in the second half. Same in Macquarie Capital, we had a real estate asset we held aside in how many years. I know Michael Silverton is on, but 5 years at the least. And this was the best time we've been working on it for a while that we've realized on a digital infrastructure couple of assets as well. So it really is driven by -- I don't know that it's cyclical. It basically is when is the best time to realize the asset and we will take into account external market factors in that, but also very much what's happening with the business that we've driven the change that we want to get it to the point where it makes sense for us to exit and let somebody else then own that business. In terms of cyclical versus structural, the environment -- we've had these environments before ups and downs. Macquarie Asset Management, Ben Way on the line. I know it's early morning for him, but I might let him speak briefly, but we're sitting with AUD 30 billion of dry powder. And I think we're going to be, as we always have been very disciplined about when we invest it, when we realize the assets, all driven by long term, how do we get the best return for our investors in these funds and keep our franchise going. But Ben, are there any cyclical points you want to comment on? On structural?

I think, Shemara, the point is that I think we all acknowledge that the environment will be a little bit -- is a bit more challenging than it was 12 months ago. But I think as you can see from, say, out fundraising, there's still very strong support for people wanting to be allocated in terms of our client base to things like real assets. So we continue to see very strong support for all our funds in the marketplace, and we expect that to continue through to the rest of the year. And equally, I think the way there's also still significant investment opportunities for us despite the changes in the macro environment, particularly around energy transition and digitalization. And as a consequence of that, there's also still strong demand for our assets. So I think you've made the right points, and we are disciplined. We do take a medium- to long-term view our job is to make sure that we get the best return to clients, and so we remain optimistic about the market both in terms of deployment opportunities, but where it makes sense from a realization point of view, because there remains very good appetite for people to be allocated to particularly to things like real assets.

Yes. And overall, for the Macquarie Group, I guess, we don't put any pressure on Macquarie Capital and Macquarie Asset Management to be realizing in a period because the Group is diversified. And as you can see in a time like this, the commodities business is contributing strongly, the banking business is contributing strongly. So we can empower them to be realizing assets at the best time for the return on that investment.

That's really helpful. And just a second one, just despite a difficult half in the MacCap business, I know you did continue to invest in the franchise, which was a bit of a drag on the profit contribution. Just I guess, with Green Investment Group now out of that division, can you perhaps just talk in a bit more detail about where you see the opportunities within MacCap and where that elevated investment or the step-up in investment is being particularly focused on?

Yes. And I'll let Michael Silverton who is on, comment in a minute as well, because he's dialed in from the U.S. But basically, there's still a lot of opportunity to support the deep expertise of our bank is with balance sheet across Macquarie Capital. The private credit book we talked about that's now at AUD 15 billion and is investing principally in North America is about 58% of that book and then Europe, another big part. So Australia is just smaller. And then I think there's 4 areas in equities where we invest. We've got the tech sort of venture style early-stage investing, which we've been doing for a long time, as you know, and had some excellent investments there. There's a gross equity that we invest in, in the Americas principally, which is government services types, safer, really revenue-generating businesses, so a little bit further along the growth curve that we have great track record in and a deeply expert team. We have our infrastructure and energy principal investments. We've done a few PPPs. You've seen the Merrill Lynch, DOT, the Pennsylvania DOT that we've done recently. And then in our private credit principal finance team, we also do investments in more mature equity position. So Energetics was an example of that, that we've done. So there are 4 areas. Basically, we look for areas where we have some deep specialist expertise relative to the market, and we support those people. They're very disciplined in their investing. A lot of what we're doing is bilateral proprietary investing. And the risk management team, which Andrew Cassidy heads up sits very strongly alongside them and we've had decades of, I think, investing in all these 4 areas. Michael, any comments you'd like to add?

Thanks, Shemara. The only comment I'd add is that, offshore, we're still relatively small in terms of our market share. And so in those sectors that we focus, there's a lot of opportunity. And from a principal standpoint, we're still seeing opportunities from a growth perspectives and private credit is growing as a sector, and our share of that market continues to be there. So we continue to see good opportunity across the board. And then also as we become more international in these sectors, there's cross-border opportunities as well that we can benefit from. But clearly, the capital markets have been challenging for us over the last period, but you can see the reduction is smaller than what you would have seen in the broader market, and that's in part because our scale is such that we can focus where we see the opportunities.

Yes, those are all good points. Thanks.

I appreciate it.

Your next question comes from Ed Henning with CLSA.

Just my first one, a little bit of a follow-up just on the equity investments. If you look at all the categories there on Slide 39, can you just touch on where you're actually seeing pricing pressure in the market, where you've taken some impairments? And also which categories you still have really strong demand, if you were to realize them in the current marketplace. That's the first question.

Alex, did you want to take that?

Yes, sure. So just a couple of things. I mean probably the most obvious area of pressure, not just for us, but generally has been in the technology sector. I think you've seen that's been pretty widely reported. That's probably the area where there's most pressure. That's the first thing. Secondly, most of these things here, as you know, we hold at amortized cost, so we don't remark these things through the balance sheet. And in many cases, they're quite seasoned investments that are probably in the money in the first place. So look, the level of impairment that we saw coming through the first half was pretty modest. I think I made the point there was -- as is sadly often the case, there's 1 or 2 positions that are underperforming their expectations, and we take impairments. But it was a relatively light half in terms of impairments coming through. Look, in terms of the underlying story, obviously, I think Ben touched before on the infrastructure space is really continues to be strong demand for infrastructure assets. Particularly they offer, tend to offer a higher yield and in some cases, are inflation protected. I don't think we're seeing anything from a transport, industrial, infrastructure perspective, the PPP sectors that Shemara talked about before, so it's generally the reason to the infrastructure space, we're seeing good demand there. Digital infrastructure, I made the point that we obviously divested a digital asset in Europe during the period and divested well. We obviously got invested in a new digital asset over the period. So we feel good about where pricing is there. Green energy, we're not really seeing any sort of softness. So generally speaking, I think we're -- we're not seeing sort of impairments come through. And again, we don't mark these things to market on the way up. So we want to divest them, generally speaking. So not so much impairment. As I said, probably the area of pressure more generally is on the technology side, but that's really reasonably well telegraphed. And obviously, more generally, as you know, it's a pretty diverse book. So sort of where we're at -- what is happening, to the capital markets point that Michael made, with the capital markets slowing down, that tends to slow down transaction activity levels, just financing to make the acquisition work tends to be harder to get people are more cautious about proceeding. And often, as you see, a downturn, obviously, purchases and vendors have a different view of price expectations. So it takes a while for that to normalize.

Okay. That's great. And then just a second one on GIG. Obviously, you're having no issues raising money. Can you talk a little bit about the ability to deploy the money? Are you actually seeing red tape being reduced for developments by governments? Or is that still talk. And then the other part of it is, the new funds that you're raising, are you still taking all the development risk? Or are you going to start to see GIG actually in the funds takes on development risk, and therefore take the profits with that as well?

Yes. So GIG, the investment environment is still huge. I think Jon Mott was talking earlier about the energy transition, and we're seeing, ultimately, what we need is massive investment in solutions if we're going to transition off the conventional ways. We deal at the moment with energy, transport, agriculture, buildings, industry, et cetera. And the capital requirement is massive. We are fortunate in that we have a team with very, very deep expertise to respond to some of that. We're seeing governments respond all over the world. You saw the Australian budget allowance for it. The U.S. has introduced this new, they call it an, Inflation Reduction Act, that has a USD360 billion allocation to climate transition investments in addition to another USD110 billion that was allocated in the Infrastructure Investment and Jobs Act. So a huge scope of projects are now being developed in the U.S. Here in Australia, for example, we've been involved in onshore wind, solar, hydrogen projects, EVs, EV charging, offshore wind is now becoming a big area. So there is a massive pipeline of opportunity to respond that is getting government support to catalyze it in the developed and the developing world and a lot of interest from private sector investors, either strategics to partner with us or financial investors to invest, so we're seeing a good pipeline. If anything, the biggest constraint we have is the capacity of our team, because as I said, we're very disciplined about building out the scale of our business based on the scope of our expertise. So we are seeing with the Green Investment Group a good opportunity to keep getting invested. Did -- sorry, there was a second question as well, did I answer that as well in terms of GIG?

Just deploying the money, just about the development risk.

All right. Yes. Sorry, yes, you did ask about them. Yes, look, I mean, we started out investing in operating assets, then we moved to late-stage construction then to earlier stage construction and then to development as the returns kept being brought in, in each part of the spectrum. And so we did end up building up a lot of development skills. So Corio, I mentioned, is the offshore wind platform. We have a lot of deep development expertise there. And we're finding that's where you are getting rewarded, but it's higher risk. So what we've got for our investors is a spectrum of offering where the more operational lower-risk assets that command lower returns as well, will be offered in one portfolio, the Global Renewable Energy Fund portfolio and series and then the earlier stage assets, which still won't be completely beginning stage, we are doing in this MGETS offering. So as time goes on, I'm sure that will get compartmentalized into other series as we respond to the market opportunity.

So you'll still be using your balance sheet in GIG to see some development gains that feed into funds, as well as some funds taking that from scratch?

That's probably right. Basically, an investment falls in the mandate of the fund, we will do it in the fund. So the balance sheet will not compete with the fund mandate, but there will probably still be areas. For example, some of the early hydrogen projects we're doing here and Macquarie Capital is playing a role with the balance sheet as well as Macquarie Asset Management. So there will be areas that are still balance sheet areas as well. But probably the vast majority of the big balance sheet will move over to the funds. So we have several billion dollars at the moment in Green Investment Group assets and over the next few years, that will have run off to much smaller amounts.

I mean, obviously, we'll continue to multiple investments in the funds themselves. That will have an interest in those assets through our limited partner interest, but less directly.

And in development stage, well, the checks tend to be small. So that will probably be the trend.