Macquarie Group Limited (MQG) Earnings Call Transcript & Summary

Thank you. Thank you very much. Thanks for joining us, and welcome to today's third quarter FY '23 trading update. A slight change from our usual process of getting an operational briefing as we are hosting a U.S. analyst and investor tour as you're aware. So today, we'll hear from our CEO, Shemara Wikramanayake, who will give you the update on the third quarter, and then we'll open up for questions. Thank you very much.

Great. Thanks, Sam, and good morning, everyone, from me as well. As usual, before I go through the results, I'll just spend a moment noting our business footprint, which as everyone would know, comprises 4 operating groups, in which we have deep expertise and which are all positioned well for structural growth, but diversified across those 4 businesses. And the first of those, obviously, is our Australian Banking and Financial Services business, which is a digital banking offering in personal banking, business banking and wealth, and still a small share of the Australian market in all those areas. So good platform for growth there. Then our global Asset Management business, which is a leader in real assets in the private markets area, but also has a meaningful footprint in public investments, and again, well positioned across that entire capability to grow in a sector where our representation is still small. Then we have our Commodities and Global Markets business, where we have a strong base in commodities and financial markets that continues to grow patiently adjacently into new regions and across new products and also a long runway for growth. And lastly, Macquarie Capital, where we provide advisory and capital market solutions, again, growing into many more regions but complemented, different to a lot of our peers with our principal investing capability across debt and equity. And as I said, across those 4 businesses, very diversified underlying thematics that they're exposed to and supported by 4 very important strong central services groups in risk management, legal and governments, financial management and corporate operations. So with that, turning to the most recent result for the third quarter of FY '23. As I mentioned, given our diverse business footprint, there were varied conditions applying to each of our operating businesses, and the net profit for the third quarter and the year-to-date, indeed, is slightly up on the FY '22 year-to-date, which you'll recall, FY '22 had a particularly strong record quarter in the third quarter. In terms of the annuity-style versus market-facing businesses, the annuity-style businesses were substantially down on prior comparable period, both for the third quarter and for the financial year-to-date in FY '23. And that was driven by the fact that we had strong realizations in our green energy sector assets last year, particularly in the third quarter in the Macquarie Asset Management business, but that was offset partially by continued growth in Banking and Financial Services. In the market-facing businesses, Macquarie Capital faced more challenging market conditions and had both a lower level of realizations and lower fee and commission income. But overall, the market-facing businesses were substantially up, both on the prior comparable quarter and the prior comparable year-to-date, driven by the exceptionally strong results in commodities, including in the gas and power business across all regions, with the results of the third quarter of FY '23 being substantially up on the first half of FY '23 results in Commodities and Global Markets. Looking then in a little bit more detail at the third quarter in each of the operating groups and starting with Macquarie Asset Management. The assets under management were broadly in line with the prior comparable September '22 amount -- sorry, broadly in line with where we finished the last quarter, with the public investments assets being down 1%, mostly driven by foreign exchange and net flows, partially offset by what happened with market movements over this last quarter. And in private markets, our assets under management were up 3%, and that was mostly driven by fund investments and asset valuations. I'd note particularly, there was $7.4 billion of new equity raised in the last quarter, bringing the raisings in that business to about $30 billion year-to-date this year compared to $27 billion of raising for the whole of last year, which was already an increasing rate of raising for that business. $5.3 billion of equity invested and the business ends the quarter with $31.6 billion of equity still to deploy. The only other thing I'd note in relation to Macquarie Asset Management is that in our AirFinance business, we entered into an agreement for the acquisition of the ALAFCO aircraft portfolio. Then turning to Banking and Financial Services. We had increases there in home loans up 4%; business banking up 2%; the deposits up 8%, now at $125 billion; and the funds on platform also up 5%. So we're seeing growth still across the BFS books, apart from the car loan portfolio that we continue to focus and streamline, but the rate of growth there has slowed. Then turning to the market-facing businesses, Commodities and Global Markets. As mentioned, an exceptionally strong result in this third quarter across the commodities platform, particularly in relation to gas and power and oil in all regions, and that was driven by both the trading results and physical execution and logistics as well as risk management activity for clients and reflecting volatile market conditions that we experienced. We also had a solid contribution from our financial markets business across foreign exchange, credit, futures, equities, et cetera. And then we had a strong performance as well from our asset finance business driven by TMT and structured lending. So strong annuity-driven revenue continuing across that platform. Now Macquarie Capital, as we said, faced very different market conditions. So while we had $92 billion of transactions completed, the revenue there was significantly down on prior comparable period. And also, the investment-related income was significantly down on the prior comparable period, given the significant realizations we had in the comparable periods. Now the private finance credit book grew to $16 billion, and we continue to invest there with $1 billion deployed in that book. So turning from the businesses then to our funding and capital position -- sorry, but before that, just touching on our global footprint. Important to note this. Typically, we've been generating about 30% each from the Americas, EMEA and Australia over recent years, and 10% from Asia, but you will have seen that the Americas contribution has continued to grow as a percent quite a bit over recent years. Given that we will be hosting investors and analysts in the Americas in early March to have a deeper dive into our business footprint there and globally in the Commodities and Global Markets, a day in Houston there; in the Asset Management business, with a day in Philadelphia, and in Macquarie Capital, with a day in New York. So you'll get a deeper insight into those businesses then. But now, as I said, turning to the balance sheet and capital position. Our funded balance sheet remains strong with our term funding comfortably exceeding our term assets. And during the period, our deposits grew 7% across Macquarie Group to $130 billion, and we were also able to raise $5.5 billion of term funding. And in terms of our capital position as well, we were $12.5 billion at the end of the first half. That has stepped up notionally to $12.5 billion with the earnings of the third quarter offset by the dividend. But of course, we will have the APRA, unquestionably strong reforms taking effect from the 1st of this year, and we're estimating a $2.4 billion impact from that, which will bring our surplus down to $10.1 billion. The businesses were net neutral in terms of capital absorption over this quarter with, as you can see on this slide, Macquarie Asset Management absorbing capital both into co-investments and seed assets for our core and adjacent fund strategies. BFS also continued to absorb capital in the growth of the home loan and business banking portfolio, partly offset by the vehicle leasing. In Commodities and Global Markets, we had a reduction in credit risk capital driven by market movements in commodities, but that was partially offset by increased market risk capital. And then in Macquarie Capital, we had growth in infrastructure investments absorbing some capital. And in terms of capital management activities over the period, on the 1st -- on the 18th of January this year, Macquarie Bank Limited issued USD 1 billion of Tier 2 capital, and that's to meet APRA's loss absorbing capital requirements. So it's the ongoing response in relation to that. So with that, our capital ratios remain comfortably above the Basel III minimums, as you can see here on this slide. And in terms of regulatory update, nothing material that's new, but we continue to work, as you can see there, with APRA on a range of matters to continue to build the resilience of the group. That includes the unquestionably strong embedding that I mentioned earlier, the ongoing work we're doing to strengthen the voice of the bank and the APRA review of the nonoperating holding company structures. So with that, let me turn to the outlook for the short term. And starting with our annuity-style businesses, there's no change really in the outlook here from the end of the first half, where in Macquarie Asset Management, we're saying that we expect base fees to be broadly in line, given the raising and the deployment in the private markets business and the impact of recent acquisitions in public investments, which have been substantially offset by the unfavorable market movements. We also expect net other operating income to be significantly down, and that's due to the nonrepeat of the Macquarie Infrastructure Company gain last financial year, partially offset by higher performance fees. And we in the Green Investment Group expect also the result to be significantly down, given the material gains on realization we had last financial year, and that we don't expect them to recur in this FY '23. Banking and Financial Services, as I mentioned, growth in the loan portfolio deposits and platform volumes, but market dynamics will continue to drive margins and the rate of growth we have seen slowing. Then Macquarie Capital, no material change there. As we said, the market conditions have meant that transaction activity, we expect to be substantially down on a record year we had last financial year with market conditions weakening during FY '23. Investment related to the income, we expect to be broadly in line with last financial year, with increased revenue from the growth in the Principal Finance credit portfolio, offset by lower revenue from asset realizations. And we don't expect material realizations in the fourth quarter of '23. But as I just mentioned, we're continuing the balance sheet deployment in both debt and equity. And then in Commodities and Global Markets, as we said, subject to market conditions, which do make forecasting difficult, the commodities income has benefited from strong trading conditions in FY '23 year-to-date and is expected as a result to be substantially up on FY '22, including the impact of timing of income recognition on gas and power and transportation and storage contracts. We also expect an increased contribution from the Financial Markets platform across client and trading activity and continued contribution, as I also mentioned, from Asset Finance. And then in terms of compensation ratio and effective tax rate, we expect those to be within the range of historical levels. And that overall short-term outlook, of course, remains subject to a range of factors, particularly in the current environment, market conditions, including global economic conditions, inflation and interest rates, significant volatility events and the impact of geopolitical events. In addition to that, the completion of period-end reviews and completion rate of transactions, the geographic composition of income and the impact of foreign exchange and potential tax or regulatory changes and uncertainties. And because of that, we continue to maintain a cautious stance with a conservative approach to capital, still a good, strong surplus, conservative approach to funding and liquidity that should position us well to respond. And over the medium term, as we've said consistently, we think we are well positioned to deliver superior performance given, as I mentioned at the beginning, our deep expertise across a diversified range of specialist capabilities, supported by our ongoing program to identify cost-saving initiatives and efficiency, ongoing technology investment across the group, strong and conservative balance sheet and our proven risk management framework. So with that, I'll hand back to Sam to take your questions.

Thanks, Shemara. We will now open up the lines for questions. So I'll hand over to the operator from Chorus Call.

[Operator Instructions] The first question comes from Andrew Triggs with JPMorgan.

A couple of questions, please, on the commodities business. Firstly, how much of the outstanding commodities performance this quarter related to risk management versus the inventory management and trading line?

Yes. Andrew, obviously, we provide that in more detail in our full year results as we get through to May. So we haven't sort of disaggregated the purpose of this update. As you know, the business is primarily a client-facing business and servicing clients through a range of products. One of the things that we do, obviously, is make markets for clients. So disaggregating the -- I guess the trading component or the inventory management and trading component from the rest of the business is not something that we're doing in this 3-quarter update. Plainly, as we said in the comments that Shem just made, the market, the trading conditions for the business were -- have been strong through the third quarter and were strong through the 9 months. So we benefited from, I guess, the volatility that we've seen, particularly in recent times across the gas and power business, both in the U.S. and Europe, the oil business and also in the early part of the year, obviously, through FX and interest rates. And so we will, as we usually do at the full year result when we provide the audited financials, provide a little more detail on that, but that's where we are for now.

And just to follow up there. If I go back to the half, there was -- maybe a tone of caution had sort of set in around the potential opportunities in this business, given markets have had to be well stocked that went through in both Europe and the U.S. Sort of elaborate perhaps on what changed over the quarter. Was this all driven by bottlenecks in the market? Or was it weather-related? And maybe just what does volatility momentum look like heading into Q4, please?

If I could start on that, and then I'll hand back to Alex. But as you know, the business footprint is diversified across many regions as well as products. So Europe was one factor, but North America obviously had a lot of volatility as well through this third quarter through the winter. And the CGM business today is bigger in North America than it is in Europe. North America as well is very diversified. There are multiple markets there. There's the Permian region. There's Southern California. There's Mid-Con. There's Huntington region, Pacific, et cetera. So the CGM result, as mentioned in our statement here, basically was diversified across all regions. In Europe, specifically, obviously, TTF had risen very high during last year. And then Europe had a milder winter. And it always did have reasonable storage coming into this winter, so TTF has come off. For us, the bigger issue is volatility, and as long as there's movement, that is something that benefits the CGM business. But as Alex said, ultimately, we're trying to patiently adjacently grow the franchise into multiple regions and products, and the result was contributed to -- from many, many regions, not just what happened in Europe.

And how do things look sort of headed into Q4?

Very hard to predict, sadly. And as we said in the results, it's subject to market conditions. As we head into Q4, ultimately, the base franchise we are confident will deliver results, but we can't predict things like demand was bought in a lot in Europe this winter. So the storage situation is better at the end of winter than we expected in Europe, but it's still tight as we go into next year and next winter for Europe. North America, hard to call. There's been a short extreme weather event in the Northeast happened, but that was very short term. Generally, prices are coming off and the situation is a little bit more benign at this stage. But sadly, it's very hard to call what the market conditions could be in the short term.

Your next question comes from Jonathan Mott with Barrenjoey.

Just following on from -- on the same around the commodities business. And I understand conditions were very strong and volatilities of what they need to make in the commodities business. But I wanted to get a feel for the direction of the price. We're seeing Henry Hub and the other benchmarks come down substantially. I think Henry Hub's down 70%, 75%. Volatility is good, but when the notional value of the contract and the commodity falls, does that reduce the opportunity to make money from each trade just because the national value is lower and then a lower commodity price environment, trading opportunities and revenue opportunities should, in theory, be lower than they are in a higher environment? I understand volatility is great. That's not with you to make money, but just when the prices are so much lower, does that make it harder next year?

Thanks, Jon. Maybe I'll take that one. I mean just the first point, and we've obviously made this point for some time, I mean the key driver of the business is really this growth of customer franchise. So the idea being that we're growing our customers. We're dealing with customers in multiple regions. We're dealing with them more often. We're trying to put relevant product in front of them to help them manage their exposures. We're trying to extend capital where it makes sense to do that. We're trying to provide market access to them. So the real driver of the business is obviously that growing customer franchise. As we've said before, obviously, the business is also -- tends to be long volatility. So where the volatility exists, that generally provides good opportunities for the CGM franchise. And the reason for that is, to a large extent, obviously, that volatility reflects an environment where our clients are wanting to manage risk more actively. So that provides opportunity to actually deal with those clients on a more regular basis. And we tend -- as I said, we tend to be long volatility. And so as we're managing that exposure on our balance sheet, that environment tends to be better for CGM. And so that's really the key driver. I mean, obviously, in terms of sort of absolute prices, to some extent, if absolute prices are coming down and that's sort of reflecting in transaction activity, then plainly, that might have an effect on how often we're dealing with clients for extending financing, for instance, on a receivables basis, if the actual price is lower than the return you're making for the extension of that financing will obviously be -- or at least the absolute dollar amount will obviously be lower. But really, the key thing, I think, to focus on, Jon, and if you look at what happened in the third quarter, had, as you said, Henry Hub coming off, but you had some regional dislocation based on demand and supply in the U.S., which provided great opportunity for us to work with our clients and obviously, opportunity on the trading income side for the business and the inventory management side for the business. Equally in Europe, if you look at what happened, the Dutch contract, which we've talked about before, I think it was sort of a third lower if you compare it on a spot basis for 30 September versus 31 December. So the price came down, but there was continued volatility, and that provided opportunity for the business to actually transact and help clients manage those directional movements in price. So generally speaking, customer franchise volatility is good. Obviously, absolute dollar amounts in terms of things like extending financing, you can -- when the prices are lower, the return from that extension of financing or the absolute dollar return is lower. But generally, what we're looking for is transaction activity, which really drives the business.

And just following on from that, just as the price came down, it was warm, people probably took the opportunity to lock in some contracts. Was there any element of pull forward where customers thought, hey, prices have come down. It's such a great opportunity. I'm going to lock in longer term. And therefore, you had great opportunities with your customers. But effectively, it was a pull forward. Do you get a feeling that, that happened in the quarter to just generate such an enormous amount of money.

Yes. So what we saw -- I mean, obviously, maybe just to sort of broaden it for a little bit, and you need to -- as Shem said in her introductory comments, we saw different conditions in different parts of the world. So in North America, for the sake of the example, what we saw particularly through the quarter was regional dislocations. You saw significant dislocations between certain regions in the U.S., and that provided opportunity for us to service clients, and it provided opportunity for us on the trading and inventory management side as well. In Europe, I think what we saw -- and we talked about this, our half year result. We actually felt that the prices through the first half of the year, it obviously reached record highs. We actually felt that the gas situation in the U.S. -- in Europe was actually more benign than the market was reflecting at the time, but that provided opportunities in the first half of the business to actually transact with customers. As the market came off in the last quarter, the business did see opportunities to work with clients to lock in prices at lower rates. And so whether it's a bring forward or just, I guess, the market reacting to the circumstances they see on a daily basis, we did see quite a lot of transaction customer activity in Europe, particularly in the third quarter. We also saw opportunities in oil, Jon, during the quarter. And obviously, we saw some quite significant movement in oil prices as well. So it really was -- I think the important thing about the business is it is a very diverse business. So the conditions that are affecting one particular part of the world are often -- it may be different to elsewhere. And the way our transaction -- our clients are actually responding to those conditions can be different in different parts of the world. Obviously, if you then look at the FX and the interest rate business, really strong first half. You're starting to see some of that volatility in FX and interest rates come out. We've obviously seen that continue into January. As people know, the economy is slowing down a bit. So there's a varied result. And I suppose the point really about the business is it is very diverse, and so its ability to service customers is really about us responding to the conditions those customers are seeing in the markets in which they're operating. Shem?

Yes. Look, I imagine there will be some questions on commodity. So I was just going to say, fair enough to ask questions about TTF and Henry Hub. But as I was mentioning at the beginning, what the teams have been doing is spending decades building deep, deep expertise in many, many submarkets. And what can be pertinently things like the variance in that submarket to Henry Hub at a point, for example, where the team will have, through supporting clients and customers and producers, deep insight on the demand curves, the supply side, the infrastructure constraints in pipelines, in storage, et cetera. And so be able through that not just in client service, but in trading as well, to have asymmetric risk taking. And that's what really matters is in a deep submarket, how all these factors are playing out. I was also going to say Nick O'Kane's on the phone. I don't know, Nick, if you want to make any comment at this point or whether it's covered for now. You'll get opportunity in March, everyone, to speak to Nick much more deeply. But Nick, any feedback...

Yes. Thanks, Shemara and Alex. I think you covered it very well. But the point you were making, Shemara, around managing the flow of commodities throughout the network is an important one, and that's one of the things which we do to help service our clients. And certainly, that was something that impacted the results through the third quarter as well as some of those macro events that we discussed in terms of the benchmark gas prices in Europe and North America.

Your next question comes from Matt Dunger with Bank of America Merrill Lynch.

Just on the CGM business again and in the context of the reduction in risk-weighted asset -- credit risk-weighted assets you talked to on Slide 13. How are you thinking about deploying balance sheet in CGM? And how quickly can you organically expand across these geographies and customers you've just mentioned to maintain revenue momentum into FY '24?

Thanks for those questions, Matt. So in terms of deploying capital for CGM, you've seen we're sitting with a huge amount of surplus capital. We are comfortable to do that because the environment is uncertain, and it's a good time. We think to have surplus capital -- and we're managing to more than deliver our targeted mid-teens returns while holding that large double-digit surplus capital amount in billion. But the CGM business, the capital drawdown can be caught quite short, and so we need to have the capital available to be accessed quickly and then potentially for short periods. And as we mentioned during last year, we had a lot of credit risk capital drawn down for derivative positions. We had supporting clients hedging their exposures. European utilities, particularly given what was going on with TTF rising, the credit risk capital, the exposure to those clients went up. That came off, but in the winter in North America, we had to draw down market risk capital quite quickly. You can see by the end of the quarter, that has moderated quite a lot. But we are wanting to be available with a lot of capital to support CGM as needed. In terms of how fast we can grow the client franchise, it's taken decades to build the deep expertise that we have. But once we actually have the technical knowledge, taking it into adjacent markets is a matter of just getting familiar with what's going on in that market. But the key drivers, hopefully, are better known to us. So our growth, say, in gas and power from North America into Europe, while it took potentially 2 decades in North America and Europe, has grown much faster, say, over the last 5 years. We're now growing into Asia, and the growth rate, I certainly feel in the position I see it, is happening a lot quicker as we bring expertise and contacts and relationships from North America, Europe into what we're doing in Asia. But again, I might let Nick O'Kane comment, Nick, on that second point in terms of building the base and what it means not just for FY '24, but we look beyond that we're trying to build medium-term resilient franchises based on deep, deep expertise and insight. Nick, any comments on the speed of growth?

Yes. Thanks, Shemara, and thanks, Matt. I think the way you've described it is right, Shemara. We're very deliberate in terms of the way that we grow into adjacent spaces and into areas that our -- we see client needs. And what we've seen over the course of the last few trading periods is the impact of work that's been put in over a number of years and indeed decades if we think about how we build the business over that time. And the way I tend to reflect on it is that the absolute size of the markets that we're operating in, we're still relatively a small participant. Certainly, in some markets, we're larger than others. But if we think about our involvement in things like some of the resources markets and some of the oil markets, there's tremendous opportunity for us to continue to grow. There's tremendous opportunity for us to continue to leverage a strong position that we have in Europe and a building position that we have across Asia. So from our perspective, we still think there is opportunity for us to grow patiently and into adjacent spaces. And then, of course, as we help our clients transition, we think there's enormous opportunity to continue to grow from that perspective. So we're quite optimistic about the medium term, given the position that's being built over the last few years.

Good point, Nick. I think as I mentioned at the beginning, for all 4 of our operating groups, not just the deep expertise, but small is beautiful that all 4 of them have a long runway over the medium term to keep growing and very much a case in CGM as well.

That's great. And just at the first half, you talked to some FY '24 asset realization, Shemara, in MAM and MacCap. Is there any update you can give today on those, understanding that they might take some time?

At this stage, not. The realizations are really driven by when we can get the best return for either our balance sheet or our fiduciary investors from the particular asset. So we don't force or rush realizations. It depends on the maturity of the asset and the environment for exits. So nothing further. Alex?

Nothing from me, Shem.

Your next question comes from Andrei Stadnik with Morgan Stanley.