Macquarie Group Limited (MQG) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Macquarie Group Limited 2023 Full Year Results Announcement. [Operator Instructions] [indiscernible] I would now like to hand the conference over to Sam Dobson, Head of Investor Relations. Please go ahead.

Thank you very much, and good morning, everyone. Welcome to Macquarie's 2023 Full Year Results Presentation. Before we begin, I would like to [Audio Gap] on the line, we also have our group heads. At the end of today's presentation, as the operator mentioned, we'll have a Q&A session, and we're looking to conclude by about 11:15. So with that, I'll hand over to Shemara. Thank you.

Thanks very much, Sam, and welcome, and good morning, everyone, from me as well. So as usual, we'll start this presentation by looking at the footprint of our business across our 4 operating groups, and those are, as some long-term investors will know, our Australian digital banking business, BFS; our global asset manager, Macquarie Asset Management; our Global Commodities and Financial Markets business; and our Global Macquarie Capital business, that is a specialist advisory and capital solutions and balance sheet investment business in our areas of expertise. Across those 4 businesses, we get very good diversification, not just by geography but also by product exposure, and they all respond differently in different markets. So we get a lot of resilience in our earnings through cycles as a result. And in this most recent cycle, which was conducive for particularly the commodities and global markets business with the market-facing businesses, to an extent, in general, we had 59% contribution from the market-facing businesses and 41% from the annuity style. Now supporting those 4 operating groups are 4 very important central service groups that ensure again that we deliver strong results through cycles. And those are our legal and governance group and our risk management group that give us very strong second line review and also assisting and executing in terms of initiatives we take. And then financial management group, which is responsible not just for our financial and regulatory reporting and our engagement with external stakeholders, but also our funding and capital through cycles. And then lastly, our corporate operations group that delivers our entire platform across technology, HR, premises, strategy, et cetera. Now all those 8 areas, together, in this last financial year, delivered, as you saw, a record result of $5.182 billion, and that was up 10% on the previous financial year. The return on equity at 16.9% was down a bit on the 18.7% last year, but that was principally due to much increased capital position with our capital surplus now materially higher than it was at the end of last year, and we'll touch on that as we go through the presentation. I won't dwell on the half-on-half changes, but year-on-year, the contribution from our operating groups was also up nearly 10%. It was up 9% on the previous financial year. And that was made up of the annuity-style businesses being down 17%, principally due to some large one-off items last financial year. In Macquarie Asset Management, we had the Macquarie Infrastructure Company contribution and large realization of green energy assets. And in Commodities and Global Markets, we had the realization of our industrial and commercial meter business in the U.K. last year. The market-facing businesses were up 38% on the last year, and that was principally driven by the contribution from Commodities and Global Markets where we had elevated volatility and market price movements in Commodities. Now overall, we, as I said, on net profit, were up 10%. Our operating income was also up 10%, and our earnings per share were up 6%. The dividend per share is up 21% at the $7.50 approved by our Board. Our assets under management are also up 10% at $870.8 billion. And I'd note that we're now including our dry powder in assets under management for previous years as well as the current year to be consistent now with global peers. The big drivers of that increase were investments made in the private markets-managed funds and foreign exchange movements, and that was partially offset by market movements impacting the public investments business. In terms of the geographic diversification of our income, Australia contributed 29%. So we had 71% coming from outside Australia, with the Americas being the largest contributor again at 38% this year. I'd also note in terms of our now 20,500-plus head count, more than 51% of that is also outside Australia. And in terms of the trends of growth in income in all of our regions, you can see on this slide, the underlying trend is increased in all of our 4 regions. The Americas last year has, as you will probably know, had a very large contribution from realizations in the Green Investment Group and some Commodities and Global Markets income. So turning then to look at each of the 4 operating groups and their contribution over the last year, starting with Macquarie Asset Management. Macquarie Asset Management contributed 23%, and that was down 23% on the previous year at just over $2.3 billion. And as I mentioned, the reason for that drop is principally because last financial year, we had the Macquarie Infrastructure Company and the large Green Investment Group realization contributions, which didn't repeat. Despite that, the underlying franchise is growing very well. So in the private market side, we have record equity under management of over $200 billion. And we had record raisings of over $38 billion compared to the record last year of $27 billion. And we have dry powder of nearly $35 billion to invest as we potentially go into what could be a better investing environment. On the public investment side, the assets under management are down slightly, and that's mostly driven by market movements plus the rotation from equities to fixed income that we've seen happen over this last year, partially offset by foreign exchange. That business franchise has also stepped up a lot with the acquisitions made over the last financial year. And I'd note that 70% of its assets are beating their benchmark on a 3-year basis. Then turning to Banking and Financial Services. It contributed 12% over this last year and -- of the net profit, and it was up 20% on the previous year to just over $1.2 billion earnings. That was driven by strong growth across the entire platform. So the home loans were up by 21%. The business banking, up by 13%. The funds on platform, up by 4%. And importantly, our deposit book growing by about 30% to support all of that. A couple of things I'd note is that in our growth in our books, not just home loans, but all of them, we're very focused on high-quality growth in terms of good credits and good returns. And the average LVR at origination remained around 65%, and the average dynamic LVR is about 55% for home loans. I'd also note with the deposits, the diversity of the sources from which we have our deposits. Turning then to Commodities and Global Markets. This was the largest contributor to net profit contribution at 57% this year, that was up 54% from last year at just over $6 billion of contribution. And we had solid contribution consistent again from the Asset Finance business and also the financial markets business that grew their contribution, and that was in areas like foreign exchange and interest rates where we benefited from volatility and from client engagement and in the futures business, a strong step-up from significantly higher interest and commission revenues. But the biggest contributor was the Commodities business where we had both strong risk management income across areas like gas and power, global oil and resources and substantially increased contribution from inventory management and trading, particularly given demand supply dynamics impacting North American Gas and Power opportunities. And then Macquarie Capital contributed 8% of our net profit contribution. That was down 47% at just over $800 million. And the main drivers there was that we had weaker market activity compared to a very strong prior year, which impacted fee revenue and capital solutions advisory and capital raising revenue. On the Principal slide, we had slightly lower investment income, but we continued very good investing across particularly private credit and also across equity and had stronger private credit income underneath that. The private credit book is now at, I think, $18 billion. We invested about $7 billion over the year. We saw a slowing in deployment in the second half So probably about $3.5 billion in the first half, $2.5 billion in the second half as the environment was tighter. And I should have mentioned in relation to BFS as well, Alex will give more detail, but the growth in our home loan book also, we saw slower in the second half than the first half. So those results from the 4 operating groups are supported by a very conservative and strong funding and capital position. And in relation to our funded balance sheet, that remains strong with our term funding continuing to comfortably exceed our term assets. And over this last year, deposits across the group grew 33% to $134.5 billion. And we also issued another $23.3 billion of term lending. Coupled with the $48 billion plus that we did last financial year, we've done over $70 billion of term funding in the last couple of years. And again, as Alex will elaborate, we're very strongly positioned now not to need to go to market for some time if that were the case in terms of meeting our funding needs. On the capital front, our APRA Basel III capital surplus has increased from the half year $12.2 billion to $12.6 billion at the end of the full year, and that's after absorbing the $2.4 billion of capital requirement due to the APRA unquestionably strong reforms. And I particularly note that our capital surplus at the end of last financial year was at $10.7 billion. We're now at $12.6 billion after absorbing $2.4 billion of regulatory capital requirements. Now the drivers in this half in terms of increasing the capital have been clearly the earnings net of the dividend, but we also had $1 billion of capital released from the business requirements, and there's more detail of that you can see here, where the biggest contributor was the $1.7 billion of release we had from the Commodities and Global Markets as we had a reduction in credit risk capital due to lower commodity prices and exposures. That $1.7 billion release was absorbed, to some extent, by the other businesses. So Macquarie Asset Management absorbed about $0.5 billion in terms of co-investments and seed investments to grow our offerings in our franchise, and that was offset slightly by realizations in the green energy Green Investment Group area. In BFS, we absorbed about another $300 million of capital in growing our home loans and our business banking books, partially offset by runoff in the vehicle leasing. And then in Macquarie Capital, we absorbed about $500 million or $600 million in investment, as I said, in the private credit lending activity, but also in some targeted equity investments in our areas of expertise and focus in that business. And with that, we are ending the year with very strong regulatory ratios well above the APRA Basel III minimums. And I particularly note our liquidity coverage ratio at the moment is sitting at 214%. Those ratios ordinarily, of course, run off unless there's issuance as the funding runs down the liquid funding. And I would also note in terms of dividends, as I said that the Board has approved a dividend of $4.50, 40% franked for the year-end dividend. And that results in a full year dividend of $7.50, 40% franked, which is up from the $6.22 declared for the last financial year. And the last thing before I hand over to Alex is just updating on some of the Board changes that we've had recently. First of all, Sue Lloyd-Hurwitz, who will be well known to investors as the CEO -- retiring CEO of Mirvac, will be joining our Board effective the 1st of June on to the group Board. And then following approval at the AGM, will also become a director of the Bank Board. And then Nicola Wakefield Evans, who has been our longest-serving director, has also confirmed that she will seek reelection at the AGM, which will happen in July. So with that -- and I think she is expected to continue on our Board in 2024. So with that, I'll hand over to Alex to take you through the results in more detail.

Thanks, Shemara, and good morning from me as well. As Shemara said, I'll now take you through some more of the detail of the financial results for March '23 and also some of the other aspects of financial management across the group. So starting with the income statement, and I thought I'd start by looking at the second half in comparison with the first half and then move on to the full year. So from a second half viewpoint, if you look at net operating income, was up 21% for the second half in comparison with the first half. The key drivers of that were a 50% increase in net interest and trading income, a $506 million increase in fees and commission income, partly offset by a reduction in investment income, and we talked about this at the half in terms of those realizations that were skewed to the first half of the year. In combination with that expenses, for the half, we're up 16%. Tax rate was slightly up based on the composition of income. And as a result, the group delivered a profit of $2.877 billion for the second half, which, of course, is a record half. Turning now to the full year result and bring to the first and the second half. You can see operating income for the year was up 10%. That was driven by a 53% increase in net interest and trading income, offset by a 5% reduction in fee and commission income, a reduction in the investment-related disposal proceeds during the year and the lower contribution from joint ventures and associates coming through the group in the full year. Expenses were up 12% for the period. The key driver there is really employment expenses, and there's a few things happening there. We saw an average increase in headcount of 12% across the group, skewed toward the other central service areas and to the Banking and Financial Services Group. We also saw wage increases coming through the group. And the other thing we see is an increased profit share and share-based payments expense coming through consistent with the underlying performance of the group. Effective tax rate up slightly from where we were at the full year FY '22. So bringing that all together, an underlying net profit across the group of $5.182 billion, up 10% on where we were this time last year. I'll now turn to each of the operating groups and give you a little more detail about the performance over the course of the year. So starting with the asset management business. You can see the net profit contribution of $2.342 billion, down 23% from where we were in FY '22. And the key drivers there are lower prices associated with realizations across the group, particularly realizations through our green energy portfolio, so fewer material realizations. The other thing we saw, obviously, is the nonrepeat of the gains from the disposition of MIC in the U.S. in -- which came through in FY '22 [Audio Gap] in operating expenses associated with the platform. Those reductions were offset by a 75% increase in performance fees, largely coming out of MIP IV in Europe and MIP III in the United States. And we also saw the nonrepeat of acquisition-related expenses associated with Waddell & Reed, A&P and CPG through FY '22. We've also set out the split from a base fee viewpoint. So base fees in the private market business, up 14%, up $164 million, and that really reflects the strong period of investing, $27.2 billion worth of investment made through the year. And that was almost offset by the reduction in base fees coming through our public investments business that relate to market movements, and as Shemara said, the switching of portfolios away from equity investment portfolios towards fixed interest. In terms of the underlying drivers, the asset under management up nearly $871 billion at March '23. And as we said before, that now includes the dry powder, which makes it consistent from a comparability viewpoint with where other firms are around the world. Turning now to the second of our annuity-style businesses, the Banking and Financial Services business, a really pleasing result, up 20% from where we were this time last year. And you can see the drivers of that from a personal banking viewpoint, a $206 million increased contribution. That really was driven by a 31% average growth in mortgage volumes over the course of the year, albeit slowing in the second half of the year as we foreshadowed at the half year results. We saw an increased contribution from our business banking $184 million. That reflects the growth in loan volumes. It also reflects the growth in deposit volumes and improving margins in that business and an increase of $191 million in terms of the contribution from the wealth channel in that business, reflecting a growth of 13% in terms of average volumes, improved margins associated with those deposits and an improvement in average funds on the platform through the year. You can see a step up in the credit and other impairment -- our impairment charges. And there's a couple of things happening there. Firstly, the macroeconomic outlook has deteriorated relative to where we were. The other thing is we've weighted slightly more to the downside scenarios. And we also had, you might recall in the FY '22 year, the release of provisions associated with the sale of the dealer finance business and the reduction in the car loan portfolio. So that didn't come through in FY '23. And you can also see the step-up in expenses through the year, 21% step-up in expenses, really expenses associated with driving the growth of the business with the investment that the team is making and the data capabilities and the technology platform that supports the business both in terms of front-office customer experience, together with the capabilities necessary to meet the obligations that we have in that business. And we've also seen a step-up in regulatory and compliance spend through the course of the year, but a really pleasing result up 20% from this time last year. In terms of the drivers. With the exception of the motor vehicle business, everything moving in the right direction in terms of growth in both line assets, deposits to support the business and also funds on the platform. Now turning to the first of our market-facing businesses, the Commodities and Global Markets business, obviously a tremendous result, up 54% from FY '22, really reflective of the opportunities the business saw through the year to grow the customer franchise, and I'll talk a bit more about that at the moment, to provide solutions to those customers. Obviously, the market conditions provided an opportunity to manage those customer positions on balance sheet and generate trading income for the group. So really tremendous result. We have seen those conditions taper off a little bit in the fourth quarter or our fourth quarter, the first quarter of calendar '23. In terms of the components of the movement, you can see commodities, up 82%. Risk management income for the year, up 50%. And that really reflects the work that the team is doing with customers, particularly in the global gas, power and emissions business, in the Global Oil business and the Global Resources business. We also saw a step up of $1.6 billion in inventory management and trading coming through there, reflecting those demand and supply imbalances that we've talked about, particularly in the North American market now for many results. Financial markets up $114 million, a little under 10%, a really strong contribution from financial markets, particularly in the first half coming through as we saw lots of volatility in interest rates and FX markets, but there are opportunities to extend credit in that business, which we were very pleased to provide and provided opportunities to grow the revenue base. We didn't have the repeat of the gain on the disposal of the commercial and industrial meters business in the U.K. And we also had a step-up in expenses coming through the group, about 22% step-up in expenses really associated with the investment that we're making in the platform to support the growth of that business and to support the obligations that, that business has around the world in relation to regulatory compliance, data and so on. So a really pleasing result for the group. Just as we've done in the past, just looking at some of the -- hopefully, the slides that help to contextualize some of the results over the period and starting with the chart that's on the screen now, which is obviously indicative of some of the volatility we saw through the year. So this is the volatility we saw in European gas prices and in U.S. gas prices. And you can see from about the middle of FY '22, all the way through until the end of calendar '22, we saw a very volatile period that provided opportunities for us to grow our customer base and provide solutions to those customers to help manage that volatility. It also provided good opportunities from a trading perspective for the group. And as we talked about the operational briefing in the third quarter, in particular, exceptional trading results through CGM. And those have normalized, if you like, in the first quarter of '23, back towards where we saw prior to the first half of '22. In terms of the chart that will be familiar to people. Obviously, on the right-hand side, you can see the growth in customer numbers across CGM. Really pleasing to see that underlying customer franchise continue to grow, and where the team seen opportunities, particularly as in the European gas, power and emissions market in our agricultural sector as well as our resources -- upstream resources. So there's been good growth in the customer numbers there. And on the left-hand side, obviously, that's reflected, continue to be reflected in the operating income of the group, which is very much skewed towards income associated with our underlying client franchise. So the growing client franchise, dealing with clients more often, in more locations, really driving the opportunities for the group. And then finally, in terms of the capital position for CGM. On the left-hand side, you can see the capital position over the last few periods. You can see the reduction in credit capital from March '22 all the way to March '23, reflective of prices coming down and volumes coming down over the course of that period. Market risk, as we've talked about through the year, stepped up a little bit as the size of the opportunity and the size of the business increase. So you can see market risk capital a little higher than what it was back in March '21 and previous periods. And you can see the impact of that -- those trading opportunities on the daily P&L chart on the right-hand side of this page, which is a reasonably familiar shape to what we've had in the last couple of years, albeit flatter and slightly more skewed further to the right of the y axis, but still very much skewed to the positive, which is reflective of the focus that the group has around client activity and slightly higher in terms of the average daily P&L, which really relates to the opportunities the team saw during the course of the year. Now in terms of Macquarie Capital, the last of our business units. So Macquarie Capital, a more challenging period, down 47% for the year, just over $800 million worth of contribution. And you can see where the drivers are there. The fee and commission income down 27% over the period; investment-related income, lower contribution than the prior year and obviously skewed to the first half of the year; and operating expenses up both in terms of continuing to invest in those sectors where we have really deep capability across the world. So great opportunity, I think, for us to grow there, but also increased investment in the platform to support the business activity, partially offset by an increase in the contribution from the private credit portfolio. In average terms, the private credit portfolio is up just over $5 billion, consistent sort of margin profile through that business. That increase in contribution is partly offset by an increase in the ECL contribution are both reflective of the macro environment and the slightly larger -- higher weighting to the downside scenarios, but also reflective of a couple of specific provisions in the private credit portfolio where we've made specific provision against the performance of those credits. In terms of the underlying drivers, Macquarie Capital, capital alongside its clients grew over the period. You can see where the growth is. It's really around the private credit portfolio, the dark green at the bottom. The team also saw opportunities in the digital infrastructure space together with the infrastructure space more generally to deploy capital. And we hope that those investments pay off into future periods. And on the right-hand side, we gave you a composition of the private credit portfolio in terms of the sector exposures that the private credit portfolio has. And as we've said in the past, very consistent with sectors where we think we have deep global expertise, which allows us to generate transactions on a bilateral basis and at good risk-adjusted returns. Now turning to some of the other aspects of the group. The regulatory compliance and technology spend, a feature of the results over the last few years and it continues to be so for FY '23. So from a regulatory compliance viewpoint, you can see up 33% on where we were for the full year '22. That really reflects the growth in the regulatory change. There is a lot of change going on across the regulatory landscape around the world. That occasion spend on new projects, and of course, some of that is flowing through into the BAU compliance spend as we continue to invest and improve the platform around the world and ensure we meet our obligations. And on the technology side, up 26% in terms of annual expenditure on technology. Just to give you a breakdown, about 1/4 of that relates to changing the group, and about 3/4 of that relates to running the group. And just by way of comparison, when Nicole Sorbara presented a few years ago, the operational briefing, you'll recall that at that time, we talked about 19% of the spend coming through the change of group activities with the balance on -- around the group. So of course, that change activity is a feature of what we're doing with our technology investment. Our balance sheet, as Shemara mentioned, another strong period of fundraising in terms of term funding, just over $23 billion of term funding, split reasonably evenly between the bank and the non-group, and coupled with last year's $48 billion, over $70 billion worth of raising over the last couple of years. We continue to work on diversifying the funding sources for the group. And this year, we're delighted to welcome another 200 investors who own debt exposures to the group. And really pleased to say the term funding -- from our point of view, weighted average term funding, still out at 4.9 years. Our deposit story is a familiar one, I'm sure, to everyone. It's been another strong year for Greg and the team in BFS with the growth of up to $135 billion, and we continue to diversify the customers that we're serving, and improve the product offering to those customers across all of our deposit products and in particular, our transaction and savings deposits and add our term deposits over the course of this year. The loan and lease portfolio up 18%, largely reflecting the growth in the home loan portfolio, the business line portfolio. At the bottom of the page there, you can see the growth in Macquarie Capital's private credit portfolio. Equity investments at $9.6 billion. The key drivers here really are investments where that we're using the balance sheet to seed future strategies for the private markets business in MAM. The other thing you've seen is increased contributions across -- -investments across transport in the aviation space, and of course, that digital infrastructure and infrastructure story I talked about within Macquarie Capital. From a regulatory viewpoint, as I mentioned before, a lot going on. I guess, most significantly over the course of the last 12 months, we've had the implementation of the Basel III. Unquestionably strong reforms coming through that were implemented on the 1st of January 2023, which is great to have a long project actually come to a conclusion. The second thing is just in relation to the German dividend trading matter investigations. Authorities continue with their investigations in Germany in relation to the dividend trading matter. Whilst nothing particularly material from a Macquarie Group perspective has happened over the course of the last period of time, we did take the opportunity to update our disclosure just to know that some of our former and current employees have -- we've been notified that they will be interviewed in relation to that matter. We continue to provide for that matter, and we'll monitor those provisions going forward. In terms of the Basel III CET1 ratio for the bank, really strong 13.7% and 18.4% on a harmonized basis. As Shemara mentioned, liquidity and cash -- the cash and liquidity position on the balance sheet continues to be very strong. The LCR, at very elevated levels, consistent with the fact that we've been raising funding ahead of the obligations to repay things like the term funding facility for the sake of the example and so on. So we'll see, over time, whilst that elevated level today, that -- that level will come down as we come to a more normalized level going forward. And then from a capital management viewpoint, the only thing to note really on this page is that in addition to the declaration of the dividend today, the Board has also enacted the DRP at a 0 discount, and we'll be buying shares on market to satisfy any applications under the DRP. And in relation to the MWREF, we will also be buying shares on market. In relation to the MWREF grants, there will be a share sale facility available for staff who have stock invested in their hands at the end of this period. And so with that, I'll hand back to Shemara. Thank you.

Thanks very much, Alex. And -- so I now will take you through the outlook, starting with the short-term outlook for the period ahead. And as usual, we'll look at this based on each of our 4 operating groups. So starting again with Macquarie Asset Management. Our expectation is that base fees will be broadly in line with FY '23, and investment-related income will be significantly down, principally due to the large games we had in FY '23 on green energy asset realizations. In Banking and Financial Services, we expect growth across the platform in the loan portfolio, in the deposits and the platform volumes. But of course, market dynamics will continue to drive margins. And we also expect to keep investing in terms of volume growth, in terms of technology and also in terms of regulatory requirements. And finally, we will continue to monitor provisioning in terms of expected credit losses, et cetera. Macquarie Capital, subject, of course, to market conditions; we expect transaction activity to be up on what was a challenging year in FY '23. And we're expecting investment-related income to be significantly up, principally due to the growth in the private credit book, partially offset by the timing of realizations in terms of investments that we have. But we are committed to continuing to deploy capital in both equity and credit across the areas of Macquarie Capital's deep expertise. And with commodities and global markets, we are expecting a continued consistent contribution from the asset finance business and the financial markets business. In relation to the commodities business, we obviously benefited from exceptionally strong trading conditions during FY '23. So for FY '24, what we're saying is we expect commodities income to be up on FY '22, subject, of course, to any volatility that we see during the year. And then in terms of Central for both compensation ratio and effective tax rate, we expect it to be in line with historical levels. Now that is as ever subject to a range of factors, which include market conditions, global economic conditions like inflation, interest rates, volatility events and the impact of geopolitical events, completion of period-end reviews and completion rate of transactions, the geographic composition of our income and the impact of foreign exchange and potential tax or regulatory changes and tax uncertainties. So given all of that, we continue to maintain a cautious stance with a conservative approach, as you've seen to capital, funding and liquidity that we think positions us to respond in the current environment. And then turning to the medium term. As we said, we remain of the view that we are well positioned to deliver superior performance over the medium term given the diversification we have across our 4 operating business lines, which are exposed to different thematics and are also very complementary to each other in terms of how they respond to underlying economic conditions, as we saw during FY '23 with different businesses responding differently and are also very well positioned for growth structurally well positioned over the medium term. And those 4 businesses, of course, are our Australian, very customer experience-focused digital banking offering in BFS, which still had small market share in all its business lines in Australia, where it focuses. And then our 3 global businesses, which also are still small in terms of the size of the markets, they're addressing and servicing on a global basis, being our asset management business with a focus on private markets real assets, but also a good public investments footprint; the Commodities and Global Markets business; and our Macquarie Capital business focusing on areas of specialist expertise in the main regions in which it operates around the world. Now that is, of course, supported by our ongoing investment in our platform in terms of technology and regulatory spend to support the group's delivery over the medium term, our independent proven risk management framework and culture and our strong and conservative balance sheet. And that has helped us over the medium term to deliver strong results. So if we look at the 17-year average, the annuity-style businesses have delivered 22%. In this last year, they delivered 18% principally due to the extra capital absorbed currently in Macquarie Asset Management, both in particular seed and co-investment positions and also the recent acquisitions that are coming through. And then in the market-facing businesses, we've delivered a 17% return on equity average over the last 17 years. And in this last year, delivered 28%, particularly due to the strong contribution from the commodities lines in the Commodity and Global Markets business. The whole group, together, has delivered, on average, 14% ROE over the last 17 years. This year delivered 16.9%, after, as Alex and I have mentioned, taking into account the $12.6 billion of surplus capital that we're holding. So higher contributions, obviously, from the operating groups at the 18% and 28% and 16.9% net. So with that, I will hand back to Sam to take your questions. Thanks.

Thanks, Shemara. I'll now hand over to the operator for Q&A. Thank you very much.

[Operator Instructions] Your first question comes from John Storey with UBS.

My first question is just on the dividend of $4.50 in the second half of the year. How should the market be reading into this just in terms of potential inorganic growth opportunities?

Yes. Thanks, John, for that question. So the dividend basically is in the middle of the range that the Board has for its dividend payment of 50% to 70%, had 60%. And I think what we're seeing is that we had a very good year, and we want to share that with our shareholders. So we're paying 60%, which is up from the ratio we were paying last year. And equally in terms of how we're responding with MEREP and the DRP as well. We're saying we're comfortable with capital to take actions that show that we have ample capital. But at the same time, the environment we're going into is a particularly uncertain one, we think. And so we've made a judgment that it beholds us to be holding very strong capital position going into this with the $12.6 billion surplus we have. And as I said, that's after the $2.4 billion unquestionably strong amount. So it's gone basically from $ 10.7 billion to $15 billion over the last year, excluding that. And -- so we think we're very comfortably capitalized, yes, for inorganic opportunities, if we see them in this current environment, but also in terms of being defensively positioned, not just with capital, but not needing to go to the markets for funding, et cetera. I don't know, Alex, if you want to add.

No, I think that covers it.

Thanks, John.

Great. And then just my second question is you've called out low levels of volatility in Q4 in global gas markets. Just want to get a sense of how material this is in terms of the revenue outlook for the commodities business. And then what's the timing impact of this in terms of how it could potentially flow through to revenue? And so you have mentioned you called out that commodities revenue is going to be roughly in line with FY '22. What's ultimately in the pipeline? And what gives you confidence in these revenue numbers?

Yes. I think what we said, John, is that it would be up on FY '22. And basically, our Commodities business, like all of the financial markets and asset finance businesses as well in Commodities and Global Markets are customer service-based businesses. So ultimately, what we are doing to drive earnings is growing our franchise, going into new geographies, going into new products as well in Commodities, but also upselling what we do with existing customers is a big driver. So the underlying growth in CGM, and you saw that in one of Alex's slides, is driven a lot by those base businesses we provide in terms of financing, risk management, storage, transportation, et cetera. And then the trading revenue is on top of that, the thing that could fluctuate depending on what volatility we see in markets. Now we're in so many different markets geographically and commodities wise that we could experience volatility in any one of those. Last year, it was in a sub area of North American gas and power that we had particular volatility, but there was also volatility, Alex showed the graphs, in European gas and power as well as North American. So the volatility could occur in many areas. The thing that gives us basis to give guidance on the earnings is what we're seeing in the underlying franchise growth in terms of those nontrading items and then assuming some level of trading. But the trading really comes from being in markets serving customers that gives us very deep insight so that if we do see particular dislocation, we're able to do some trading around that. Hopefully, that answers it, John.

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

If I could just ask you to remind us on potential asset realizations you're looking into FY '24 and how we should think about potential performance fees in private markets businesses you're moving into?

Yes. Thanks for that, Matt. So in the private markets, we have balance sheet assets as well, but I'll focus on the asset managers, private market businesses. What we typically have is performance fees that we'd guided some years ago sit at about 50 basis points of equity under management. In this last year, they were at 45. So it can bounce up and down depending on timing of realizations. We also are growing our equity under management a bit into nonperformance fee businesses to some extent, private credit and, to some extent, real estate as well. But in terms of the timing of assets, we've got a large European fund and a large North American fund that are reaching the end of their life and realizing assets, and those are the fourth in the series of the European funds, MIP IV, and the third in the series of the U.S. MIP III. They have a number of assets where we've seen very good growth in the underlying asset performance. So we take some recognition of the performance fees before the assets are realized because the accounting standards require us to recognize those fees as we form a view that there is a highly improbable risk of reversal in terms of the fees being generated. So we've already recognized some of the fees in the revaluation of the assets in the funds. But typically, we have been able to realize at a premium. It really depends on market conditions. So we're pretty disciplined in what we recognized so far being what we think is highly improbable risk of reversal. And then as we realized about half a dozen assets across those 2 funds and a few others, hopefully, we will generate performance fees into next year. As we guided, the main reason we see net other income down in the asset managers because the one-off gains in the green energy assets were pretty strong last year, and that's why we think we won't have as high net other income. Does that cover it, Matt?

That's perfect, Shemara. And just if I could ask on Macquarie Capital private credit, 26% of those exposures in software and technology, particularly deployment into debt. Can you just talk to us about how you're getting comfortable with credit risk management in MacCap?

Yes. Basically, we've been investing in private credit in that -- through that team now for, I don't know, it's probably at least 12 years -- actually going back just since the time of the GFC. So we have a very good experience in terms of our team and their investing experience and their credit losses. It's less than 1% -- in fact, less than 0.5% in our credit loss experience. Basically because we're using very, very deep expertise in subsectors, we see a massive pipeline of opportunities, and we sit down and sit down and only do very few investments each year based on confidence in the underlying, not just the business we're investing in, but the partners we invest with. So our loss experience has historically been low. We're very disciplined about putting money out of the door. Our expected credit loss provisioning is running at about 3% to 4% compared to the experience that we've had. And I think that's what gives us confidence. Often, we're going in again with partners that we've worked with before as well. So it's really the deep expertise of the teams in their subsectors that gives us confidence.

Maybe just to add to that. The technology exposures of the group and software exposure of the group have mainly taken out to cash flow-generating businesses, typically, government business, services-type businesses with an established and growing platform rather than, I guess, the more publicly talked about technology story, which tends to be obviously loss making. So a lot of the activities in those sectors where we have real expertise, cash flow and more defensive elements associated with government and business services, which again, I think on the source is the point that Shemara is making around the performance over time that we've seen about that -- through that book.

Yes. That's actually a very good point because in private credit, we're investing in more mature software and technology businesses cash flow lines, whereas in our venture -- Macquarie Capital Venture Capital business, MCVC, we invest in early-stage things like, say, PEXA here is an example where we'll put small checks in early on and then help grow those businesses over the years to a larger equity realization.

Your next question comes from Jonathan Mott with Barrenjoey.

Two questions, if I could, I'll break them up. The first one, around the world, we've -- well, if you look at Macquarie over an extended period of time, you're seeing an ongoing movement into GFC into unlisted assets. And people would really like that because it avoids the volatility and you get stable long-term returns. But at the same time, there's a push overseas in the U.S. and around the world that maybe these assets, and especially commercial property, haven't been marked properly and there's a liquidity issue at the same time. And this is getting a lot of regulators to focus on, on this issue. Do you see this as a potential risk that over the next 5, 10 years, maybe even a shorter time frame, that there's going to be a regulatory push back into more liquid, more marked assets that could potentially make unlisted assets less attractive?

Potentially, I would start by saying the unlisted assets they're not commercial property. They're typically operating businesses, where we are driving the bulk of our superior return by actively managing those assets, whether it be in our asset manager, in our deep periods of expertise across infrastructure, et cetera, or on the balance sheet where we invest in tech and infrastructure and government services, as Alex said, growth businesses, et cetera. So I think for us, where its balance sheet, we are making sure that the funding for those is termed out for the life of our expectation of holding those assets. So we're not expecting regulation to hurt our sources of funding and liquidity for staying in those businesses. And we think we have delivered superior returns through our human capital capabilities and can continue to. In the asset manager, in terms of allocation to unlisted assets and where the regulators will ask our institutional investors to allocate more to liquid assets because there isn't transparency and visibility of price, that may be a factor, but the allocation, at the moment, to the asset classes we're focusing on like infrastructure, are very, very small globally relative to the size of the class. And there is a very good liability match in terms of the long-duration liabilities a lot of these investors have. So even though there might be regulation and it goes to more transparency of marking, we think we will still see good flows to our asset classes and good growth in terms of our share of those flows as well. And we think we'll continue to be able to, even if we're constantly marking the assets, show investors because as you know, I just mentioned earlier, we are very disciplined about marking those assets. If they need to be marked down, we would mark them down. But typically, as we mark them up, as the operating performance grows in terms of our active management of them, we're very disciplined about marking them up, as required under accounting standards.

And second question, if I could. When you look at this result, we've never seen a result by Macquarie, which is so heavily skewed into one division, CGM making 58% of the contribution. It's also the most capital intensive of the division. The other divisions did okay with the Banking and Financial Services growing. The others were pretty soft. When you see a year like this which is so heavily skewed, how do you manage the staff compensation ratio? And when it is a year like this where some of the divisions haven't performed well and a more capital-intensive division is really driving the results, shouldn't shareholders receive a larger proportion of those returns? So how do you manage this? And I know you'll say that the profit share has worked well for many, many years, we've never seen a year as skewed as this.

Yes. Well, Jon, just like in your business, we're ultimately a human capital business, and it is talent that drives the earnings for shareholders. So basically, we work off market compensation rates for each different business, and they are very different depending on what the underlying business is. And so the compensation ratio can vary depending on which of the businesses contributes the most in a year, but that's just a number that falls out of making sure we pay market rates to attract talent. We try to pay the lower end of market rates and have a broader offering than just money to our talent. But we need to make sure we maintain that talent and that is aligned with shareholder interest because without them, the earnings are not there. So this year, CGM delivered $6 billion of earnings, as you say, 57% of the group's earnings. The rates at which people in CGM get paid are determined by the markets they operate in. And there's different rates for some businesses, within CGM as well, and we honor those arrangements to make sure we keep attracting talent. In the other groups as well, they're paid based on the market for those businesses, which does take into account the return on equity as well. You saw that some -- the Capital Markets businesses this year delivered a return of 28%. So when you say they're capital intensive, we can still deliver very, very high ROEs in CGM with -- depending how that money is made in areas. Where the human capital is driving much more of the return, we can deliver very high ROEs. And as you can see in that 28%, Macquarie Capital had a much more challenging year, down 47% at $800 million. So the CGM number would have been pulling that average up. So I think we certainly take into account the interests of shareholders, and our view is it's smart for the shareholders to be compensating top, top global talent at market competitive rates -- at the low end of market competitive rates, but giving them an offering where they stay with us long term, and we can grow businesses behind them.

Maybe -- Jon, just maybe just a couple of points for me. I mean, obviously, the businesses -- the market-facing businesses are set up and delivered this year in a way that you'd expect them to. When condition's conducive, then we would expect those market-facing businesses to perform really well. And over the course of the year, from a CGM viewpoint, you obviously saw a significant volatility. I put up the chart around gas in Europe and the U.S., but you saw volatility across global markets more generally, across commodities more generally. And in that environment, I think the team was able to step up and grow their customer franchise, obviously help those customers manage that volatility, which provided an opportunity for us on the trading side. So I think the business actually did exactly what we wanted to do. And if you think about the combination of the portfolio, obviously, you've got these stable type of businesses in the annuity stream and then you've got these businesses that perform better when the conditions are actually conducive to them doing so. So I think the business performed as we sort of expected it to. And we talked about it through the course of the year. So that's one thing, I think, that is relevant to think about. I think the other thing, which is interesting from a capital perspective, in terms of the heavy use of capital, is it is a relatively short dated capital business as well, which I think is a positive in the sense that a capital comes back quite quickly. And over the course of the year, as Shemara showed in her slide, we have $1.7 billion worth of capital come back to the group, which is really consistent with the way that CGM business has set up. It also enables us to respond quickly to market conditions. So the capacity to turn that capital where the conditions are conducive to doing so, I think, is a really strong element of the way the CGM business has operated and the type of business it's involved with.

And I might just briefly mention as well that actually, ironically, the profit-sharing rate for the group was down this year over last year because of the mix of not just CGM, but the divisions and lines from where we generated earnings. The compensation ratio was up a bit. That's not to do with profit-sharing rates. It's to do with the investment we're having to make in headcount and hence, the base comp numbers being up a lot as we have to invest in our operating platform to respond to regulatory requirements, technology, et cetera. Again, in line with shareholder interest, I think. And you had a second question, Jon?

Your next question comes from Andrew Triggs with JPMorgan.

First question, please, just around the commodity guidance. So you provided for FY '24 the reference to the FY '22 is the baseline for growth off that level. I'm just wondering whether if you look more into the medium term, whether you think that's a reasonable baseline for us to think about the commodities performance of the business?

Yes. I think subject to volatility that we experienced in terms of market conditions, I think we're saying our franchise is growing year-on-year-on-year. And we're at a point now where we think, hopefully, subject to market conditions, we can keep growing from those FY '22 levels. We've got Nick O'Kane here. I don't know if you need to add anything to that, Nick, or you're happy with that answer?

No, thank you, Shemara. I think so far, you've answered very comprehensively. Perhaps just to add one thing that we're tailoring our services to our clients around the demand that things like the energy transition are coming through, and that's how we're thinking about servicing the client base. So our expectation is those demands will increase over time, giving us the opportunity to continue to grow the franchise.

Yes, that's a good observation.

Nick, given you've answered that question. The -- that slide on Slide 31, around, I guess, benchmark prices on European and U.S. gas prices, obviously, probably related a little bit more to risk management revenues. But in terms of the inventory management and storage business, can you talk a little bit about what's happened in more recent months around dislocation in physical markets within the North American market, please?

Sure. As sort of we've tried to demonstrate here on that slide is we're seeing, compared with the conditions that we saw in calendar year '22, a slightly more subdued trading opportunities. However, in terms of the demand for the underlying services that the clients require or that the business actually supplies to our clients, we're still seeing pleasing amounts of underlying client activity. So yes, there has been a little bit of a reduction in the volatility from what we've seen as extreme markets over the previous periods, but the underlying demand for our services still remains quite strong.