Macquarie Group Limited (MQG) Earnings Call Transcript & Summary

Well, good morning, everyone, and welcome to Macquarie's First Half 2024 result. Before we begin, I would like to acknowledge the traditional custodians of this land and pay our respects to their elders past, present and emerging. I'd also ask you to turn your mobile phones either to silent or turn them off at this stage. So this morning, you'll hear from our CEO, Shemara Wikramanayake; and our CFO, Alex Harvey. And with us here or online, we've got our group heads as well. At the end of the presentation, we'll have an opportunity for question and answer. With that, I'll hand over to Shemara. Thank you.

Thanks, Sam, and good morning and welcome, everyone, from me as well. So as usual, I'll just commence by touching on our business footprint across our 4 operating groups, which have been in place for a long time now. Across those 4, as you know, they give us very good diversification in terms of the underlying thematics to which they're exposed, and all 4 of them really well positioned for medium-term structural growth with the areas they operate in. And those are our Australian Banking and Financial Services group that is offering a customer experience-focused digital banking offering here with a long runway to grow in home loans, business banking and wealth. And then our 3 global businesses, our asset manager in private markets and public investments, especially with a great real asset franchise, which is growing a lot in this environment, especially our Commodities and Global Markets, which operates across asset finance and financial markets and commodities, a [ green ] long runway for that franchise to grow. And then Macquarie Capital, which is our advisory and capital solutions business growing in many regions as well as bringing the Macquarie balance sheet alongside where we have deep expertise in debt and in equity. And they're supported by our 4 key central services groups across our Risk Management Group, Legal and Governance, Financial Management and Corporate Operations. Now turning to this most recent result for the half year. As you saw, we delivered a result of $1.415 billion, which was down 39% on the prior comparable period last and actually down 59% on the most recent half, and the return on equity was 8.7%. And given the change to the prior comparable period and the most recent one, I thought I might spend a moment on this next slide dwelling on some of the key drivers. And you can see that the operating group contribution as well was down 38% on the prior comparable period. But the key point I'd note is that the underlying franchise in all 4 of our businesses continued to grow through this period. And the contributors -- there were 3 large contributors that I'll go through as I speak to each group. But starting with Macquarie Asset Management, you'll see as we go through the presentation that our underlying assets under management are up, equity under management in private markets and the public investment assets. And as a result, our base fees and our performance fees were broadly in line with the prior comparable period. The main contributor to the result being down substantially on the prior comparable period in Macquarie Asset Management was the timing of the realization of assets in the Green Investments Group, plus increase in operating expenses. But prior comparable period, first half last year, we had some material realizations in our Green Investment assets because it was a very conducive period for realization. In this first half, we are holding the bulk of those assets for a core renewable fund that we're launching in Macquarie Asset Management, which strategically is a big opportunity for Macquarie Asset Management to go into adjacent real asset businesses. And so important that we have this seed portfolio, demonstrating our expertise to launch that well. In Banking and Financial Services, the result was up and we continue our underlying franchise growth, just like in MAM, with the assets under management growing, the loan books are growing, the platform funds are growing, the deposits are growing. Operating expenses again up, and that's probably the second contributor to the change from the prior comparable period as well as the timing of green investment realizations, is that OpEx is up in all 4 groups in BFS. We're investing a lot in technology and growing our platform and regulatory compliance. In Macquarie Capital, the franchise, again, continues to grow. The fee income is broadly in line, but the client base is growing there. And also importantly, our private credit book continues to grow. So while again we had large equity realizations in the first half, last year, you may recall the U.S. real estate asset pillar, the European fiber network on [ Avia ], a conducive environment for realizations. This time, less equity realizations, but more contribution from the annuity-style private credit investment income. And then Commodities and Global Markets, the franchise there, again, continues to grow, so both in asset finance and financial markets. We had solid contribution. Commodities, you'll see in Alex's analysis, the client numbers continue to grow. The main reason the result was down was because we experienced greater volatility in the first half of last year, particularly in European gas and power and in resources across coal, but also gold. This period was a much quieter period in terms of volatility in underlying commodities, but the important thing is the franchise continues to grow. So that was probably the third of the contributor is the timing of asset realizations, especially green assets in Macquarie Asset Management, the OpEx being up in the CGM, less volatility in terms of the commodities. And similar contributors when you compare to the second half of last year, although the second half of last year, you may recall had greater volatility contribution to commodities and global markets. So with that, as you saw, operating income profit, EPS and also the dividend per share, which I'll talk about at the end, were down. Looking at some of the underlying drivers before going into the numbers group by group. Assets under management were up 2%, and that was mostly through investments made in the private markets managed funds and favorable FX, offset by a reduction in some co-investment management rates, especially in a European situation. As well as the diversification by business lines and thematics, we're very diversified by region. We now have about 2/3 of our income generated outside of Australia, as you probably know. And the largest regions outside of Australia are North Americas. You can see all the Americas in this and Europe, Middle East and Africa. So turning then to looking at each of our 4 operating businesses. Macquarie Asset Management delivered $407 million. That was down 71% on the approximately $1.4 billion last year. As I said, big contributor to that being down with the timing of realizations in green energy assets. In the comparable period, last half, Alex will take you through these numbers, we had about $800 million of realizations. And in this half, we just had the OpEx and debit that we absorbed while we hold those assets, which was about $100 million. So it's about a $900 million turnaround. The underlying business, as I said, the franchise continues to grow. So equity under management in private markets, up 2%. Assets under management in public markets, up 2%. We had raisings in this half year of about $8 billion. Basically, that's impacted by the lumpiness of what funds are opened at the time. The prior comparable period, we had a particularly large rating of $22 billion, and that was because we had our seventh European fund open, our third Asian fund and sixth U.S. fund, the European and North American funds being the really big ones. In this period, we had a North American fund open for raising. We also -- you may have seen it announced that in our Energy Transition fund, which is newer technologies in the climate response, we've closed on about USD 1.7 billion in October, so just after the half year inclusion. We also invested comparable amount, $7.8 billion, and have $35.3 billion of dry powder in our private markets at the end of the period. So the underlying franchise continued to grow strongly. In public investments, the main drivers there of the movements were the foreign exchange movements in net flows, offset by market movements. And you'll see there, particularly equities, assets under management down 6% despite net flows, mostly impacted by market and also a rotation of the market to fixed income, where we were up -- sorry, equities were down 3%, fixed income up 6%, which flows to that region globally. Then turning to banking and financial services. The results there were some up 10%, $638 million, from what I recall is about $580 million first half last year. Ongoing growth, as you can see in our home loan portfolio, business banking particularly, so in home loans we're just a bit over 5% of the market now. Business banking, we're still about 1%, I think, [indiscernible] of the marketplace. So a long runway to grow, and we may talk later about the investment we're doing, particularly in that area. Funds on platform also up, supported by 1% growth in deposits. You may recall last year, we had very strong growth in deposits driving the asset growth that we've been able to support with that now. The competition has picked up a bit in deposits, but we're still managing to grow deposits. And we're still very focused on the quality of the credit in that book. So very disciplined growth. So if the markets are competing a little too aggressively, we'll pare it back. And if there's opportunity, we'll grow at a slightly different pace. Commodities and Global Markets, down 31% at $1.383 billion. And as I said, the contribution from the financial market, so in foreign exchange, rates, futures, and the contribution from asset finance was solid and consistent. The asset finance portfolio, I notice, is about 8%. And in the commodity markets, where the franchise continues to grow, client numbers are up. The reason the result is down is because, as I said, in risk management income, We had lower volatility in EMEA Gas & Power. I think everyone will recall the activity levels going on there. As a result, volatility flowed over into the coal sector as well in resources and gold was quite volatile, whereas this half, also in North American Gas & Power in inventory management and trading, there was volatility that drove the commodities result. This half, particularly quiet one, but the underlying income is up, particularly on the first half on FY '22. If you look the underlying growth that was a period also with less volatility. And then Macquarie Capital, results down 28% at $430 million. It was the high $500s first half last year. Fee and commission revenue is consistent with what it was in the prior comparable period and the most recent prior period. And the market activity is picking up a little bit globally. But the big thing is that in private credit, we're continuing to invest another $1.5 billion deployed with over $20 billion now in that private credit book. We're having good experience in terms of the quality of the investment of that portfolio, which is pleasing. Offsetting that contribution is the timing of realization of assets. As I mentioned, first half last year, some particularly big equity realizations. In this half, less of them. I think we were taking advantage of the environment, particularly in the first half last year where we had opportunity to realize mature assets. So that's the operating businesses. If I could touch on the capital and funding position, our funded balance sheet remained strong. Our term funding comfortably exceeding our term assets and $8.3 billion of term funding raised in the last half and the deposits now up about 1%, as I said, overall, at just over $135 billion. Also, our capital position at 10.5 billion, a strong capital position that's down from the $12.6 billion at the beginning of the financial year where we did have the earnings for the first half, but offset by the second half dividend last year and $1.7 billion of capital absorbed in the businesses. Across the board pretty much, as you can see here, Macquarie Asset Management grew a couple of hundred million into seed investments and core investments to grow funds, co-investment, BFS, ongoing absorption of capital at the usual run rate for growing the loan books. Macquarie Capital, ongoing deployment in private credit and also some equity investment. CGM returning, releasing a bit of capital because credit exposures were lower, driven by movement in commodity prices, and the center also, corporate absorbing capital for regulatory requirements. But with that, we have still very strong capital ratios well above our 3 regulatory minimums. And given that very strong capital position, our Board has approved a buyback of $2 billion, an on-market buyback. And that on-market approach will give us flexibility to be able to respond to market conditions or business opportunities as we see them. The Board is comfortable that with the surplus capital that we have absorbing the capital return, we'll still have a prudent capital position and ability, given our conservative balance sheet settings, et cetera, to navigate the current economic environment.and also be able to support business activities as the team see opportunities. And the Board has also declared a dividend of $2.55, 40% franked. And there's, under the DRP, [ not planned ] to be a discount consistent with the approach of the capital return. And before I hand over to Alex, the last thing I wanted to touch on is that we were very pleased to announce today that our Board has appointed Wayne Byres as a bank-only Nonexecutive Director, joining Ian Saines, David Whiteing and Michael Coleman. And with Michael's expected retirement by mid-2024, he will make the third of the bank-only nonexecutive directors. And I think you all know Wayne is the former Chair of APRA but also has global experience in his thoughtful roles. So with that, I'll hand over to Alex to take you through in more detail. I'll come back and speak about outlook, and then we'll be happy to answer questions.

Thanks, Shemara, and good morning everyone. As Shemara said, I'll now take you through a little more of the detail of the financial results for the first half and I'll touch on some other aspects of financial management as we move through the presentation. Starting with the income statement, you can see operating income for the group for the half was down 8% on the first half of last year. As Shemara mentioned, the principal drivers of that were a substantial reduction in investment income, down to $366 million from $1.55 billion in the first half of last year after a really strong period of realizing the first half of last year. That was partially offset by a $403 million reduction in credit and other impairment charges coming through the group for the first half. And you can see, pleasingly, net interest and trading income, and fee and commission income both broadly in line with where we were for the first half of FY '23. Expenses for the first half were up 6%. And you can see, primarily increases in employment expenses and related expenses from the increase in average head count across both the central services areas and the operating groups, partially offset by reduced share -- profit share expense coming through the group, consistent with the underlying performance. You can also see a step up in the other operating expenses, and that largely reflects the investment we're making in data and digitalization across the group coming through those operating expenses for the first half. So operating expenses up 6%. Income tax, effective tax rate at 29.3% versus 24.2% in the prior corresponding period, and that reflects the geographic composition of income and the nature of income coming through the group for the first half. As for bottom line for the group, $1.415 billion, down 39% on where we were this time last year. If I now touch on the operating groups. Obviously, as Shemara mentioned, there's little bit of noise coming through the Macquarie Asset Management P&L for the first half. The end result, $407 million, down from just over $1.4 billion last year. And you can see the primary movers there in the center of that bar chart. You can see $831 million less contribution from the disposal of green investments through the half. Our people recall we had a very significant period of divestment in the first half of '23. We just divested some waste-to-energy assets in the U.K., Polish onshore wind assets, and we also divested the first of our wind farms in Taiwan. So that was coming through the first half. We didn't see that repeating in this half. I think consistent with the long-standing practice we've had in relation to this activity, a lot of the expenditure in relation to development and OpEx actually goes through -- in terms of those green investments actually goes through the P&L. And so over the course of the half, we had nearly $100 million step-up in DevEx and OpEx associated with the investment we're making in Corio, our offshore wind platform, and Cero, our global European solar platform service, coming through the P&L The other thing you can see is a step up in operating expenses, $103 million. There's a couple of drivers there. FX, as Shemara mentioned, was a headwind with the weakening Australian dollar. The other thing we had in the first half for MAM was a provision associated with the legacy matter that we had to take in the first half. So that's the sort of noise coming through the P&L. On the other side, obviously, from a base fee viewpoint, really pleasingly, we had a 13% growth in base fees on private markets, and that reflects the significant period of raising that we saw in Macquarie Asset Management over the last 12 months and investing the team's been able to do in a whole range of assets around the world. Partly offsetting that was a $45 million reduction in base fees associated with our public investments business, and that mostly reflects the asset allocation that we've seen, consistent with other asset managers around the world where people are shifting equity portfolios to fixed income portfolios. From an asset under management viewpoint, you can see $892 billion, so up 2% on where we were at 31 March. And within that figure is $35 billion worth of dry powder across our real asset stable of funds. A record level of dry powder, obviously, consistent with significant raising we saw in FY '23, $38 billion, and the $8 billion of raising that Shemara mentioned earlier in the first half in the asset management business. Now we added an additional slide. There's obviously been a lot of commentary in relation to the economics of renewable asset development around the world. So we thought it would be useful just in the context of these results to actually add some -- an additional slide here to give a little bit of context to what we see going on around the world. So firstly, on the left-hand side, you can see -- on the bottom of the left-hand side of the graph, you can see what's going on in terms of short-term capital expenditure volatility, particularly in wind. So in recent times, we've seen a step-up in the CapEx associated with wind development. That's largely related to commodity price increases that we've seen through the back end of the last couple of years, together with the supply chain disruptions that emerged through COVID. That's normalizing to some extent in the very recent term. You can see solar, by contrast, has basically been continuing its long-term trend. But overall, I guess, in the top left-hand side, you can see the long-term CapEx both for wind and for solar development continuing to head down, which is obviously a reflection of the economies of scale as we start to get more renewable energy assets developed in both solar and wind all over the world. On the second -- on the right-hand side of that slide, we've got 2 graphs there that are showing you what's going on with power purchase agreements in the corporate sector, both in relation to solar and in relation to wind. And you can see across a whole range of markets around the world where we're operating, you can see a pickup in PPA prices over the near term. And the reason for that, obviously, they're reflecting inflation. They're reflecting increase in wholesale electricity prices in lots of markets around the world. And they're also reflecting the fact that there's a significant demand for renewable powers. Lots and lots of commitments have been made by corporates around the world to actually source power from renewable sources. So all that's coming through on the demand side, and you can see that reflected in the prices. Obviously, this price reflection is counterbalancing some of the CapEx inflation to preserve project economics on transactions. In our own case, we've obviously seen these dynamics play out in a number of markets around the world. One thing I want to draw everyone's attention to in relation to our offshore wind platform, Corio, we were pleased just recently to be awarded the opportunity to -- in partnership with Total and a local investor, to develop a 1.4 gigawatt offshore wind farm just off the coast of New York in the United States. And indeed, in that auction process, we were able to secure a material step-up in the offtake price from the prices that were available for people who bid in prior rounds. And the contract that we were awarded allows us to adjust the offtake price for the cost increases on certain components that occur between now and when we actually reach the decision to commence the development of the project. So the market is adjusting to the underlying factors to enable the development of renewable energy, and we're seeing that in lots of markets around the world. Obviously, more broadly, there's -- there remains significant capital requirements to fund energy transition and really strong demand for investors, albeit the current environment is providing some challenges from, as I said, inflation pressures, increasing interest rates, one of the things we talked about before, the shortage of talent to develop these assets around the world, and obviously, the supply chain challenges. We remain confident, obviously, in the significant embedded value in our own portfolio, and we might talk about that over the course of the morning. And as Shemara said, we're really pleased with the progress the team is making in moving this activity from a balance sheet activity, which we had in Macquarie Capital, towards that fiduciary offering in Macquarie Asset Management and in particular, reaching initial close of our Energy Transition fund in October this year. So turning now to Banking and Financial Services. The second of our annuity businesses, another strong result, up 10% on where we were this time last year. And you can see that coming through all the core verticals, if you like, in BFS, you can see mortgages up $47 million in terms of the contribution. That reflects a growth of about 14% in average terms in the mortgage book. Business banking, up $85 million. You can see a growth in the volume of lending. You can see growth in the deposits that are supporting the business bank and improved margins that we're seeing come through there. And we're also seeing a growth of $57 million in Wealth Management, which is both improvement in margins we're seeing come through there, together with the growth on funds on platform, up about 10% from where we were this time last year. Partly offsetting that is the increase in expenses, and we continue to invest in BFS to improve the customer offering, the digital, the data capabilities to improve the customer offering, and we think that's paying dividends in terms of how the business is developing. And we're also upgrading the system or high-grading the system to ensure that we can meet the regulatory and compliance -- important regulatory and compliance obligations that the Bank and Financial Services business face. So we're seeing that come through. That expense is really reflecting of headcount. So the head count is up, and we also had salary increases coming through over that period of time as well. The underlying drivers, from BFS' perspective, all basically moving in the same -- in the right direction. Obviously, car loans are down a little bit again, although the decline is slowing, which is really encouraging in terms of what's been done for product development there. I think exciting in this half, we've seen a big pickup in the business banking loan activity, up to $49.6 billion from $30 billion at 31 March. That's good to see the work the team is doing in digitizing and upgrading that capability and the offering we have for customers in the marketplace. In terms of maybe turning to the first of our market-facing business, now the Commodities and Global Markets business, another really strong half from CGM. And I guess the point that I'd make here is that we talked a lot about the diversity of the franchise in CGM. And I think the result that we're seeing coming through this half really reflects the diversity where -- or the benefits of the diversity that we've talked about in the past. We talked earlier in the year about the fact that CGM in the first quarter, in particular, experienced more subdued trading conditions, particularly in our North American Gas & Power business, albeit the client franchise remained quite solid through the half, and market conditions toward the back end of the half have improved materially from where they were in the first half. In terms of the drivers of the result, you can see commodities income down $421 million. That was down 24% from the first half of FY '23. You can see the big driver there, Risk Management income down $390 million, which is really about 25%. And mostly that's coming through our European Gas & Power business and our Resources business. Both of those segments of CGM had very strong first halves of '23, consistent with the underlying volatility we're seeing in the business. Despite the drawdown in terms of the contribution in this half, the underlying client franchises in both of those aspects of CGM continue to perform very well and grow really well into the future as well. Another thing we saw was a $55 million reduction from inventory management and trading, again, more subdued trading environment, as we talked about, partly offset by the timing of income recognition associated with transport and storage contracts coming through the P&L in the first half. Our financial markets, down $27 million or 5%, a really solid contribution again against a very strong comp in a comparable period. Of course, people recall that was the big step movement up in interest rates, in particular, the impact that had on both interest rates and currency movements that obviously was coming through in the first half. We didn't see that in the second half. And the second [Technical Difficulty] think the growth -- the improvement in the franchise and the growth of the franchise over the course of the last 12 months. The Asset Finance business continues to produce a solid result. And we've been able to grow our exposure to that market through increased lending to shipping and TMC in a range of markets around the world. As Shemara mentioned, costs were up $302 million for the half, so it's quite a big step-up in cost, about 24% step-up in cost. That really reflects the investment that the team is making in data to support the business in digitalization of the business, both to support the growth of the business and the growth of the franchise, but also again, the investment we're making to support the regulatory and compliance obligations that are associated with the global commodities and markets business. In terms of the underlying drivers, again, this is a slide that hopefully everyone is pretty familiar with. Now we've had it for some time. So if you look on the operating income side on the left-hand side, you can see that the vast majority of income coming through the first half of '24 was the underlying client business. Obviously, a smaller contribution from inventory managing and trading consistent with the more subdued environment. Interestingly, if you look at that, particularly on the commodity side, if you look at the commodities income coming through for the first half, it's actually up 17% on the first half of FY '22, which again is a reflection, I think, of the growing franchise and the customer franchises coming through. And you can see that customer franchise reflected in the client numbers on the top right, which continue to grow. And of course, what we have seen from a capital view point is capital coming back to the group as activity levels have come down and commodity prices have come down. So most of CGM's capital is exposed to credit, and you can see that credit capital reducing with both activity and with actual commodity prices. Market risk continues to represent a relatively small portion of CGM's capital. And in fact, a slightly smaller portion than we saw in '22 and '23, again, consistent with the environment that the business has [Technical Difficulty] from Macquarie Capital, down 27%. And you can see the drivers there in the middle of the page. Investment-related income down $247 million. Again, the first half of last year was a really strong period of realization in Macquarie Capital. We were able to take advantage of that. We didn't see that repeat in the first half of this year. That was partly offset by growth in the contribution from our private credit book, up $195 million. That private credit book, in terms of average drawn balances, has grown by $3.8 billion. The other thing we didn't see in this half was the losses we took on our DCM underwriting, positions that we saw coming through the first half of last year. We obviously didn't see those repeated. So that's coming through that net income activities -- net income line as well. Our fee and commission income, down slightly, down 5% on where we were last year but quite a solid result, particularly M&A. Capital markets have been a bit weaker, and we've actually seen equity volumes come up in Macquarie Capital. So a little bit lower than where we were last year, but quite a strong result and the pipeline looks quite good there. And operating expense is consistent with other parts of the organization, up, largely reflecting the investment the team's making in technology and infrastructure to support the global platform. Pleasingly, from a capital viewpoint, you can see the capital we have alongside Macquarie Capital, up from $4.2 billion to $4.7 billion. It's good, obviously, in this cycle, we're pretty encouraged by the investment the team's making. We've been able to grow the private credit book, and you can see that coming through the investments over the period. The other areas where the team has seen opportunities, really in relation to digital infrastructure, things like fiber networks that the team has been able to grow over the course of the last 6 months, government services in the United States, business services, those areas that have been a core component of Macquarie Capital's activities for a long period of time. We saw them -- the teams are opportunities to grow our exposure. And obviously, that capital, both in the private credit book and the equity book underpins -- we think underpins the story going forward for Macquarie Capital. So we're really pleased with how that book's actually performing. Now turning to some of the other aspects of the financial management of the group, turning to the cost of regulatory compliance and technology spend, another chart that hopefully people are familiar with. Just a few things to point out here. In terms of the reg and compliance spend, you can see that $622 million in the first half, now that's up 31% on where we were for the first half of 2023 Interestingly, it's only up 9% on the expenditure incurred in the second half of '23. So you can see the growth rate actually slowing. And so we pointed out, one of the things that was a significant piece of work in the Australian marketplace was the introduction of the unquestionably strong regime, the new Basel III regime. That's obviously now happened. So that project has drawn to a successful conclusion. And so some of that is starting to play its way through into the cost of regulatory compliance. The other piece on this page which is worthwhile drawing out is the technology spend. I mentioned it a couple of times on the way through. Technology spend is up about 18% on the prior comparable period. Interestingly, one of the things that is happening, though, is that the proportion of our technology spend that we're spending on change the group has actually increased from 22% back in FY '18 right up to 35% today. And a lot of that change is obviously improving the capabilities of the organization, which we think will pay benefits into the future. The balance sheet continues to be strong. We raised just over $8 billion in the half. Most of that raising was done in the bank and the [ wide ] average life of the funding at a 4.4 years, I guess consistent with the approach we've taken for a long period of time, and we've continued to try and diversify the owners of our paper all around the world, and we've been successful over the course of this half in doing that. From a deposit view, deposit growth, obviously, this half was a little less than we've seen in prior halves. I mean people will recall, I think, in FY '22, we grew deposits by $33 billion. So we're obviously ahead of that -- the curve in terms of the competitive environment for deposits. It is very competitive out there. We've obviously slowed our growth in deposits over the course of the half, consistent with the slowing growth that we've seen on the asset side in BFS. The one thing I would say is that the team continues to broaden and diversify the deposit products in the market and continues to upgrade our capabilities, particularly our digital capabilities, to capture those deposits for customers and make sure the experience is as good as it possibly can be. The loan books for the period were up 6%, mostly that's BFS on both the business loans and the home loans. And you can see at the bottom of that page, the growth in Macquarie Capital's private credit book. On the equity investment side, you can see up from $9.6 billion at March, up to $11.4 billion. The main driver there is the green energy movement you see in the middle. And there's a couple of things going on there. Firstly, we were able to complete our project at one of our offshore wind projects in Asia. So we were able to complete that investment, which was good. So that's now reflected on the carrying value of the balance sheet. We're also continuing to grow. We have a significant solar platform in, again, in Asia, in India that we've been able to develop over the course of the half, and money has gone in there. And as I said before, we're really delighted in partnership with Total and the local partner to be awarded the opportunity to develop a large offshore wind fund in the U.S. And again, the seabed lease for that is coming through that value at the half. We also saw opportunities for Macquarie Asset Finance. The air finance at least was able to acquire a portfolio of aircraft, and some of that's coming through in this half. And as I said before, Macquarie Capital growing its investments in digital and technology investments in a number of markets around the world. From a regulatory viewpoint, the Australian regulatory environment continues to evolve. The main focus over the next little while will be in relation to liquidity, interest rate risk and, obviously, the consultation paper that APRA has released in relation to additional Tier 1 capital. Obviously, we will participate in those consultation processes and we think are well equipped to manage any changes that might arise from any of that. There's obviously no update to disclosure in relation to Germany. The CET1 ratio for the bank continues to be very strong at 13.2%, as does the LCR position and the liquid asset position. And finally, just in relation to capital management, as Shemara mentioned, the Board has elected to leave the dividend reinvestment plan on at no discount, and we'll be buying shares on market to satisfy that any applications under the DRP in relation to the on-market share buyback will go through a process of getting the docs cleared by ASIC, and then we'd anticipate that we'll be in the market buying shares toward the end of the month. So with that, I'll hand back to Shemara. Thanks very much.

Thanks very much, Alex, and I'll take you through the outlook, starting with short-term outlook. And as usual, we'll go through this by each of our 4 operating groups. So starting with Macquarie Asset Management. As we've been discussing, the franchise is growing nicely. So we expect the base fees to be broadly in line, but in relation to the net other operating income, subject to market conditions, we expect that to be substantially down on FY '23, principally due to the timing of realization of the green energy investments for the reasons Alex and I have been explaining. And we expect the net other operating income for the second half of 2024 to be broadly in line with the second half of 2023 financial year. Now Banking and Financial Services, we are seeing ongoing growth, as we said, in the loan portfolio, the platform volumes and the deposits, but the market dynamics will continue to drive margins there. And we also expect to see ongoing investment in our cost base in technology and in regulatory compliance as we continue to grow that business. Macquarie Capital, subject to market conditions, we expect the fee revenue from the transaction activity to be broadly in line with the prior financial year, FY '23. Investment-related income, we're expecting will be broadly in line with the first half of FY '24 in the second half, where we expect to see increased income from the private credit loan book, but partially offset by lower revenues in terms of realizations of equity investments, but we're continuing to deploy balance sheet in both debt and equity there. And then in Commodities and Global Markets, solid contribution continuing from the financial markets and the Asset Finance business. In the commodities business, we had, of course, an exceptionally strong year in FY '23, partly contributing to the buyback the Board has approved. So what we can give in terms of short-term outlook is that we expect the commodities income to be broadly in line with the prior year FY '22, and Alex has shown you some data showing how the franchise grows from FY '22. And that's, of course, subject to volatility, which could create market opportunities. And I'd note we're exposed to those across a range of commodities, energy ones, but also hard commodities-based, precious et cetera, agri commodities. For compensation ratio and effective tax rate, we expect those to be broadly in line with historical levels. [Technical Difficulty] factors, which include things like market conditions across global economic conditions, inflation and interest rates, volatility events and geopolitical events. Also, the completion of period-end reviews and completion of transactions, the geographic composition of income that provides foreign exchange impacts, and potential tax or regulatory uncertainties. And given that we continue to maintain, even after the announced buyback, a cautious stance with a conservative approach to capital funding and liquidity, that should position us well for all environments. For the medium term, we think we remain well positioned to deliver superior performance given, as I mentioned right at the beginning, the diverse [indiscernible] range of businesses in which we have deep expertise, being a customer-focused digital bank here in Australia, our global asset manager, our Global Commodities and Financial Markets business in Macquarie Capital advisory and principal investment business supported by ongoing investment in our platform, our strong and conservative balance sheet and our proven risk management framework and culture. And over the last 17 years, you can see on that slide, that's helped us deliver, from the annuity businesses, a 22% return on equity, 17% from the market facing and, post our surplus capital of 14%, net return on equity over the last 17 years. But in this particular period, for the reasons we've been discussing, the annuity businesses were at 11%, the market facing 13% and the net return was 8.7%. So with that, I will hand back to Sam to take questions. I'd note we have most of our group heads and Stuart Green, CEO of Macquarie Bank, in the front row here. And I think Ben Way and Michael Silverton, the group heads of Macquarie Asset Management and Macquarie Capital, are available online. And our Chairman, Glenn Stevens, is here as well and lots of hands up. So I will hand over to Sam.

Great. Thanks, everyone. So we'll start with questions in the room and then we'll go to the lines. Let's start with Ed, Ed Henning.

A couple of questions from me. Can you just start on a little bit more why you're so confident in the asset realizations come through in the second half. There's obviously a big market bid/ask spread at the moment. And then also within that, you talked about the core renewable fund. How much of the realizations are actually going to go into seedings in the fund, for the first question, please?

Yes, I'll give an overall comment and let Alex speak as well. But I guess starting with your second point first because it's related to the first one, I think, in terms of confidence we have as to why we think in the portfolio of realizations, we think we can achieve what we want, I would first say, in Macquarie Capital, I think, Alex, we're pretty much done in terms of the realizations we're looking to do. So the fee levels Alex showed you for the last 3 halves are running pretty consistently. And even on the fee levels, we have good visibility in terms of the book for the second half subject to market conditions. The realizations as well, there's not a lot to be done. It's principally driven by private credit, and we're pretty much done. In Macquarie Asset Management, to your second question, we have a lot of green energy assets to realize. And I know the market justified we would have questions seeing some of the write-offs that have been happening recently. I might take a moment to talk about those, but Alex showed you about a $2 billion dollar book. Part of that is being held for the core renewable fund, part of it that is more mature and has a large gain accrued in it will be realized to third parties because usually when we're seeding funds, we don't want to have a question afterwards as to whether we sell it at too big a profit. So the more mature assets, we will be selling externally. I think the important point to note is that our portfolio, we feel comfortable, is very different to the situations where these large write-offs have been announced recently. And I'd say the write-offs have all been happening in relation to assets that unfortunately, were bid in this most recent period where they agreed to offtake in sort of 2021, and the prices have gone up a lot in the period since. And we happily don't have assets that are impacted by that, or out of the $2 billion, a very small portion. I think about a large portion of it, 40% is solar, which is not being impacted, 60% is wind. Out of the wind assets we have, there's a couple of large ones which basically have already reached operations and are making profits on the offtakes that were agreed, that were agreed well below these problems happening and so they're already generating good earnings. We have good interest in the asset, and that gives us comfort. Just as examples, and I'm sure this is a question on everyone's mind so I might spend a little bit of time giving a bit more color on this. But I think we've had a few examples in the U.S. where there have been problems. Orsted has pulled out of some New York offshore wind projects. BP and Equinor pulled out of a joint one and Avangrid pulled out. We were just awarded another round of -- with Attentive, which is a Total JV. I think NYSERDA, which is the New York authority that awarded them, has come out and said they awarded USD 145 in terms of the pricing for the offtake there on average across the 3. Orsted has announced that they had prices of $84 and $94 on the PPA, said agreed. They've also said costs have gone up 40% since they bid those. It was the same with the BP-Equinor project. We are aware of the PPAs. I don't think it's public. But I think they're broadly in line with those kind of 2020/'21 numbers, same with Avangrid. The -- Avangrid stepped away for about $50 million. Equinor and BP have taken a few hundred million. Orsted has taken several billion across a lot of projects that were impacted by that. Also, in the U.K., we've had -- I think it was Vattenfall has walked away from a project, and there's been no bidders in the latest round of trade bidding. The latest round of bidding we can talk about, and again, we're aware of the Vattenfall price, I don't know if it's public, but the latest round of bidding was at GBP 44. And when the bidding started, so we have East Anglia ONE as a project, as an example, that price was about GBP 140, came down to about GBP 120. It's dropped by about 70%. There were rounds done at GBP 37.5 and unfortunately for the people that did that, the prices went up a lot and they were caught in this period where now when you're bidding the new ones, we're aware prices are going up, we're bidding higher prices but we're also bidding protection for increased prices, and that's what we're doing in our recent bids. So happily, we don't have any that were caught by that unfortunate period. The other thing I'd note is that the U.K. have said they want 50 gigawatts of offshore wind by 2030. They're at 20-something. They're going to have to step up the prices. And the alternative wholesale price is volatile, but it's currently sitting in the 80s. the forecasts are for that to go to 90s and 100s. So they can afford to put the bidding up. It's been amazing in the U.K. how they bought on offshore wind and brought the price down so much, but they can still afford to pay a bit more and bring on offshore wind projects. We're going to continue to be disciplined in whether we beat or not, as well others, I expect, and the same in the U.S. The Biden administration has said they want 30 gigawatts by 2030. They're running at current forecast at a max of 21 even with the IRA. So I think what this has done is hopefully given a bit of a wake-up call to people that are putting these offtakes in place, that if they're going to get the supply, they're going to need to offer pricing that will attract private capital. And we are in the situation where we haven't actually bid into those -- or we've got one very small one. I think that we haven't put a lot of money into it and we're assessing whether to go ahead with it or not. The other thing I would note, and probably, Alex, not leaving a lot of airtime for you to add to this, but is that our approach is we're expensing all our OpEx, DevEx. We're not capitalizing. Alex showed you that we've got a triple-digit million that we're expensing. So we're very disciplined about what we will take onto the balance sheet and we're provisioning as well if we don't see the opportunity. But I guess, apologies for the long, detailed answer, but that hopefully gives you some sense of why we feel comfortable that the things we're looking to exit to third party, we have reason to believe that these are operating assets with good PPAs earning money and we're seeing interest in them. We've already sold a portion of East Anglia. Formosa 2 in Taiwan is another one. And then the ones that are being held for the fund, their earlier stage, we're pretty much transferring them at cost plus a small markup as we've always done. When we seed funds, we don't look to make huge profit on transferring them to the fund because the bigger opportunity there is to create the big fiduciary business, and the trust element with our investors is super important. So we want them to have a very happy experience always, but especially with the first fund.

I would just -- maybe just I'll add just a couple of points. I mean Shem obviously covered it really well. The two other things I'd say is that we had obviously not anticipated a significant period of realization in the first half, which is what's happened. We were expecting a better result in the second half, which is obviously what we've said in terms of the outlook. Often in these processes, it takes a period of time, so actually preparing the assets for sale. And often, they're obviously multi-month periods, so multi-month processes. So we're obviously well sort of advanced on some of those processes now, which I think as we look through the portfolio, we've obviously got some visibility as to where we think some of those assets might go to third parties and obviously some visibility around the fundraising environment. So I think that that's giving us the confidence obviously to give a view as to what the full year outlook might look like. You should -- again, some background a bit, I mean obviously, we've been in the business of developing and selling these assets for a long period of time. So a lot of the people we're actually trading with are people we've traded with in the past. So I think that also gives us some confidence in terms of what we're going to likely have seen in the second half. The one thing I would say, obviously, in the outlook, we obviously said subject to market conditions. So to the point that you're making. And finally, we don't want to sell those assets at less than their fair value. So we don't feel like we need to sell them. We feel like they're good quality assets. We want to get the right result for shareholders in doing that. Market conditions are a bit uncertain. They're not just uncertain because what you're seeing in the renewables market. They are obviously uncertain in terms what's going on with interest rates and a whole range of things. So that's why we added the subject to market conditions. But we've got a fair bit of experience and a fair bit of visibility on what we see. Obviously, at the end of the day, these are complex processes and they take many months. And so we're working hard, and we'll see how the second half plays out. But I think it's the sort of planning for that process and the fact that we always thought they'd be second half of the year which gives us confidence in terms of the outlook.

I would just say one last thing, which is that this is not the only business we do. So some of the people that have had issues, they have to be bidding all the time because it's their core business. We have a very diversified book and as our team, so we're pretty disciplined about whether we're giving capital to one part of the business or not depending on what's going on because we have opportunity to invest in other areas.

Just to clarify from what you said, obviously, you invest the fund [indiscernible] -- sorry? Just to clarify what you said, the majority of the gains, it sounds like going to third party from the -- other than going into the fund...

Maybe. It's a combination of both. I mean so to the point that Shem was making, obviously, a lot of those assets that are going to go into the fund, we've obviously, consistent what we've done elsewhere, we've spent development capital and we've expensed that through the P&L. So we obviously, we'll see some recovery coming out of that. But in terms of the ones that have big gains on a carrying value, they're typically going to third parties. So it's a combination of both.

And just sorry, just one more question. Today, you talked a lot about expenses. Can you just talk a little bit more about the outlook, the continued need to investment and how we should think about expense growth going forward?

Yes, sure, and it's probably a question that others are going to ask as well, so I'll cover it again and people have further questions. Basically, we've been investing a lot in a range of areas over the last several years. And I'd say since FY '22, our headcount and our costs have been going up a lot. A chunk of that is revenue-driven. So Macquarie Asset Management bought Waddell & Reed [indiscernible] et cetera. There was a big revenue driven investment there. BFS create -- a lot of what we're doing is investing in our digital platform. So revenue driven, a lot of it in technology because we're trying to upgrade our platform to be more competitive. And then obviously, regulatory compliance is the third big area. We've been investing a lot, and Alex gave you some detail on that, over many years. As a highly regulated global organization, our license to operate and having that available for our franchise to operate areas like CGM, we need to make sure we're front-footed. And frankly, that's all stepping up. We just invested a lot in net zero reporting. Now the world is moving to, in addition to measuring and reporting on emissions, looking at biodiversity and nature-based reporting, so all of this is part of license to operate in the world today. We are still very focused on return on investment. And I think over FY '22 and FY '23, there was less focus from investors on the costs going up because the revenues were going up so much. We certainly have been focused on it all along. And so we're looking at where it's revenue driven, are we getting that benefit where it's tech-driven? Often there's benefit because not just the revenue we drive, but we'll take costs out through automation. And we've seen some of that happening in BFS recently. And then the rig spend is spend we have to do to make sure we are hopefully delighting our regulators ultimately by delivering what they want. Now our headcount has gone up from about 17,500 people in FY '22 to over 20,000 people. And again, some of that is buying the businesses we've bought, but there's been a lot of investment in tech rig, et cetera. That should hopefully start to now see benefit to come through, for example, and I don't know, Greg, if you want to talk about it, but in Business Banking, you're doing a lot of investment now in systems in the home loans. You've said you've got the front end well covered, but the middle and the back need investment, and this drives greater return. Do you want to speak to that? But I guess the short answer, I said we're very focused on what the return on the cost investment is and we're comfortable that these investments we're making are driving our ability to deliver better revenue. Albeit in this period timing factors have reduced the revenue, we should see ongoing revenue. Apologies, Greg, do you want to briefly comment, because it's a good example of where we're investing OpEx?

Thanks, Shemara. It is a great example. We have been investing a lot and you've seen that play out in the home loans business where there's been significant -- sorry. We've been investing a lot in the home loans business, and you've seen the growth come over years in that space, but we continue to invest. An example in the last year or so has been variable rate reviews, which have been a big factor in the market, and through investment in technology there, our productivity has improved over fourfold. So 400% improvement in productivity, and that has meant we've been able to achieve savings in that space. So we continue to invest. We would like to see our home loan volume continue to grow over time. But as you said, in business bank, we've made some significant investments, particularly in the originations capability that has been pivotal to the success in home loans, and we haven't had a retooling of the origination capability in Business Banking in probably 20 years or something like that. And so we've invested in the origination capability. You've seen that start to give some dividends already, and Alex talked about the volume growth in the last 6 months, but we only have a small proportion of clients yet on that newer technology. Likewise, in Business Banking, we have clients now on a contemporary Internet and mobile banking suite of products, which again will bring dividends to us in terms of the servicing of those clients. And now we're also investing in our wealth platform, which again is an older platform there because it's been around over 20 years, and we expect to see efficiency dividends come through in the next couple of years there.

It's a bit of a timing gap always. So I might just let Alex comment. Nicole is here in the front row as well who can comment on our investment in the platform, if needed. But for now, why don't you just comment briefly and then I'll see if we have questions...

I'll just go on briefly, not much to add, I think. I mean obviously, one thing we are seeing, Ed, is we're probably seeing a slowing growth in the headcount. And you can see that just if you look period-on-period, so you're seeing a bit of a slowing growth. And that obviously reflects the big step-up we've made in the last 2 or 3 years that both Shemara and Greg spoke about. So we had a big step up to not only improve the capabilities from a data and digitalization perspective, but also importantly, to meet the regulatory and compliance obligations that the organization faces in lots of markets around the world. So that's slowing a little bit. I think the other thing we've seen probably is some of those regulatory compliance projects, unquestionably strong was Basel III here was a very significant project for the whole industry. Obviously, we've now implemented that, so that's helpful. Some of those larger projects are coming to a conclusion. And I think the other thing we've seen, and we talked a little bit about this before is that there's clearly some labor constraints over that -- particularly over that COVID period where in order to get people with the capabilities that we want, we obviously needed to pay significant amounts of money for those people. Some of that pressure's come out in the market. So we're seeing -- we're sort of slightly benefiting. I think the broader point that both Shem and Greg are making is that in terms of digitizing the organization and making the [ cape of the ] organization data centric, we really think, in terms of future proofing it and enabling the growth of the business going forward, those investments are really, really important to the medium term success of the organization. So we intend to keep investing.

And Nicole's got a mic and both HR and [ comm techs ] is under Nicole. So did you want to just briefly comment at all on [ people ]?

I'll just add a couple of things. I won't -- certainly won't repeat anything that's been said. It's a huge investment in data platform, both centrally, also in MAM and CGM. We also are doing a lot of work with CGM modernizing their risk systems. MacCap, we're doing a lot of work, refreshing their equities platform. And in terms of building a scalable operating model, now we have less than 10% of our platforms in on-premise infrastructure. So -- and we're at the stage now where we're starting to decommission legacy data centers. So we've really been investing heavily and we're starting to see the dividends.

Apologies, everyone, for those long answers, but we might take the follow-up.

Well, we'll start with the sides here. John?

John Mott from Barrenjoey. A couple of questions if I could. The first one, you talk a lot about the dry powder that you've got. I think it's $35 billion that you've got within the funds that you're looking to deploy. Yet at the same time, you come out and you just announced a $2 billion buyback, which would suggest that you don't have the opportunities to invest shareholders' money for principal or other opportunities. So usually, when you're trading at 2x book, the market's wanting you to continue to deploy to continue to grow. So [Technical Difficulty] of other people's money. You're happy to deploy it, but you don't think you've got opportunities for the $2 billion of your own money.

Yes. Well, the $35 billion, as a percent of our equity under management, is just growing proportionately. So our equity under management has been growing with that in line as well. We typically have a 4-year period to invest the equity in our funds, and we're pretty disciplined about making sure it gets invested in Macquarie Asset Management. Maybe you saw we invested GBP 8 billion just in the last half, a finding opportunity and pursuing things as they see opportunity to invest. As far as the balance sheet is concerned, we have ample to support what we're seeing from our businesses. And that for us is very important because we do get lots of opportunities still shown to us. And you'll have seen even over this half, we've continued to deploy capital. What we're saying is we have even more than we need to support the ongoing investment and particularly after the exceptional result we had last year, which raised our capital position quite a lot. And given looking forward the earnings we see from the business after the dividend, continuing to grow our capital position, we feel we're sitting on a surplus now that's well above what we need to support our teams in driving opportunity, and the responsible thing to do is return that surplus to the shareholders. We have 2 options if big opportunities come up beyond what we're seeing anyway. One is to slow this down because it's an on-market approach and we can pivot any time we want. And the other, of course, is to come back to our shareholders and ask for capital if we have something particularly compelling. But our normal rate of investment -- Alex, please feel free to comment -- but we feel we have -- the Board looks at making sure we have a buffer of capital available for investment to do those one-off things that come up. And even after that, we're sitting with surplus capital. So we think the responsible thing to do is give that back to shareholders [indiscernible].

Just to add to that, maybe just a dimension in terms of what's going on with the thinking, John, obviously, we've got $10.6 billion worth of surplus over reg minimum. So that's the first thing. And obviously, not all that's available to support the growth initiatives of the group, but a good portion of that is available to support those initiatives. The reason we're sitting on such a high surplus, if you went back to '21 when we raised the capital, from that point on, '22's earnings were roughly $3 billion -- sorry, $4.7 billion and '23 were obviously $5.2 billion. And we made the point along the way that -- that period of time, a few things happened. You had really good conditions for realizing assets. So we saw really strong realization in MacCap. We saw really strong realization in the great investments portfolio, particularly at the back end of '22 and the first half of '23. And CGM's business through that whole -- really through 18 months to the back end of last calendar '22 had really strong conducive conditions, particularly in energy markets, and there are a whole range of factors that were contributing to that. But more broadly across CGM, really strong results. So the consequence of that meant that we earned superior returns in both '22 and '23, $4.7 billion and $5.2 billion. So as we sat down, looked at the capital now, we're saying, well, that's a lot of additional capital beyond what we expected to earn given the normal rate of growth of the organization. And it did -- it felt prudent to us, therefore, to actually announce the buyback. That buyback obviously doesn't take away from the fact that we're still sitting on significant surplus even after the buyback to support the initiatives that might be done across the group. And we feel good about that. I mean the first half absorbed about $1.2 billion worth of capital across the group, excluding the corporate piece. So we feel like there's plenty of opportunity for the team to invest and plenty of capital to support that if those opportunities arise.

Can I just follow on from those comments? So you raised equity in year '21, [ 200 bucks, I think it was ], and then you've had great profit the last 2 years. We've now come back down to, would you describe this as a more normal year? Obviously, less volatility than the extreme that we saw last year, especially in commodities. And I think we had a polar vortex even before that. So that was -- you made more money than you anticipated, and we're now at a more normally -- and from our perspective, given guidance to the second half, but when we look forward to FY '25, '26, it's pretty hard to sort of estimate what you guys are going to make, and the market's contemplating that at the moment. Is this the more normal year we should be thinking of the model from this is a more realistic year after 2 extraordinary years?

Yes. I mean I'll have a go first, I suppose. The way I would think about it is, firstly, to organize it, we think in a medium-term sense. So what we're trying to do is grow medium-term sustainable franchises that have a unique proposition in the market that's attractive to the customer base. So if you think about Greg's world, we've obviously gone from 1% share in the mortgages to 5% share. We're still 1% of the business bank. We're slowly but surely growing a digitally-enabled financial services business that we think is attractive to customers. We're growing deposits. We're growing deposits to continue to grow that franchise. We think there's a long runway in that franchise. From an asset management viewpoint, we're now nearly $900 billion of assets under management. That's obviously a record amount of assets under management. That assets under management, we think, and the superior position we have in infrastructure, to cite a good example, and renewables, these are long-term secular trends that we think we're well placed to participate in. From a CGM viewpoint, we've talked a lot about the customer franchise, and we've given you those slides to talk about the customer franchise growing in a whole range of different markets, Macquarie Capital growing the private credit portfolio or growing the equity. So what we try and do, from a management viewpoint, we're not trying to forecast the next 6 months or the next 3 months. What we're trying to do is really trying to say, are we -- is the organization positioned well in structurally advantaged sectors, and we think the answer to that question is yes. I mean obviously, what we did say, and we're very clear about this, John. Obviously, last year, we talked about the exceptionality of the conditions. Those conditions were exceptional in '22. They continued into '23. And there were a whole range of circumstances which gave rise to that. Energy markets, we talked about. They're also great opportunities for us to realize. That allowed us to outperform what we expected to do, but what we're really trying to do in the medium term is grow the franchise. And so that's the question that I guess, yes, you all need to have a view on.

Great. We'll start on this side, and then I'll come in that side. John?

John Storey from UBS. Alex, just following up from what you said in terms of how you're deploying capital into structurally attractive markets. One of them has been private credit. I think it was Blackstone a few weeks ago, their results call just called out just changes in their expectations just around loss rates and asset quality. Is that something that you're concerned about, particularly in a potential recessionary environment in the U.S.?

Yes, look, we have about a -- private credit, we've been investing on the balance sheet. So green investments, we're just moving to the fiduciary [indiscernible] we've been doing on the balance sheet. And we have about a $20 billion book. The team that's been investing in that has been with us since before the GFC. And we've been very disciplined in patiently growing that from -- I think it was about $7 billion at that time, into more adjacent sectors and regions. And frankly, we have a disciplined approach to the expected credit loss provisioning of that, so about half the first year's margin is provisioned in expected credit loss upfront every year. We are finding that the loss experience we're having is actually very low because typically, we're going into higher cash flow businesses. They're more resilient ones. That happens to be where our expertise has been and with sponsors and partners we've known very well. So we certainly have been watching carefully to see whether there's stress coming out in that. At this point, we're not seeing it. If we were, you can be confident we will be taking that in our expected credit loss provisioning because we're very disciplined about the provisioning. So Blackstone has a much bigger business exposed to way, way, way more markets. We just have $20 billion. Very U.K., Europe focused and some portion in the U.S., but it's channels like insurance broking that we know super well.

Maybe just -- I'll just add a couple of things. The portfolio has about -- there's about 160 positions. So it's a pretty diverse portfolio. And generally speaking, and this is a long historical, I guess, affinity, this cash flow, significant cash flow generating businesses, typically be other ones where we want to lend money to. So they're generally good cash flow generators, typically good sponsors with a large amount of equity underneath them. So we feel good about the capital structure that we've invested or been part of. The other thing, as you know, I mean from an IFRS viewpoint, the ECL provisioning sort of -- it requires you to have a forward look at way things are going to happen as the economy cycles through whatever your view is of the economy. So as Shem said, we're holding about $700 million worth of ECL against that book. And to some extent, that's a view as to what the impact of the economy will be on those exposures. I mean inevitably, in the book of 160, there's obviously a few situations that are going to underperform our expectations, but one of the great things from a private credit viewpoint, obviously, is it's got -- as we've talked about before, about 4.5% running yield on it. So actually get quite a bit of running yield coming through, which obviously allows you to offset some of those losses. But inevitably, over the course of the cycle, you'll see some of those assets underperform. And in fact, in COVID, for the sake of example, we had a big exposure to [ Paddy ]. Obviously, [ dive shop ] wasn't a great place to have an exposure to in the middle of COVID. This half, we're able to refinance that. We're able to write some of that back, which is why the ECL has turned around this, so one of the reasons ECL has turned around this half. So inevitably, we have things that underperform. It's a diverse portfolio of defensive sectors, good sponsors and generates a good deal of running [indiscernible].

And the other thing, Michael Silverton on the phone. I don't know if he wanted to add comments, but he's just reminded me I should also share that it's 90% first lien, so we're doing a lot of senior secured. In terms of where we are in the capital stack, we're not covering the spectrum that other private credit managers might do. We're -- in the spreads we're getting a 4.5 to 5 post funding costs and transfer pricing. And so it's a more low risk area of private credit, I think. Sorry, Michael, did you want to add anything?

No, I think you covered it.

Maybe just on the next question is you've spent obviously a lot of time this morning talking about private assets and impact of rising interest rates. But on your more public side, which we would think is more annuity, you've obviously had outflows there. That business has been quite acquisitive over the last few years. How concerned are you about some of the trends that are emerging within that business?

Yes. I'll give a brief comment, might let Ben Way comment as well because they're all dialed in from around the world. But in public investments, we've not had flows that are materially different to market. Our performance has been driving inflows. The main area where we've had higher outflows was in relation to the Waddell & Reed acquisition where we bought that business in partnership with LPL, where medium term, we've got on to the LPL platform. They're one of the big handful of players in the U.S., and that's benefiting our broader business. But it meant that the Waddell & Reed advisers had a broader offering to sell from. So early on, we saw some outflow above what we'd already budgeted. But basically, at the moment, I think that's out of the system and the business is running like it would. The biggest thing impacting that business is the value of assets, so obviously really impacts the revenue lines, and we've been in a period where equity markets have come off, so I think that's the bigger factor that's affected earnings. But ultimately, we've now grown to a really good quality franchise there. The thing that's been amazing about these acquisitions is that we have managed to deliver on the integration cost savings that we targeted. So we've been able to bring far more teams across in terms of revenue generation without having to step up the OpEx. And that is driving, hopefully, as the markets recover, much greater earnings out of that public investments business. It's a very much scale business where once you've invested, for example, the way we're getting the investment in all the operational platform, the legal to compliance, the distribution into the wholesale market, you can add a lot of revenue and volume on without the costs moving a lot. So that's been our experience in public investment. Ben, did you want to elaborate?

Good answer. I maybe add a couple of additional items. I think when you look at [ MAM ] and why you need to think about it is there's an integrated global asset manager that can provide solutions to our current and future client base and be able to do that where relative value is shifting between different asset classes. And so I think the public side is a good example of that. It has obviously been much more attractive to be in equities over the last 15 years when the markets moved up. We've obviously acquired some assets in the last few years, and those assets have been affected by the markets and haven't really reinflated yet, but will, over time. But we bought those given [ so we have them ] run very efficiently. So I think that's partly how you look at equity really is the market has been relatively subdued. And so getting holding down that fee load. From a fixed income point of view, though, the reason why that thought means we've got a growing franchise and also clients at the moment are reallocating. So rather than that business go away from that, that business can be reallocated from an equity [ move to a ] fixed income. And that also obviously has this client opportunity on the private side where we can better serve those clients. So I think we're looking at a whole range of initiatives, including things like active ETF that allow us to enhance our distribution to be more relevant in the equity in [indiscernible], but we're still -- while we're at much bigger scale than we were 2 or 3 years ago, there's still a lot of room for us to grow in -- across different strategies included in fixed income, in areas, for example, like leveraged credit and there's also opportunities for us to move into different geographies. So we continue to see that as an important part of our investment capabilities as a solution provider for clients.

Great. Maybe other side, get Brian first and then Andrew.

Brian Johnson, MST. I have 2 questions. The first one is kind of related on the cost side. Could we just get a feeling for the declining ROE, what that did over the last 3 consecutive halves? As vague as you possibly can, but just directionally, how did that flow through into the cost that we actually see? I would have thought last year,when I was not doing anything, the profits were so high you probably abandon the methodology a little bit or you had the ability to kind of wander away from it a bit. Can we just get a feeling how that drove the costs over the last 3 sequential halves? And then the other one is on the cost, and I do have a question to follow this, is if we have a look at the cost environment that we're in, I'd just be interested, your messaging today seems to be that it's a lot about investment. But you're also saying that there's some kind of wage rate pressure. I'd just been through, to Alex, when did you have visibility that the costs were a little bit worse than perhaps you'd been thinking previously? Was it something that was bang on in line with what was budgeted? Or is it something that's come through as a bit of a shock? And then I have one more question.

I'll let Shem answer the first one because I'm not sure I quite understand the question, Brian, so...

Let me -- I'll have a go. Basically, Brian, Alex put up -- I think his first slide would have been around Page 24, where he was showing the movement from 1H '23 to 1H '24. And you can see that there's about $300 million of that, that comes out of OpEx and $700 million out of revenue. So I think the ROE, you're talking about of $8.7 million in this half is impacted a lot by the timing of revenue in this half. So as I mentioned, revenue-wise, the huge realizations we had in the prior comparable period in that half, it's lumpy in both Macquarie Capital and green investments in Macquarie Asset Management and the volatility we had in EMEA Gas & Power resources in coal and gas, North American Gas & Power compared to, [ Nick ], what has been a particularly subdued half this year. The revenue factors have had much more impact on the bottom line and the ROE. Having said that, yes, the costs are up $300 million, net of the profit share absorbing a big chunk of gross cost, half of that is sucked up in profit share. So only half of it comes in online, although our tax rate as well this half is up for reasons Alex can explain. In terms of you're saying when did we see the cost coming through, I think we saw it like everyone else, when labor markets were tight, inflation was high, wage growth was happening. We see that. It's part of what we absorb into the investments that we're making. That's now easing a lot. But we didn't sit through FY '22 and FY '23 saying we're just going to spend like there's no tomorrow. We remain disciplined on where are we investing, why, what return are we getting on it? And certainly, as an executive committee, we focus on that a lot.

Is that the question, Brian?

Well, it's just that with an ROE-driven bonus pool, there's always going to be a degree of cost mechanism. And I suppose what I really want to get a feeling at, if we were to strip out the volatility of that, what would have been like the pre-bonus pool of cost growth? Because it looks to me as though in each of the divisions, it's perhaps bonus pool goes through the middle, at the divisions, the cost growth was probably a little bit disappointing. Is that a fair...

Well, yes, yes. I mean -- so as Shem said, obviously, profit share absorbs some of that. And I can assure you that the business units, Brian, are very focused on what does the cost impact mean to the net profit they're delivering and what does that, therefore, mean to their profit share, right? So I think there's a real focus on that. What we have seen over the course of the last -- if you look back at cost, 2021, you probably had just under $9 million worth of costs. FY '23, that was about $12 million worth of cost, right? So there's probably -- and of that, there's probably like, I don't know, 1/3 of it is probably profit share, something like that, right? And the balance is underlying costs. And so...

Well, there's also brokerage payments, legal costs that's coming out of that. 1.5 is probably stuff that's not reflecting profit share movements and also external costs that vary with activity levels. So it's probably at 1.5 bills.

Yes. I think of that cost, partly has been supporting the growth of the business. So we talked a lot about in Greg's area, we've seen significant growth on the mortgage side. We've seen investment made in the business bank. We're seeing investment made in the wealth side. That's obviously supporting the revenue story that's coming through. But equally, there's been significant investment made across the organization in things like regulatory and compliance costs, and they're really, really important. Obviously, we operate in lots of markets around the world. We need to make sure we're meeting all the obligations associated with that. There's also been other factors like ESG reporting that Shemara mentioned previously. There's financial crime, there's cyber risk, there's a whole range of things that the organization is investing in to make sure the platform is appropriate for -- to support the business going forward. The other thing we've seen, obviously, as Nick's -- in CGM, as Nick's business has expanded into Europe, you had Brexit over that period of time. So we now have a European bank, MBE, that's been set up. That obviously is really important in terms of being able to service European clients, but it's a regulated financial institution in Europe that requires all that support. So there's been a significant investment in that. So I don't think there's -- I think there's a really strong focus on cost from the groups. And I think the groups all understand exactly what it means when you're spending the money and what it means from the profit share. I don't think there's any doubt about that. At the same time, there's been some external environment issues that have impacted the cost base, COVID being one of them. So what COVID did, obviously, is that restricted the supply of staff at a point where you need to invest in technology and regulatory and compliance and business growth. So the cost of wage pressure came through over that period of time. So there's been some external factors that I think are -- probably put additional pressure on the cost base that we've seen over the last few years. The point I was making before is that some of those issues have started to moderate a little bit with some of the regulatory changes actually being implemented. So that's really positive. And that obviously takes a bit of pressure off the cost. And some of the wage pressures come out, obviously, as the economy slowed down a little bit. So as we look going forward, I think we continue to be really disciplined about it. Some of the key drivers, we think, are dissipating a little bit. But the more important point, I think, is that when we think about the organization, it's got to be data enabled, it's got to be digital in order to service customers all over the world. And that's the -- that's really the medium-term story we're trying to [indiscernible].

And I think, Brian, if you go back and look at our presentations, Alex shares the cost change. Like last year, BFS, it was a $250 million cost step up. He had that in his slide. So we're focusing on this all the time. We'll be reporting it to every period. We report in his walk across bar charts. We watch it in every business.

Just a second question if I could push my luck because I've got years of questions to catch up on. Just if we have a look at it, Macquarie's accounting, no doubt about it, way more conservative than the peers, which means you've probably got far less impairment charge risk than so we would have seen during the GFC for Macquarie. But that said, I just wonder, the bond rates, even though they were a lot lower than they were 2 days ago, they were a lot higher than they were 6 months ago, a hell of a lot higher than they were 2 years ago. We've also got a lot of concerns kind of percolating out there about unlisted assets kind of sitting on entities' balance sheets where the valuations are still a little bit wrong. What I'd be intrigued about is that when you buy the asset inflation protected, which sounds great, you term out the debt funding when you buy it. What's -- is there a problem for the new buyers, though? What does the stress that we're seeing on these kind of asset valuations, what is that actually doing to the demand or the capacity for the counterparties to actually buy the assets from Macquarie? Then if you could wrap that into what you think happens next year as far as the realizations go, which is the question, that would be really useful.

Yes. Well, we don't buy the index. As you know, we're invested in a few core areas where we have [indiscernible] deep expertise, so for example, our asset manager is very focused in the infrastructure sector. Last time we had rates rising, we put together some really good analytics for Macquarie shareholders on how inflation-resilient infrastructure was as an asset class. So the revenues are moving in line with the increase in these base rates. We match the funding to the revenue profile of the asset. So some, we might term out for a very long time. If it's a U.K. regulated asset, where every 5 years, rates are reset, we will match our funding to that because we don't want to get caught with funding costs that are different to where the regulator will reset the rate. But typically, the revenue line compared to other asset classes is responding much more to underlying inflation, and because the profit margins are so high, the profits tend to grow faster than discount rates come off with the increase in rates. That's the infrastructure. We talked at length about green energy and what we've been doing there and what the big drivers are. Yes, underlying interest rate environment affects the cost environment, but we are being very disciplined about making sure when we bid an offtake, we either have a massive spread there or we bid it in a way that we can pass on costs now. And we just mentioned that the world is probably going to move to something more like that. When we do venture capital investment in MCBC and MacCap, really underlying rates are not a huge thing. You're putting in tens of millions of dollars of checks, taking out hundreds of millions. It's all about delivering a tech solution, so it's not a big player there. Similarly, in our MCGT investment franchise in the Macquarie Capital world, what we're doing is software and services, investments, et cetera, for governments, where the growth is very, very strong, and the driver of our gain as an investment is really not hugely impacted by what the underlying rate environment is doing. The rate environment, Glenn and I were discussing this, this morning, it's gone to a sort of 4%, 5% rate. When we started our careers, they were like 15%. So yes, it's gone up a single-digit number of percent, likely to sit there for some time now, and so we will operate in a more 4%, 5% world. The implications of that are not just on the cost side, they are on the revenue side as well, as well as the discount rates, as you mentioned. So we're pretty disciplined about thinking about every vertical where we have deep expertise and invest, what are the implications for that? And should we be paring back, should we be pivoting the way we invest or should we be doubling down?

I'll just add just a couple of things. I mean obviously, transaction flow, not just for us but across the sector more generally, Brian, is down. And that's partly a function, I think, of sort of uncertainty as to the outlook. So you think about sort of economic uncertainty that is out there. So that's one thing. Second thing is, given the transaction activities relatively -- is relatively lower, I guess we probably haven't seen the full effect of what does the interest rate changes mean from an availability of debt perspective? What does it mean to the values? But you have to imagine that given that we've talked about the gap between buyers and sellers, part of that gap, I think, is how much credit you can get to enable your bid for an asset. And I suspect inevitably for transactions to start flying in, you will need -- sellers will need to come down a bit and buyers will need to go off a bit to make a market. So -- but I think that's still playing out. What I would say to you is that two things that are really interesting for me, one, there's a lot of capital out there. A lot of capital needs to get invested, whether it be in private equity hands or whether it be in private credit funds. And so it's pretty interesting. We thought, for instance, we slowed the growth of the private credit book. We did that because we thought they'd be expanding margins. We haven't lost margin, but we really haven't seen an expansion in margin because there's a lot of capital out there looking to get deployed. So it'll be interesting to see how that plays its way out. And then to the point that Shem is making, it's not -- obviously not -- no, no, you're not asking the simple question. It's obviously not just a function of the availability of debt. The real question for buyers is how does the asset perform in the economy that they're going to hold it in on the next 3 or 4 years. So what happens to the top line, what happens to cost, then obviously, financing is part of it. So I think there's still a way to go in terms of how impactful those interest rate movements are. So to the other point that I guess Shem is making, a lot of the assets we've got on the balance sheet are defensive assets, or they're assets that have some capacity to respond to a different inflation or interest rate environment in their concession agreement, so they feel like they're good places, generally speaking, good places to invest. On the point about the conservative accounting, we obviously just follow the rules, as you know, Brian. But what we haven't done is, as the cost of capital went down, we didn't mark up assets. And so as the cost of capital comes down, we're not expecting to have to mark those assets down. Inevitably, we'll have 1 or 2 situations where we'll need to impair an asset. But generally speaking, we -- 2 things. We think the expected credit loss interpretation of IFRS 9 here in Australia, it requires you to take a forward look. We've obviously had overlay provisions in our expected credit losses for many years now. So that's partly us anticipating the point that you are making. And generally speaking, obviously, we don't mark to market. We basically hold these things at cost. And indeed, in the case of renewables, obviously, we've expensed a lot of development and OpEx, which means that it would effectively feel like we've created these assets and the embedded value.

We've got Andrew in the middle here.

It's Andrew Triggs from JPMorgan. First question, please. Alex, I think your comments implied a decent improvement in commodities environment in the second quarter, perhaps ask you to elaborate on that point. And to what extent has that been driven by volatility from recent geopolitical events? And just if you could weave into your comments, obviously, the second half is very important in the energy business, so tightness or otherwise of the gas markets in the U.S. would be helpful too.

Let me just -- let me make sure just to make the -- I guess, make the point I was talking about before. So what we did see in the first quarter, particularly a more subdued trading environment and particularly in North American Gas & Power. And so when we updated our outlook at the AGM, obviously, one of the comments we made then was that for the first quarter, Gas & Power in North America had been more subdued than we were expecting on the trading side. What we did see through the first half, I think, is reasonably solid client activity across most of the commodities complex. We didn't see -- as you know from the results, we didn't see as good -- as significant a contribution from EMEA Gas & Power or resources, but that was more a function of just how strong the first half of last year was. As we went through the half, I think a few things have happened that moved. That client activity continues to bubble along, which we're really pleased about. And we've obviously seen some more conducive trading conditions, both in North America but also more generally around the world. And that's really just reflecting, I think, a level of uncertainty, whether it be the economic uncertainty, whether it be the interest rate environment, whether it be the FX implications, or as you're talking about, whether the energy side. So I think we saw a better second quarter of our first half. But again, I think put it in context against the point we made at the AGM was a weak first quarter. So I'm happy to talk with the outlook. But Nick, do you want to...

I was just going to preface what Nick said, saying you talked about energy, but as I mentioned, CGM is exposed to so many other commodity and financial markets. So at the moment, foreign exchange has calmed down a bit. Rates have had more volatility, but Alex and I mentioned areas like gold, [ resource ], coal, all those so -- that Nick might let you talk about.

Yes, as you mentioned, from a commodity markets perspective, we did see a significant reduction in the amount of volatility versus the prior corresponding period. However, I think the story is around the underlying growth in the franchise. And if you want to take a look at the performance of -- let's just concentrate on the commodities business for a moment, versus FY '22, what you'll see is actually the quality of that franchise coming through. Even though the underlying volatility in the markets was lower, we still see -- we still were able to see growth in that business. And again, to a couple of things that you've already mentioned, Shemara, it was substantially lower than the previous period, but it was also lower than we might have expected. We have seen some volatility return to the market more recently. I wouldn't necessarily say that is completely as a result of most recent geopolitical results, but perhaps a result of some underlying change [indiscernible] related to supply and demand. And as we look forward into the second half, it's very hard for us to forecast what a market might do one way or the other. However, I think that some of the longer-term constraints that exist in some of the commodities markets that we operate in are still there. So from that perspective, we remain ready to respond to the conditions and to respond to what our clients require to -- for us to help them to manage those markets as they play out over time.

And just a second question relates to the guidance from Macquarie Asset Management around net other operating income. Just interested to the extent to which that guidance relies upon lumpy performance fees. Obviously, AirTrunk has been in the process being a viable transaction for you. So for example, with AirTrunk, would that realize the performance fee in the May fund that it sits in?

I mean obviously, we do expect some performance fees in the second half of the year, but the way I would think about performance, I don't think there's any particularly special about the second half of the year, Andrew, is my point. I mean we -- I still think the right way to think about performance fees is 50 basis points of equity under management. I mean obviously, it's a pretty big portfolio, now a pretty diverse portfolio. So where those performance fees are coming from will vary from period to period. But I think just given the increasing diversity of the business, that 50 basis points of equity under management still feels like a sensible place to be. Well, obviously, this may be slightly different, slightly above, slightly below one period after the next, but that feels, through time, a sensible place to go.

I've been running at 35 to 40 basis -- it's been running at 35 to 40 basis points more recently. I'm understanding that was probably the more realistic level for the medium term?

No. Well, I mean it was -- and if you went back a few years before that, it was probably running at 70 basis points or 80 basis points. So it won't be 50 basis points every period, period-on-period. But I think as you start to think about the increasing diversity of the business, I think the regularity of those performance fees, I guess, is getting further reinforced, right? I mean last couple of periods have been slightly lower than 50 in the period. Before that was slightly higher than 50, but I still think we're very comfortable, and we talked about this, the operational briefing, at the 50 basis points. It feels like the right indication to give shareholders or to give stakeholders, but recognizing there will be some variability from one period to the next. I mean more -- I won't speak specifically about AirTrunk. But more generally, what we talked about before, the team have been really active on the digital side. Plainly, one of the areas that I think there's been real value accretion, and we're really happy with the performance, not just for AirTrunk, but more generally, is the focus of activity across fiber networks, across data center networks. All of those assets have obviously been real beneficiaries of the sort of environment we found ourselves in the last couple of years. So we're really pleased with how the portfolio is positioned.

So we'll start with Andrei and then we'll go to Brendan.

Andrei Stadnik here from Morgan Stanley. My first question, can I ask around MAM and the private market side? So the -- I think the fund raisings were a little bit slow in this half at about [ 8 ]. Been in the news looking to raise over USD 10 billion for a range of infra and renewable funds. So how are you thinking about the fundraising environment and how differentiated do you think infra and green energy will be versus some of the challenges more vanilla [ state ] or private equity?

Well, you've probably all seen, Andrei and everyone, I guess, that the raising level in private markets has been down. And that's because we're in an environment where the public markets have come off, so people having this denominator effect of being overweight private and not allocating, they're not getting as much cash back from realizations because the transaction activity is slower in private markets while people wait for visibility on pricing. So the overall raising has reduced. But within that, people are allocating more to the managers they know and trust and have dealt with for ages. So I mentioned in the prior comparable period, we had our seventh European fund open. We managed to close that at record level. We had our third Asian fund, we managed to close that at record level. We have our 6th U.S. fund open at the moment. Under U.S. laws, we cannot comment while we're raising. But we'll be able to announce that, hopefully, when we give you results for the next half. We also just had an energy transition fund, which is the first fund -- time fund to go out and raise, and raised nearly USD 2 billion. That's a more venture capital style fund so it would be smaller scale. Again, good raising there compared to what we'd hope to raise. And we're out raising our core renewables fund now. It's not a first-time fund because we had 2 predecessors, and part of the reason we haven't been able to go out sooner is we needed the predecessor fund to reach its required investment level before we could take the new fund out, hence the reason why into the second half, we'll be doing the first closes of that, hopefully. I can't comment because we're out raising. Hopefully, in the second half, we can tell you about the interest we're seeing, et cetera. I would just say we have a really good group of global investors that now come with us into other areas, and that's why we've been doing record ratings for our funds even in this environment. We have a very good track record in green, in the asset manager, but 20 years on the balance sheet. So we would hope you've seen others raise multi, multibillion dollar green energy funds. Macquarie, hopefully, should be there with them. But a, we're not allowed to comment legally; b, our practice is not to comment on things till we've got them done. So we'll hopefully share with you down the road.

My second question, just a strategic question around data. So you mentioned you're investing in some of your big alternative asset management [ PEs ], also investing you're trying to marshal -- organize their data. So what kind of -- given the breadth of your underlying investments and operating assets, what count of advantage and over what time frame can you expect to derive from actually looking through better into the data coming from your businesses?

Yes. Well, I mean it's basically going to be a structural change that's going to play out for a very, very long time from here, I think. And it's impacting our business in a whole lot of areas. Macquarie Capital is principally investing in earlier stage in digital technology. Macquarie Asset Management is a very big player in this, and we have data centers in every region of the world. I mean reference was made to AirTran but we've got the aligned portfolio in the Americas. We've got -- which is bigger. We've got VIRTUS portfolio in Europe. We also have done data centers in Macquarie Capital in Europe. But it's not just data centers. It's fiber optic networks, it's towers, et cetera, that we've been investing in for a while, but it's a growth area in infrastructure. So I think that thematic will affect many parts of our business over the next while. And then centrally as well, we're capitalizing on the opportunities there. Anything you want to add, Alex?

No, I was wondering whether they wanted to comment. The only other thing I was going to say is when we think about data, I mean obviously -- and Nicole made this point, I think in response to a question at the AGM, we think about data, and I suspect Ben can comment in a second, but it will be the same across his portfolio. The sort of nearer-term uses are probably productivity-enhancing type opportunities across the group, whether it be people doing jobs, but manual process removed, or better insights or faster insights or some of the repetitive tasks actually being improved through the use of digital capabilities and better access to data. I suspect that -- and that probably applies, I would imagine, through the MAM portfolio as well. Into the longer term, Andrei, trying to put a time frame on it, there will be, as you start to think about, you're getting high integrity data available all the time in the hands of the right people. Whether they be in the MAM assets or whether it be in the group's activities, the capacity to stitch all that together and to draw insights out to deliver a better service to customers, I think we're pretty excited about the revenue potential there. But I suspect that's longer term, but Nicole will be [indiscernible].

I was going to say apologies, I misread your question. You were saying how can data disrupt. It's like climate change. It's one of the big structural changes happening in the world, and we are trying to align all our businesses to benefit from it. So if we're talking on that scale, BFS, CGM, [indiscernible]

Ben, I don't know whether you're still there. Do you want to add anything just from the MAM portfolios. I think Andrei was interested in that assets?

Yes, I'd say two things. Thanks, Alex. The first one is in terms of just the digitalization of the world and the disruption it's creating, the beneficiary of that is obviously digital infrastructure as we just see a massive demand from particularly the wholesale clients. So the best credit quality companies in the world who traditionally are building and bringing online just-in-time capacity. And really now what they've done is realize that there's been a huge growth in their need for capacity, driven by things like AI and just ongoing digitalization. And so they're now going to much more proactive arrangements with long-term inflation-linked contracts where any sort of megawatt of capacity is hotly contested. And so to have big franchises, like Shemara said, in that particular world is very advantageous because you just can't build the capacity as quickly and you've also got great partners to do that with. So those businesses continue to benefit from the tailwind. And if anything, the tailwinds have taken off. And I think at the same time, having a portfolio set of companies of 175 servicing hundreds of millions of people around the world with thousands of employees, obviously, the amount of data that they're generating and the insights that then can be used in terms of modernizing and fast tracking their performance is huge. And if you just think about some of our more traditional assets, things like our ports, there's a huge opportunity to get, a, an uplift in the underlying performance of that business by using things like automation and electrification, which allows us to increase the throughput but also to be able to better service clients because we understand the flows better and can make sure that we service both the shipping companies, but also the transport companies in a much more efficient way. And therefore, you're able to not only charge more for that but do better partnerships with those sorts of companies. And a lot of that is data-driven and has as an underlier, digitalization. So I think what's incumbent on us is making sure that we've got the right leaders with the right experience in place to help us not just transform our portfolio but also take advantage of those opportunities in the marketplace. And that's certainly occurring.

It's Brendan Sproules from Citi. I've just got a couple of questions. Firstly [indiscernible] Alex. First question on the tax rate. It was very high this half, but you've sort of guided in your short-term guidance to more in line with historical levels. Are we to imply here that the shift in the mix of revenue is going to lead to a really below average tax rate in the second half?

Yes. So the first half tax rate up at 29.3% was, you saw the step-up in the Australian component of income. For the sake of the example, obviously, the geographic composition of income that is driving the average tax rate. The other thing is the nature of income coming through. So some nondeductible expenditure hybrids, for the sake of the example, create a permanent difference there which is coming through the effective tax rate. Yes, the point of the change in guidance on the tax rate, we would expect, I think, that the overall tax rate will be slightly higher than what you've seen in the historical periods. And that's just what we expect, what we're seeing in terms of the -- both the geographic composition of income and the nature of some of the activities. So obviously, there's different tax treatments for disposal gains versus income, for the sake of the example, and all that's obviously affecting the overall tax rate. So I guess it's obviously still consistent with historical ranges. But yes, we saw a little bit more in the front half, and we'd expect the tax rate overall to be slightly higher for the year than we've seen in recent historical periods.

Second question on the amount of capital that you're putting into each of the business units. Now notwithstanding the impact of currency, I think it was about $1.7 billion. How representative is that going to be of the need to put capital into these businesses going forward?

I'll comment briefly and elaborate, but BFS you've seen [indiscernible] sort of run rate because we're growing our mortgage books and our business banking books at a certain rate, subject to competition in the market and being disciplined about credit. MAM is constantly using some capital for seed investments and co-investment in new strategies and will continue to do that. Same with MacCap, there are 4 verticals that they invest in, and they are constantly drawing capital, including the private credit book where we grew $1.5 billion. Having said that, the Green Investment Group should release a lot of capital as it transitions to a fiduciary model. But I'm sure MAM will find other areas that they'd like to see capital in. And then in CGM, it varies a lot because it's mostly credit capital as we've shown that it absorbs some capital in, and that depends on activity levels with clients and where we're needing to step up. So -- and then centrally, it depends on regulatory developments. But I think that run rate that we've had in this half is not unrepresentative because BFS, MAM and MacCap will be running at this rate and CGM will [indiscernible].

Yes. No, I don't think [ that's the right, Shem ] -- CGM, I mean one of the great things about the CGM from a capital viewpoint, it's actually quite short-term capital. So it sort of recycles quickly and it can respond to market conditions. So as a combination with the other parts of the organization which is slightly longer-term capital, it's actually a nice diversity story there. So in Nick's business, you'll see, obviously, if market conditions are more conducive, I suspect you'll see a step-up in both activity levels and in capital because most of the capital there is credit capital. So you see that step up. From a BFS perspective, we're seeing consistent growth. And obviously, our forecast is talking about growth in -- across the loan activities. It's good to see the step-up in the business bank. Obviously, we think that from a margin viewpoint it's attractive. We like the offering we've got in the market. So we think there's a runway to grow there as there is in the mortgages. As Shem mentioned, MAM is a bit more -- a little bit more lumpy in terms of seeding assets or putting assets on the balance sheet that might ultimately make its way into another fund. And then from Macquarie Capital's viewpoint, I mean obviously, we've now got the credit book at about $20 billion. We've got appetite to continue to grow that credit book beyond that $20 billion. It's been a relatively quieter time probably for the last 18 months in terms of equity investing. As I was saying to an earlier question, we divested a bunch of assets at the back end of calendar '22, which was a good time to do it, and then the front end of '23, and it's been a relatively quiet a time to invest. But the team is starting to see good opportunities to invest. I guess the way we think about it is there's organic generation that's coming from the group. You've got a dividend payout ratio of 50% to 70%. We obviously feel good in terms of -- we've done a buyback because we feel like there's surplus based on the excess earnings, but we feel like the group with that profile of net retained capital can support the growth that we'd expect coming through the groups on average over time.

It's Matt Dunger from Bank of America. Just wondering if I could ask on the impairment charges and the reversals in the period. Are you able to unpack some of those where they came out of Macquarie Asset Management and MacCap and also whether there's more to play out here?

Yes, no problem at all. Thanks for the question, Matt. The -- so from a MAM viewpoint, it's a relatively simple story. It's obviously not a credit story. It's a typically equity impairments. And there were -- there were just a handful where we were able to reverse a provision we've taken a couple of years ago. One was in relation to an offshore wind farm that we had up in Asia. In fact, it was a -- I made the comment at the time that we were having supply chain challenges. That asset is now being completed and is operating, as Shem mentioned before. So we're able to reverse some of the impairment coming through there. And then we've taken an impairment a few years ago in relation to our stake in Macquarie AirFinance, just when that air finance business was -- obviously, the airline industry more generally was having a more subdued period. So we wrote back that in the first half. I mean generally speaking, MAM's not sitting on significant other impairments, Matt. So I wouldn't -- you wouldn't expect to sort of either an ongoing or a regular recurrence of those write-backs. BFS is, I think, a relatively straightforward story as we grow the books. We're obviously just accruing Stage 1 ECL against the BFS business. There were a couple of exposures in the business bank that had underperformed their expectations that we took some Stage 3 provisions on. From a Macquarie Capital viewpoint, there were, again, as is often the case, -- just a couple of things that happened during the half. So there was a credit impairment that I mentioned earlier that we were able to refinance, so we were able to recreate that back to face value. And there was a small equity investment that we were able to recreate just based on the performance of the underlying asset. And we had a little bit of ECL coming through from the growth of the private credit book. But obviously, the ECL was slightly smaller than we saw in the first half of '23 because the growth of the book was slightly smaller. And then finally, from a CGM viewpoint, we had an overlay last period of time. You recall the volatility in the energy markets. So we had an overlay that, I guess, was anticipating some underperformance from a couple of credit exposures in the energy markets that didn't eventuate, so were able to release that overlay. And then in this half, we had a couple of positions in the U.S. that under -- that we don't think we'll be able to recover our face value and so we impaired those. But I guess it's a story probably more generally, we feel like the equity book across the organization is obviously basically held at cost, and so in a reasonably good shape. And obviously, from a credit perspective, we're not really seeing anywhere at this point any deterioration in credit performance, and we're obviously holding quite a big ECL, which is, I guess, the ECL is trying to anticipate what the impact of the future environment will be on our credit books. We've got that on a model basis, and we're still holding about 340 in overlay provisions as well across the group. Hopefully, that helps you.

You have a question from Matthew Wilson with Jefferies.

I didn't realize being in Melbourne was such a disadvantage, but that's apparent. A quick question on green assets. It seems very clear that margins in this space today to build and develop the green assets are very thin, given some of the reasons that you also articulated in your presentation. And hence, it's much better to manage an operating asset. But the reality is the world wants more green assets and it wants less inflation. So what needs to be done to make sure capital finds its way into that space and generates an appropriate risk-adjusted return?

Yes. And thanks for the question. Thanks for waiting so patiently. Basically, what needs to happen is that the PPA prices need to go up. I think, as I said in relation to the very first question, the costs have gone up. If we're going to attract private capital to this sector, they have to be able to make a decent return. And I think what's playing out at the moment, which we fortunately, through good luck or good management, we've managed not to be a big player in this, but what it is showing is that if governments and communities want renewable energy, they're going to have to step up and pay for it, and they can afford to. When we talked about where the alternative energy costs are, if they want to attract private capital to the sector, and that's not just by developers, but it's all the OEMs, the operators, the construction companies, et cetera, so I think that will actually play out. We told you that U.K. latest round of bids that failed were at GBP 44 a megawatt hour. The wholesale energy is at GBP 80 a megawatt hour. They've got scope to step up. They've happily come down from bidding GBP 140. When we did East Anglia, it was GBP 120. We're just going to have to be disciplined now as we bid. And as we said, not just in getting the PPA upfront, but making sure the terms of the contract allow us to pass through cost increase. But -- except that it is difficult for governments in the bids they've already done to go and renegotiate price because that creates a very bad precedent for them. So there's an unfortunate environment playing out. But hopefully, it will result in people responding to draw the investment needed. So I think that was our -- sorry, did you have another question, Matthew? Sorry, Matt.

No, that's -- they've all been done. That's great.

Thank you. And I was just going to say thanks also to the group [indiscernible]. We've got Andrew Cassidy, our Chief Risk Officer; and Evie, our Head of Legal and Governance; and Stuart Green, our CEO of Macquarie Bank are also with us but didn't comment. But thanks, everyone, and thank you all for your time.

Thank you, everyone, for staying with us, and we look forward to catching up over the next couple of weeks. Thank you.