macquarie group limited · macquarie asset management, corporate and asset finance, banking and...

FINANCIAL INSTITUTIONS

CREDIT OPINION3 April 2019

Update

RATINGS

Domicile New South Wales,Australia

Long Term CRR Not Assigned

Long Term Debt A3

Type Senior Unsecured - FgnCurr

Outlook Stable

Long Term Deposit Not Assigned

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Francesco Mirenzi +61.2.9270.8176VP-Sr Credit [email protected]

Patrick Winsbury +61.2.9270.8183Associate Managing [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Macquarie Group LimitedUpdate to credit analysis

SummaryThe long-term rating of Macquarie Group Limited (MGL, A3 stable) reflects its strong overallcredit profile, that balances the risks of the group's continual evolution, and the evolution ofits earnings profile – which places greater emphasis on annuity-like businesses with a lowerreliance on the potentially more volatile trading and capital markets businesses -- against thecredit positives of the group's strong capitalization and liquidity metrics and its entrenchedmarket position in Australia. The rating also includes two notches of uplift to reflect our viewthat depositors and senior bondholders would benefit from systemic support, if needed.

In particular we note:

» MGL's shock-absorbing capacity is strong and stable. This reflects the significantcontribution of its more stable earnings sources -- such as funds management, assetfinance and retail banking businesses -- which offset the inherent volatility of its capitalmarket-facing operations. In addition, MGL's risk appetite in its capital markets businessesappears contained with trading revenues weighted to commodities business -- which hashistorically been less volatile at MGL -- and conservative market risk management.

» MGL maintains a solid balance sheet position, moderately improving its capital andliquidity metrics during the recent reporting periods. As at September 2018, its bankingsubsidiary reported an APRA Basel III Common Equity Tier 1 (CET 1) ratio of 10.4%. It alsohas a sizeable capital surplus above regulatory requirements of AUD 3.4 billion at thegroup level. The banking subsidiary had a quarterly daily average Liquidity Coverage Ratioof 159% for the quarter ending September 2018. Management's focus on maintaining aresilient balance sheet is key to maintaining the firm's strong credit profile.

» A high probability that MGL would receive systemic support in case of need, as aconsequence of its significant presence in Australia's financial markets. We continue toview the regulatory and political framework in Australia to be favorable to the interestsof senior bank creditors, in contrast to many developed markets affected by the globalfinancial crisis. As a result, we incorporate two notches of systemic support uplift into theratings of Macquarie Bank Limited (MBL), and, by extension, MGL

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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Moody's also maintains ratings for the group's banking subsidiary, MBL (A2/A2 stable, baa1), and an intermediate holding companyhousing its non-bank operations, Macquarie Financial Holdings Pty Limited (A3 stable). For the rating factor grid applicable to MBL,please refer to MBL's Credit Opinion.

Credit strengths

» A diversified business profile, constrained by exposure to non-lending risks.

» Conservative risk management is key to MGL's credit profile.

» Capital levels remain supportive; future positioning is a key credit consideration.

» Strong liquidity profile.

Credit challenges

» Exposure to volatile capital markets businesses, albeit declining.

» Complex and diverse nature of MGL's operations, requiring disciplined and proactive risk management.

Rating outlookThe outlook is stable for all the ratings of MGL and its subsidiaries.

Factors that could lead to an upgradeDespite its more diversified ratings profile, MGL retains exposure to financial market conditions. As a result even if operating conditionsimprove markedly, the prospect of an upgrade is unlikely. The baseline credit assessment of Macquarie's banking subsidiary, MBL,positions the firm at the higher end of the range applicable to wholesale banks..

Factors that could lead to a downgradeThe ratings would come under negative pressure should the trend towards a more diversified business profile reverse itself and resultin a higher exposure to volatile financial markets businesses. Any signs of a loss of discipline in its risk management or a materialreduction in its capital and liquidity buffers, including as a result of cumulative effects of M&A activity, would also be detrimental to itsratings.

As the ratings of MGL, MBL and MFHPL incorporate the potential for systemic support, any signal from the regulator or governmentthat suggests a less creditor-friendly stance on bank resolution could create downward pressure on the supported ratings. In particularany signs of a reduction in the degree of a support available to, or expectation of greater loss absorbency by, holding companies couldlead to downward pressure on the ratings of Macquarie's holding company, MGL.

Further deterioration in the operating environment faced by MBL and MGL could lead to a change in their macro profile and place theirratings under downward pressure.

We view the Macquarie legal entities as closely intertwined, with a high degree of operational and financial linkages. However, shouldin the medium-to-long run there be a sharpening of the boundaries between the group's bank and non-bank entities, it could lead togreater divergence of their credit profiles and rating outcomes.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 3 April 2019 Macquarie Group Limited: Update to credit analysis


Key indicators

Exhibit 1

Macquarie Group Limited (Consolidated Financials) [1]9-182 3-182 3-172 3-162 3-152 CAGR/Avg.3

Total Assets (AUD million) 190,427 180,368 171,095 182,133 171,578 3.04

Total Assets (USD million) 137,784 138,351 130,520 140,106 131,077 1.44

Tangible Common Equity (AUD million) 13,812 14,442 13,406 12,879 11,644 5.04

Tangible Common Equity (USD million) 9,994 11,078 10,227 9,907 8,895 3.44

Problem Loans / Gross Loans (%) 0.3 1.3 2.1 2.5 3.4 1.95

Tangible Common Equity / Risk Weighted Assets (%) 15.0 - - - - 15.06

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 1.4 7.2 11.4 14.8 19.7 10.95

Net Interest Margin (%) 1.3 1.3 1.4 1.4 1.5 1.45

PPI / Average RWA (%) 3.1 - - - - 3.16

Net Income / Tangible Assets (%) 1.4 1.4 1.3 1.1 0.9 1.25

Cost / Income Ratio (%) 74.3 75.0 73.4 66.9 67.9 71.55

Market Funds / Tangible Banking Assets (%) 45.3 46.2 45.7 54.3 53.5 49.05

Liquid Banking Assets / Tangible Banking Assets (%) 34.2 33.7 36.2 37.8 40.2 36.45

Gross Loans / Due to Customers (%) 147.2 137.4 134.4 155.6 155.8 146.15

[1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully-loaded or transitional phase-in; IFRS. [3] May include rounding differences due to scaleof reported amounts. [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [5] Simple average of periods presented for the latestaccounting regime. [6] Simple average of Basel III periods presented.Source: Moody's Financial Metrics

ProfileMacquarie Group Limited (MGL) is the non-operating holding company of the Macquarie Group. As a global financial services provider,it offers asset management; finance, banking, advisory and risk and capital solutions across 25 countries. As at 31 September 2018, thegroup reported consolidated assets of AUD 205.6 billion.

MGL was formed in 2007 when Macquarie Bank Limited (MBL, established as Hill Samuel Australia Limited in 1969, renamed MBLin 1985, and listed in 1996) was reorganised under a holding company structure. Since 2007, MGL’s shares have been listed on theAustralian Securities Exchange (Ticker: MQG).

Detailed credit considerationsA diversified business profile, constrained by exposure to non-lending risksMGL's earnings are highly diversified by product and geography. MGL's activities are carried out through five primary business lines:Macquarie Asset Management, Corporate and Asset Finance, Banking and Financial Services, Commodities and Global Markets as wellas Macquarie Capital.

MGL benefits from a highly diverse business profile, with a strong earnings contribution from its more stable lines of business, includingasset management, asset finance and banking. This provides the group with a strong and stable earnings base, enabling it to betterabsorb any earnings shocks arising from market volatility that would affect its markets facing businesses (Exhibits 2 and 3). The group's(and MBL's) increased diversification account for a positive adjustment we apply to the financial profile of MBL in its scorecard.



Exhibit 2

Net profit contribution by divisionFor the half-year ended September 2018

Exhibit 3

Earnings heavily weighted towards more stable sourcesHalf-yearly profits excluding Corporate Centre costs

Macquarie Asset Management29%

Corporate and Asset Finance17%

Banking and Financial Services11%

Commodities and Global Markets27%

Macquarie Capital16%

Source: Company disclosures

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18

AU

D m

illio

ns

Annuities-style Capital markets


Despite this, MGL continues to have a material presence in capital markets, which are subject to greater earnings volatility. In our view,this constrains the firm's overall risk profile. Accordingly, we have adjusted the Asset Risk section of the MBL scorecard to place thisfactor in the `baa' rating range that we believe to better reflect the balance of risks faced by MBL.

Underlying earnings trends are:

» Macquarie Asset Management's (MAM) operations are its biggest earnings contributor, with assets under management of AUD549.5 billion as at September 2018. Base fees derived by MAM were AUD 884 million for 1H 19, up 11% on the prior the priorcorresponding period. In addition, MGL has been generating an increasing stream of performance fees, AUD 282 million at 1H 19,down from AUD 537 million at 1H 18 (Exhibit 4). We expect performance fees to continue to be a material factor through the 2019and 2020 financial years. We note that high levels of performance fees are a positive, but on a through-the-cycle basis, we view thebase fee stream generated by MAM to be the key contributor to the group's profitability.

» Asset and loan portfolio of the Corporate and Asset Finance (CAF) division reduced 5% from the prior corresponding period toAUD 33.7 billion at 1H 19 with the asset finance, vehicles and principal finance portfolios reducing due to net repayments andrealisations. As a result net profit from CAF was down 29% from 1H 18 to AUD 437 million.

» The group's Australian mortgage portfolio continues grow strongly and the Banking and Financial Services' Australian loan portfoliohas grown 17% in the 12-months to 1H 19. The division's net profit contribution was up 3% to AUD 296 million due to good loangrowth but constrained by increased costs and the impact of the government's bank levy.

» Profit contribution from Commodities and Global Markets (CGM) was up strongly by 85% from 1H 18 to AUD 700 million at 1H19. The result was primarily driven by large increases in client hedging activity as weel as increase activity in inventory managementfor physical commodities. CGM is well placed to take advantage of commodity price volatility, however, we also expect that thedivision's earnings profile will consequently be more volatile when compared to Macquarie's annuity style businesses.

» Profit contribution from Macquarie Capital, was up 114% from the prior corresponding period to AUD 406 million largely as a resultof asset realisations and reclassifications on equity and debt investments. These primarily related to asset realisations in the greenenergy and technology sectors (Exhibit 5).



Exhibit 4

Macquarie Asset Management base and performance fees

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18

AU

D m

illio

ns

Base Fee Income Performance Fee Income Average Performance Fee Income (2H15 - 1H19)

Source: Company disclosures, Moody's Investors Service

Exhibit 5

Profit growth contribution1H18 to 1H19 movement

1,248

-427

-182

10

322

216

123

1,310

0

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1H 18 Macquarie AssetManagement

Corporate and AssetFinance

Banking and FinancialServices

Commodities andGlobal Markets

Macquarie Capital Corporate Centre 1H 19

AU

D m

illio

ns

Source: Company disclosures, Moody's Investors Service

Conservative risk management is key to MGL's credit profileThe benefits of MGL's global scope and diversification also raises the level of operational complexities and risk management challenges.In addition it exposes the firm to and risks associated with the rapid way in which its business model has evolved historically. As aresult, we adjusted MBL's financial profile negatively by one notch.

We consider MGL's ability to maintain a conservative risk culture as being one of the firm's most difficult tasks. The diversity of MGL'sbusiness requires tight risk controls, cognizant of market, regulatory and reputational pressures both on an individual unit and ona portfolio basis. To date, management has been focused on containing its markets exposure through a combination of tight riskmanagement oversight and an emphasis on less volatile streams of trading revenue.

MGL has a well-embedded risk culture and the firm's track record and ability to limit earnings volatility are positive. Maintaining itsdisciplined risk culture remains a challenge as the group grows larger, or pursues further growth opportunities through acquisitions.

Capital levels remain supportive; future positioning is a key credit considerationThe firm's capital requirements are a combination of Basel III capital requirements for its banking operations contained within MBL andadditional capital requirements in respect of its non-banking operations calculated on the basis of an economic capital adequacy model(reviewed by the Australian Prudential Regulation Authority).

As at September 2018, MBL, MGL's banking subsidiary, reported a Common Equity Tier 1 (CET 1) ratio of 10.4%, calculated with APRA'scapital methodology (Exhibit 6) and a self-reported “Harmonized” Basel III ratio of 13.5% . On an overall group basis, as at September



2018, Macquarie had AUD 3.4 billion of capital buffers relative to APRA's requirements, assuming a minimum Tier 1 ratio of 8.5% of thegroup's risk-weighted assets.

Exhibit 6

Common equity Tier 1 ratio of Macquarie Bank Limited

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

Sep-16 Mar-17 Sep-17 Mar-18 Sep-18


MGL's capital deployment has been focused on the group's three divisions with relatively more stable cash flows (its `annuities-style'businesses – Macquarie Asset Management, Banking and Financial Services, and Corporate and Asset Finance). As at September 2018,the overall capital requirements of these businesses were AUD 9.0 billion or c.55% of total capital requirements for the group.

Whilst Macquarie had announced at 1H 18 that it had an approved on-market share buyback of up to AUD 1 billion, the group did notbuyback any shares given the strong business growth it experienced through to 1H 19 and the buyback program has now closed. Weview this as further evidence of the group's prudent capital management, which is a key support to MGL's and MBL's high rating levels.

Strong liquidity profileOn a consolidated level, MGL's liquidity metrics remain strong. As at September 2018, the group's cash and liquid asset portfolio stoodat AUD 23.5 billion and MBL's quarterly daily average Liquidity Coverage Ratios at the September 2018 quarter was 159%. MGL'sstandard liquidity policy is to ensure that at least twelve months' maturities can be met from internal sources. This is reflected in MBL'svery high `a1' Liquid Resources score.

The group's external wholesale funding is chiefly raised by MBL. MBL has also successfully grown its deposit base on the back of itsprivate client business. Factors we would view to support the stickiness of such deposits are the fact that they are transaction accountswith relatively small average balances, such that there would be a high degree of coverage by Australia's Financial Claims Scheme (aform of deposit insurance).

The group’s funding structure remains exposed to high levels of wholesale funding, which, based on Moody's measure, was at 46.5%for MBL as at 1H 19. The weighted average maturity of the firm’s long-term wholesale funding remains at around 4.6 years, mitigatingsome of these concerns. Customer deposits rose to AUD 49.4 billion from AUD 46.4 billion a year ago.

On balance, we view MBL's Funding Structure to be commensurate with a `ba2' level, an upward adjustment -- reflecting a reasonablylong and evenly distributed maturity structure -- from the unadjusted `b1' score.

MGL benefits from the strong and stable economic conditions in Australia and the expectation for higher global economicgrowthAustralia's Strong+ Macro Profile reflects a very high degree of economic resilience, institutional and government financial strengthand low susceptibility to event risk. Australia is in its 27th year of uninterrupted economic growth, although the economy is facingreduced investment in the resources sector and, although rising, nominal income growth remains low. Our baseline scenario assumesGDP growth of up to 2.5% in 2019 and 2.5% in 2020. Australia’s economy has undergone a transition from growth led by investmentsin the resources sector to other sources of growth. This adjustment has led to below-trend nominal GDP and wage growth and,consequently, a more difficult operating environment for banks.



While there may still be pockets of weakness from lower private-sector investment and fiscal spending, low interest rates supportoverall private-sector demand. Rising house prices in Sydney and Melbourne over 2013-17 were accompanied by an elevatedproportion of lending to residential property investors, raising concerns regarding financial stability. Australia also has very high levelsof household debt, with household debt-to-annualized disposable income ratio reaching 188.6% in September 2018. To address therising risks in the housing market, Australian Prudential Regulation Authority has undertaken a number of initiatives to preserve prudentlending standards and strengthen the resilience of the banking system.

These actions have led to a slowdown in higher-risk lending activity and a reduction in overall credit growth compared with thenational income. House prices in Sydney and Melbourne are softening in an orderly manner. However, the resilience of householdbalance sheets and, consequently, bank portfolios to a serious economic or funding shock has not been tested at these levels of privatesector debt.

Our view of the operating environment also reflects banks' strong pricing power as a result of the high concentration in the bankingsector. Australia's structural reliance on external financing remains the sector's primary vulnerability. On a net basis, the country'sforeign debt funding has traditionally been sourced primarily through the banking system, exposing Australian banks to the risk ofsudden shifts in foreign investor sentiment.

MGL derives approximately 33% of its net operating income in Australia. The remainder of MGL's income is diversified internationally,with approximately 31% stemming from the Americas, 27% from Europe, Middle East and Africa and 9% from Asia. On a weightedaverage basis, this results in a Macro Profile of Strong +.

Support and structural considerationsGovernment SupportWe believe the probability that MGL would benefit from systemic support in case of need to be high. In contrast to many crisis-hiteconomies, we view the regulatory and political framework in Australia to continue to be favorable to bank creditor interests. We alsonote that, to date, the regulatory focus in Australia has been heavily on the preservation of systemic stability and that the Macquariegroup as a whole has a significant presence in Australia's financial markets.

Within the group, we believe that the chief beneficiary of support would likely be MBL, and accordingly we incorporate two notchesof systemic support in its A2 rating. We note that during the global financial crisis in 2008-10, only MBL was eligible under thegovernment's guarantee programme for debt and large deposits.

Nevertheless, considering the high degree of operational and financial integration between MGL and its operating subsidiaries, weview their credit profiles to be closely linked. In particular, although there is a global regulatory trend towards “pre-positioning”, suchas requiring separate, or easily separable, IT systems for different legal entities; we view the probability that, in a crisis, the Macquariegroup could swiftly be unbundled to be relatively low and, consequently, we believe it increases the probability that the group would besupported as a whole.

MGL'S relationship to the ratings of its operating subsidiariesMGL's A3 rating is positioned one notch below the A2 rating of MBL. MBL dominates the group both in terms of assets and earnings.MGL's rating is positioned in line with Moody's usual notching practice for holding companies, which recognizes the structuralsubordination of MGL's creditors to those of its principal operating subsidiary.

We assign the following ratings to MGL's principal operating subsidiaries:

» Macquarie Bank Limited has a baseline credit assessment of baa1. The bank's A2 / P-1 for deposit and debt ratings incorporate twonotches of uplift for potential systemic support.

» Macquarie Financial Holdings Pty Limited is the intermediate holding company for non-bank's entities. MFHPL's operations areclosely interlinked: three of the group's five business lines cross over the boundaries between MBL and MFHPL. MFHPL's issuer ratingincorporates uplift for systemic support as a result of its close integration with the bank.



MBL is primarily comprised of the Banking and Financial Services, Corporate and Asset Finance, and Commodities and FinancialMarkets lines of business with only small parts of Macquarie Securities and Macquarie Asset Management residing within it. MacquarieCapital, the majority of Macquarie Securities and the Macquarie Infrastructure and Real Assets fund management unit continue to bepart of MFHPL.

We continue to view the Macquarie businesses as closely intertwined, with a high degree of operational and financial linkages.However, should in the medium-to-long run the transfer serve to sharpen the boundaries between the group's bank and non-bankentities, it could lead to greater divergence of their credit profiles and rating outcomes.



Ratings

Exhibit 7Category Moody's RatingMACQUARIE GROUP LIMITED

Outlook StableIssuer Rating A3Senior Unsecured A3ST Issuer Rating P-2Other Short Term (P)P-2

MACQUARIE FINANCIAL HOLDINGS PTY LIMITED

Outlook StableIssuer Rating A3ST Issuer Rating P-2

MACQUARIE BANK LIMITED

Outlook StableCounterparty Risk Rating A1/P-1Bank Deposits A2/P-1Baseline Credit Assessment baa1Adjusted Baseline Credit Assessment baa1Counterparty Risk Assessment A1(cr)/P-1(cr)Issuer Rating A2Senior Unsecured A2Subordinate Baa3 (hyb)Commercial Paper P-1Other Short Term (P)P-1

MACQUARIE BANK LIMITED, LONDON BRANCH

Outlook StableCounterparty Risk Rating A1/P-1Counterparty Risk Assessment A1(cr)/P-1(cr)Senior Unsecured A2Pref. Stock Non-cumulative Ba1 (hyb)

MACQUARIE BANK LIMITED, SINGAPORE BRANCH

Counterparty Risk Rating A1/P-1Counterparty Risk Assessment A1(cr)/P-1(cr)Senior Unsecured MTN (P)A2

MACQUARIE INTERNATIONAL FINANCE LIMITED

Outlook StableIssuer Rating A3Senior Unsecured MTN (P)A3Subordinate MTN (P)Baa3ST Issuer Rating P-2Other Short Term (P)P-2

MACQUARIE FINANCE LIMITED

BACKED Pref. Stock Non-cumulative -DomCurr

Ba1 (hyb)

Source: Moody's Investors Service



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REPORT NUMBER 1165646


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