Macquarie : 2024 full-year result transcript

TRANSCRIPTION

MACQUARIE GROUP LIMITED RESULTS ANNOUNCEMENT

FOR THE YEAR ENDED 31 MARCH 2024

3 MAY 2024

	[START OF TRANSCRIPT]
Operator:	Thank you for standing by and welcome to Macquarie Group Limited 2024 Full
	Year Results Announcement. All participants are in listen-only mode. There will
	be a presentation followed by a question-and-answer session. If you wish to ask
	a question, you will need to press the star key followed by the number one on
	your telephone keypad. I would now like to turn the call over to Mr Sam Dobson,
	Head of Investor Relations. Please go ahead.
Sam Dobson:	Right, there's still some people coming in, but we'll make a start. So,
	good morning, everyone, and welcome to Macquarie's Financial Year
	2024 Full Year Results Presentation, good to see so many of you here.
	Before we begin today, I would ask that you turn your phones to silent,
	and I would also like to acknowledge the Traditional Custodians of this
	land, the Gadigal people of the Eora nation, and pay our respects to their
	Elders, past, present, and emerging.
	As is customary, we'll hear today from both our CEO, Shemara
	Wikramanayake, and our CFO, Alex Harvey, on the results, and then we
	will have an opportunity for questions at the end. I'd also note that
	probably for the first time since COVID we've got all of our EC here
	today in person, so that's great. With that, I will hand over to Shemara,
	thank you.

Shemara Wikramanayake: Thanks very much, Sam, and I should also note that we have our Chair, Glenn Stevens, and the Chair of our Audit Committee, Michelle Hinchliffe, here in the front row as well with us, as well as the pleasure of having all of the Executive Committee with us in person for the first time in ages. So, welcome from me as well everyone, and as usual,

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before going through the results for this year, I will just touch on the footprint that we have across our four operating businesses.

As you know, we have very good diversification across those four businesses, with four deep areas of expertise that are exposed to structurally very well growing underlying themes and those are our Australian Digital Banking offering headed up by Greg Ward, here that group, our global Macquarie Asset Management Business, very strong in private markets, but also public investments, headed up by Ben Way, here in the front.

Commodities and Global Markets, which has strength globally, not just across commodities, but also financial markets, and very good runway to grow across all those areas. Simon Wright, Group Head there, sitting next to Greg, and then Macquarie Capital, which as well is doing advisory and capital market solutions brings the balance sheet in our areas of expertise in equity and debt, and Michael Silverton is with us here, the Group Head for Macquarie Capital.

They're obviously supported by very strong operating platform across our four operating groups, and in terms of our very important risk management framework, the Risk Management Group headed by Andrew Cassidy, and sitting next to him, Evie Bruce, Head of our Legal and Governance Group. Also, the Financial Management Group, as well as our regulatory and financial reporting and tax, et cetera, and communication with stakeholders, like yourselves, is dealing with funding, capital liquidity through the cycle which is very important for our performance.

Alex, our CFO, is here on the stage with me, and the Corporate Operations Group where the platform supporting us to invest, particularly in this area of technology moving so fast, but also covering HR, our premises strategy foundation, Nicole Sorbara, here in the front row.

Now, in this last year the split of contribution from the annuity in the market facing businesses was 45:55, as you know that varies depending

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on the external environment of the time. So, turning to the results in this most recent year. You will have seen we delivered a result of $A3,522m, that was down 32% on our very strong record year, last year, and the two big contributors for that were in Commodities and Global Markets.

We didn't experience the external environment volatility, particularly in energy markets, that we had in both FY22 and particularly FY23. Then, in Macquarie Asset Management where we are transitioning our balance sheet green investment strategy to a fiduciary strategy, which we consider very important in the medium-term, that impacted results as well.

I would note the second half of last year was up on the first half, and reflected that we had a better second half. It was down on the second half of last year where we had very strong commodities earnings. I won't dwell on the details by half, but I will just note that the Operating Group contribution was also up 35% half on half, and year on year it was down, 35% from a very strong year last year.

Before turning to looking at each operating group, a couple of things I'd note, one is the assets under management have grown by 7% to $A938.3b. The big drivers there were in our private market funds, the investments that we made lifted AUM, and also market movements and foreign exchange contributed. That was partially offset by assets that we no longer manage as a result of reduction in our co-investment management rights.

The second thing, apart from assets under management, I'd note as usual, is the footprint globally in terms of diversification of our income. This year, Australia contributed 34%, which is up a little bit due to the non-repeat of the big gains we had in North America and EMEA over last year, but more broadly, we expect to see this non-Australian earnings contribution continuing to grow given our small presence in the big offshore markets.

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This last year, we had two-thirds of our income come from those offshore markets. We also had more than half our 20,000 odd staff based outside of Australia. Now, that 20,000 staff number has grown quite materially over the last few years, particularly over FY22 and FY23, and Alex is going to give you a bit of the deeper dive into the headcount growth and the cost growth when he speaks.

I won't spend ages on this slide, in terms of the diversification, it follows the messages I gave by region. I will turn now to going through each of the operating groups, and starting with Macquarie Asset Management, the result, as you will have seen, was $A1,208m contributing 18% of Macquarie's earnings, that was down 48%, and as I said, the big driver there was, as we discussed at the half year, that we had meaningful realisations of about $A800m a year in FY22 and FY23 in our green investments which were a balance sheet strategy.

This year we've held those assets to seed a fund which is called, the Macquarie Green Energy and Climate Opportunities Fund but, MGECO for short.

You saw we launched that fund and transferred six of the seed assets across to that. As we transfer assets to the fund, they're typically later stage ones, and we're transferring them at pretty close to the investment we've made in them which we're typically expensing in DevEx and OpEx each year, compared to the more mature assets on the balance sheet which were being realised, as I said for gains at about $A800m a year.

This year, in contrast, we had a $A200m negative number due to the OpEx and DevEx on those numbers. So, about $A1b turnaround in Macquarie Asset Management. I would also note going forward, Macquarie Asset Management still has a portfolio of more mature green assets that will be realised over the next few years, but unlikely to be at the scale of contribution of FY22 and FY23 because we're no longer pursuing that strategy. So, over the next while we will gradually realise

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the balance sheet assets but raise the funds and build the fiduciary income.

Now, as well as launching that MGECO fund, we also, over this year, had very good fundraising, so equity under management is up at just over $A222b, and that was after nearly $A22b of raising in what was a very challenging fundraising year, but investors were doubling down on their core managers, and so the seventh in a series of the European funds, MEIF7, was the second largest raise in infrastructure funds globally being just a regional fund at €8b and closed subscribed above its hard cap.

We also, as well as MGECO, as I mentioned in the half as well, have the Macquarie Green Energy Transition Fund, the earlier stage fund, MGETs raising, that's at $US2b and interestingly and materially, it's the first of our private market funds that distributed its capabilities via the very big US wealth channel which is not one MAM has previously done distribution into, we've really worked with big institutional investors, but areas like insurance and private markets, wealth were also becoming bigger sources of funding.

So, also, we're ending the year with over $A37b of dry powder in MAM that's also a record for dry powder in the private markets. In the public investments, the assets under management there were up 6% to just over $A567b, mostly driven by market movement, but pleasingly 69% of the strategy, it's a multi boutique approach, are beating their benchmark on a three-year basis.

Then, turning to Banking and Financial Services, the result there again you will have seen $A1,241m, up 3% and contributing 19% of the operating group income this year. They are - our digital banking offering continues to gather market positioning and grow the franchise, so we had good increases in the home loan portfolio up 10%, the business banking portfolio, which was up 22%, now that's off a low base, so a material percentage growth for us, and the funds on platform which are up 15%. That was supported by the deposit growth of 10%.

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In terms of volume, we did announce just recently that we would cease new car lending through our broker and our direct and our novated leasing channels, so that will see run off slightly. The other thing that impacted the results, obviously, is the competitive dynamics and margin pressures as well as ongoing investment in the platform.

Then, turning to the market facing businesses, Commodities and Global Markets, $A3,213m, which was down 47% but still the biggest contributor at 47% of the Group. That middle column there, the commodities area is where we saw the meaningful step down and that was basically, as I said, due to the market environment where we didn't have the European and North American volatility, we saw in FY22 and FY23.

That impacted both the income from risk management services, which depend on how active our clients are, and also the inventory management and trading Alex will take you through in more detail where this played out, but in the risk management it was really EMEA gas and power and resources to an extent offset by agriculture where we continue to grow our franchise, and in the inventory management and trading, it was the North American gas and power.

Now either side of that the two business, Financial Markets another good year in growing the franchise there, in foreign exchange we had strong client activity globally, and we also in the funds financing had good growth in the book in North America, and in futures as well we saw an improved commission and interest revenue.

I should say that financial markets in a more normalised year like this, we are getting some two-thirds from Commodities and a third from Financial Markets and Asset Finance with Financial Markets being a big contributor at nearly 30%. Asset Finance, again, we were able to grow the total portfolio by 5% to $A6.5b.

Then, Macquarie Capital, the result of $A1,051m was up 31%, apologies, Michael, I got it wrong by a per cent when we were speaking earlier, but that's a good result for Macquarie Capital improvement and step up

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wise, 16% contribution from it. The big driver over this year was the investment related income where we continue to grow that private credit book, so it's up $A4.5b, now at $A21.5b, and also in terms of lower impairment charges for our equity positions.

On the fee income side, last year you saw across the industry again was a more subdued year, so the fee income was down, but we had higher broking fee income. Then turning from earnings to balance sheet and funding. Our funded balance sheet as every remains strong with our term funding comfortably exceeding our term assets. Over the year, Alex and the team were able to raise another $A21.1b of term funding, what were quite conducive markets, and our deposits grew across the whole of Macquarie Group by 10% to $A148.3b.

Our capital as well has ended the year stronger at $A10.7b, up from $A10.5b. The big contributor there was the earnings offset by the dividend. We also did $A600m of buyback, which again, Alex can give you more details of, and the businesses absorbed about $A600m which I will elaborate on in a moment, but I just wanted to note that our CET1 ratio is at 13.6% at the end of the year.

In terms of that $A600m absorption of capital, the biggest area was in Macquarie Capital where we were growing both the private credit book and equity deployment and that was in areas like technology, and infrastructure and energy. We also had CGM, particularly in the second half, increased credit capital driven by portfolio growth and client service, and in BFS we had ongoing growth in home loans, business banking, partially offset by the runoff in car loans, but consistent absorption of capital.

Then, in Macquarie Asset Management, particularly in the second half, you saw that reduction of $A700m, just in the second half due to divestment predominantly driven, as I said, by this agreed acquisition of the six renewable investments by the MGECO fund. So, with that, we remain in very comfortably above our Basel three regulatory ratios, as you can see here.

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The last thing I wanted to touch on is the dividend, before handing over to Alex. The Board has declared a second half ordinary dividend of $A3.85 per share, that takes the full year dividend to $A6.40, and that is 40% franked, it's at 70% payout at the higher end of our range. We have mentioned that we feel have surplus capital at the current stage, we are mostly addressing that, the most effective way for shareholders is via buyback, but we also are doing it through dividends.

So, with that, I will hand over to Alex to take you in much more detail through the financials.

Alex Harvey:Thanks Shemara, and good morning, everyone, from me as well. As Shemara said, I will now take you through a little more of the detail of the financial results for the March year end. Starting with the income statement, I might focus initially on the second half and then draw it together for the full year result.

So, you can see, as Shemara said, a stronger second half relative to a pretty subdued first half of '24. Operating income for the second half was up about 13.5% and the main drivers of that you can see at the top of that stack there, $A417m increase from net interest and trading income. We also had a $A203m increase in fee and commission income.

We had a $A252m reversal through the P&L of credit and other impairment charges. We also had nearly a doubling of the investment income as the climate for realisation, the second half was better than we saw in the first half.

From an operating expenses viewpoint, you can see the operating expenses up, about 4% on the first half, largely that reflects the increased profit share expense we saw coming through the Group in the second half consistent with the performance of the Group, partially offset by lower underlying salary costs as headcount is trending down.

So, on a total basis, that was $A2,107m bottom line up about just under 50% from where we were for the first half. Now, if you bring those two halves together and look at the full year result you can see net operating income at $A16.9b down 12% on where we were this time last year, and

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the main drivers of that were a 16% reduction in net interest in trading income following the very strong conditions the CGM experienced through FY23.

We also saw a 49% reduction in investment income coming through particularly Macquarie Capital and Macquarie Asset Management. Partly offsetting that was a $A235m release in the P&L from some impairments we'd taken on a small number of equity positions across the Group in prior periods, and $A134m release in the P&L from credit impairments where we see the macro-economic climate improving and we've changed our weighting of scenarios that are impacting our expected credit loss provisioning.

If you look at the operating expenses, operating expenses were broadly in line with where we were for FY23. There's a couple of things happening there. In terms of underlying average headcount, average headcount for the year was up 8% from where we were in FY23, and we're seeing ongoing, albeit slowing, wage inflation through the year.

We've continued to invest in data and digitalisation efforts across the Group, and we had some unfavourable foreign exchange movements as a result of depreciation of the Australian dollar. Partly offsetting that, were lower profit share expenses consistent with the underlying performance of the Group.

The effective tax rate for the year at 26.8% up from 26.1% last year, so an increase in the effective tax rate really the nature and geography of income coming through this year, and so the bottom line of $A3,522m down 32% on the record result we saw in FY23.

Now, given the increase in the operating expenses that we've seen over the recent periods, we thought we'd add a new slide to the deck which really shows the composition of operating expenses, and importantly the movement in average headcount over the course of the last few years.

I thought I'd focus on the period from FY21 to FY24, obviously that's where we're seeing the significant step up. That's also been a period of

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time of significant growth across the Group. So, from a revenue viewpoint, in FY21 we did $A12.8b worth of revenue. In FY24, we're doing $A16.9b worth of revenue.

Commensurate with that was the increase in the operating cost base. The operating cost base in FY21 $A8.9b in total, now just over $A12.1b. In terms of the underlying drivers of that increase in the cost base, you can see average headcount over that period of time increased 29%. There are three main drivers there. We invested in the growth, in the business that we've seen over the course of the last several years.

We've increased our focus, our headcount associated with regulatory and compliance obligations in many jurisdictions around the world, and we've also undertaken some acquisitions. So, we've increased our headcount as a result of those acquisitions that the Group has done over the last few years.

In addition to that, we've seen a 50% increase in non-salary technology expenses, things like market data, things like software licences, progress of data and digitalisation across the Group they're intended to scale what the enterprise is able to do on a global basis, and of course investment that we're making in data and digitalisation to support our important regulatory and compliance obligations around the world. So, that's a 50% increase in non-salaries technology.

We've also seen a nearly $A500m increase in other expenses and there's a few components there, obviously, but a couple of things that are worthy of note. In this period, in particular, is that we saw travel and entertainment expenses up quite considerably from '21 to '24, most because 2021 was actually a low period as people recall in COVID, but in addition to that, we've seen a significant step up in the amortisation of intangibles consistent with the sort of businesses that we bought of the course of the last few years.

You can see from '23 to '24, the headcount, the operating expenses are fairly flat and what we're really seeing there is, whilst the averages have been going up over the last three or four years, we're now starting to

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