Credit Opinion: Macquarie Bank Limited

Transcription

1 Credit Opinion: Macquarie Bank Limited Global Credit Research - 09 Nov 2014 Sydney, New South Wales, Australia Ratings Category Moody's Rating Bank Deposits A2/P-1 Bank Financial Strength C- Baseline Credit Assessment baa1 Adjusted Baseline Credit Assessment baa1 Issuer Rating Senior Unsecured A2 A2 Subordinate Commercial Paper Baa2 P-1 Other Short Term (P)P-1 Ult Parent: Macquarie Group Limited Issuer Rating A3 Senior Unsecured Subordinate MTN A3 (P)Baa3 ST Issuer Rating Other Short Term P-2 (P)P-2 Macquarie Capital Funding L.P. BACKED Pref. Stock Non-cumulative - Ba1 (hyb) Dom Curr Macquarie Finance Limited BACKED Pref. Stock Non-cumulative - Dom Curr Ba1 (hyb) Contacts Analyst Phone Ilya Serov/Sydney Francesco Mirenzi/Sydney Stephen Long/Hong Kong Tanya Tang/Sydney Key Indicators Macquarie Bank Limited (Consolidated Financials)[1] [2]3-14 [2]3-13 [3]3-12 [3]3-11 [3]3-10 Avg. Total Assets (AUD million) , ,965.0 [4] Total Assets (USD million) , ,288.7 [4] Tangible Common Equity (AUD million) , ,313.0 [4] Tangible Common Equity (USD million) , ,712.3 [4] Net Interest Margin (%) [5]1.2 PPI / Average RWA (%) [6]2.3 Net Income / Average RWA (%) [6]1.2

2 (Market Funds - Liquid Assets) / Total Assets (%) [5]12.1 Core Deposits / Average Gross Loans (%) [5]73.3 Tier 1 Ratio (%) [6]10.7 Tangible Common Equity / RWA (%) [6]13.5 Cost / Income Ratio (%) [5]71.5 Problem Loans / Gross Loans (%) [5]1.3 Problem Loans / (Equity + Loan Loss Reserves) (%) [5]6.9 Source: Moody's [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - transitional phase-in; IFRS [3] Basel II; IFRS [4] Compound Annual Growth Rate based on IFRS reporting periods [5] IFRS reporting periods have been used for average calculation [6] Basel III - transitional phase-in & IFRS reporting periods have been used for average calculation Opinion SUMMARY RATING RATIONALE The A2 / P-1 ratings of Macquarie Bank Limited (MBL) reflect its strong overall credit profile. The A2 rating also includes two notches of uplift to reflect our view that depositors and senior bondholders would benefit from systemic support, if needed. MBL is the principal operating entity of Macquarie Group Limited (MGL, rated A3 / P-2). Please refer to MGL's Credit Opinion for details of the credit profile of the consolidated Macquarie group. The majority of the rating factors for MBL and MGL are the same and this credit opinion provides an abbreviated outline of rating factors pertinent exclusively to MBL. Our rating view of MGL's and MBL's standalone credit profiles balances the risks of the group's continual evolution and its earnings profile -- which is subject to a degree of volatility -- against the credit positives of the group's strong capitalization and liquidity metrics, its entrenched market position in Australia and management's prioritization of business lines with greater earnings stability. For MBL, our rating view also reflects the bank's close integration with the broader Macquarie group. Although regulation limits the extent of MBL's intergroup exposures, we view the operational integration of the Macquarie group to be sufficiently tight to warrant the same baa1 stand-alone rating for MBL and the non-bank operations of the group, which are housed under an intermediate holding company, Macquarie Financial Holdings Limited (MFHL). (Please select "Read Full Report" for a more in-depth discussion. Note that the Pre-Provision Income / Average RWA and Net income /Average RWA ratios in the Key Indicators Table are calculated under the Basel III regime as of FY In Australia, minimum capital requirements under Basel III have been met since 1 January 2013 and there are no transitional arrangements for capital deductions. To calculate the average risk weighted assets for FY 2013, only reporting period subsequent to 1 January 2013 were used). Rating Drivers - Capital levels remain supportive; future positioning is a key rating consideration - Liquidity is at the upper end of the peer group - Strong potential for systemic support - No rating uplift from parental support. The outlook is stable. What Could Change the Rating - Up Despite the recent trend towards a more diversified business profile, MBL (and the broader MGL group) retains exposure to financial market conditions. As a result, even if operating conditions improve markedly, the prospect of an upgrade is unlikely. Moody's views wholesale / investment banking businesses to be appropriately rated in the Baa range. MBL's standalone credit assessment of baa1 already positions it at the higher end of this range.

3 What Could Change the Rating - Down Protracted earnings weakness that results in MBL (or the broader Macquarie group, given its close operational integration with MBL) taking on additional risk and/or materially reducing capital to boost return on equity could result in a downgrade. As the ratings of MBL incorporate the potential for systemic support, any signal from the regulator or government that suggests a less creditor-friendly stance on bank resolution could create downward pressure on the supported ratings. DETAILED RATING CONSIDERATIONS CAPITAL LEVELS REMAIN SUPPORTIVE; FUTURE POSITIONING IS A KEY CREDIT CONSIDERATION As a result of MBL's close integration within the broader Macquarie group, we assess MBL's capitalisation within the context of MGL. MGL's capital requirements are a combination of Basel III capital requirements for the banking operations contained within MBL and additional 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). MGL's capital deployment has been focused on the group's three divisions with relatively more stable cash flows (its `annuities-style' businesses -- Macquarie Funds, Banking and Financial Services, and Corporate and Asset Finance), which have seen an additional AUD 0.4 billion capital deployed during 1H 2015, bringing their overall capital requirements to $6.2 billion or 53% of total capital requirements for the group. This is the highest proportion of capital allocated to these businesses over the recent past. Partly as a consequence of higher capital needs, the group has reported a reduced APRA Basel III Common Equity Tier 1 (CET 1) ratio of 8.7% (down from 9.6% as at FY 2014). On a self-reported `raw' Basel III basis, the CET 1 ratio was 10.8% (down from 11.4% as at FY 2014). The capital requirements in respect of MGL's non-bank entities are just under AUD 3 billion, relative to total nonbank funded assets of AUD 13.2 billion. The group has increased the `equivalent risk weight' (i.e. the amount of capital held against funded assets, excluding net trading assets and deposits held with MBL, assuming the standard 8% capital requirement) to in excess of 200%. Against its equity investments and co-investments in Macquarie-managed funds, it reports a 49% capital-to-assets ratio. In total, as at September 2014, MGL had AUD 1.4 billion of capital buffers relative to APRA's requirements, assuming a minimum CET 1 ratio of 8.5% of the group's risk-weighted assets. This continues the trend toward a reduced capital buffer, which has decreased from 27% as at March 2013 to 16% in 1H However, including the recent hybrid issuance, the capital surplus is AUD 1.8 billion. Although at this point we view the reduction in the capital buffer as credit-neutral, a continuation of the longer-term trend towards lower capital surpluses could put Macquarie's credit profile under pressure. In this respect, we see the issuance of an AUD 429 million hybrid instrument on October 2014, the reduced dividend payout ratio of 62% and the re-introduction of a discount on the group's dividend reinvestment plan, all of which help buttress its capital ratio, as indicative of management's commitment to maintain a conservative balance sheet, which is a key support to Macquarie's credit profile. LIQUIDITY IS AT THE UPPER END OF THE PEER GROUP The Macquarie group's external funding is chiefly raised by MBL. Under Prudential Standard APS 222, MBL is able to pass some of these funds to the rest of the group, but its aggregate exposures to related entities are capped at 35% of its capital base. MBL has successfully grown its deposit base on the back of its private client business. Factors we would view to support the stickiness of such deposits are that they are transaction accounts with relatively small average balances, such that there would be a high degree of coverage by Australia's Financial Claims Scheme (a form of deposit insurance). The Macquarie group tends to hold liquidity at the operating subsidiary level. MBL's liquidity strengthened during the crisis, but even before the crisis, MBL has always maintained a conservative liquidity profile, in line with the overall group - aiming to be able to cover a minimum of one year's worth of wholesale obligations and contingent

4 liabilities from internal sources. In 1H 2015, the group has seen the proportion of short-term funding increase to 12% (and 14% for MBL). This is well below the pre-crisis levels but compares unfavorably with the level of 6% reported in 2012 and We note that somewhat offseting these risk, MBL increased its holding of liquid assets. Our expectation is that short-term funding will stabilize at around 10-12% of the group's overall funding needs. Moody's views management's commitment to maintaining strong liquidity coverage as major positive factor underpinning the group's ratings, but will continue to monitor the group's funding profile as its business model evolves. STRONG POTENTIAL FOR SYSTEMIC SUPPORT We judge the probability of systemic support for MBL in the event of stress to be high. This is based on MBL's significant position in the Australian financial market. Additionally, the regulator's own Probability And Impact Rating System - which measures the systemic impact of the failure of an individual institution - uses asset size as a major input. As one of Australia's larger banks, MBL scores well by this metric. It also plays a significant role in Australia's financial markets. Although the bank does not have a big presence in the retail deposit market, it has been growing consistently and its overall deposits are comparable in size to Australia's regional banks. Australia is a member of the Financial Stability Board (FSB), and in its interim report, Australia's Financial System Inquiry has highlighted the lack of statutory bail-in as a gap relative to international standards. The Australian authorities have thus far adopted a cautious and nuanced public stance on creditor bail-in. Treasury has commented that further consideration is warranted, but noted concerns about the workability of bail-in for large institutions. At the same time, while supporting the FSB's aims to minimize the burden of bank resolution costs on tax payers, the RBA has opined that the policy "toolkit" should retain the ability to "take an institution under public ownership before selling it again when the risk appetite of the private sector has returned to more normal levels". NO RATING UPLIFT FROM PARENTAL SUPPORT MBL's ratings do not include any uplift from the potential for support from its parent, MGL because (i) MGL is rated lower as a result of being structurally subordinated to its operating subsidiaries, (ii) MGL's and MBL's performance are highly correlated as a result of their close operational integration and (iii) the group holds its liquidity resources at the operating company level. In practice there is some potential for MGL to provide additional capital support to MBL -- but also for capital to flow the other way. MGL is the listed entity that would raise additional capital for the group if required. The regulator has also publicly indicated that so long as regulated entities -- such as both MBL and MGL -- individually meet minimum regulatory capital requirements, it is ambivalent where surplus capital is held within a group structure. Therefore, given that MBL operates at a relatively high level of capital, and in view of the close operational integration of MBL and the rest of the group, there is also a possibility that capital and dividends could flow from MBL up to MGL at certain times. Rating Factors Macquarie Bank Limited Rating Factors [1] A B C D E Total Score Trend Qualitative Factors (50%) B- Factor: Franchise Value C Market share and sustainability x Geographical diversification x Earnings stability x Earnings Diversification [2] Factor: Risk Positioning C+ Corporate Governance [2] Ownership and Organizational Complexity Key Man Risk Insider and Related-Party Risks Controls and Risk Management x

5 - Risk Management x - Controls x Financial Reporting Transparency x - Global Comparability x - Frequency and Timeliness x - Quality of Financial Information x Credit Risk Concentration Borrower Concentration Industry Concentration Liquidity Management x Market Risk Appetite x Factor: Operating Environment A Economic Stability x Integrity and Corruption x Legal System x Financial Factors (50%) B- Factor: Profitability C PPI % Average RWA (Basel II) 2.03% Net Income % Average RWA (Basel II) 1.33% Factor: Liquidity B+ (Market Funds - Liquid Assets) % Total Assets 9.24% Liquidity Management x Factor: Capital Adequacy A Tier 1 Ratio (%) (Basel II) 11.77% Tangible Common Equity % RWA (Basel II) 14.80% Factor: Efficiency D Cost / Income Ratio 74.50% Factor: Asset Quality B+ Problem Loans % Gross Loans 1.22% Problem Loans % (Equity + LLR) 5.95% Lowest Combined Financial Factor Score (15%) C- Economic Insolvency Override Neutral Aggregate BFSR Score B- Aggregate BCA Score a1 Assigned BFSR C- Assigned BCA baa1 [1] - Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information. [2] - A blank score under Earnings Diversification or Corporate Governance indicates the risk is neutral. 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 on for the most updated credit rating action information and rating history Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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