Another Strong Quarter for Macquarie

Business Strategy & Outlook:

Macquarie Group is a global asset manager which has spent decades branching out from its Australian investment banking roots. Asset management provides more recurring revenue streams compared with transactional based investment banking, but still carries volatility as base management fees are tied to underlying asset values–primarily fixed income, equities, and infrastructure assets. Macquarie Asset Management is a top 50 global asset manager with over AUD 750 billion of assets under management. Specialist capabilities in infrastructure and property management set Macquarie apart from most peers and has been a key source of growth. With established capabilities and investment records, the large asset managers in the space continue to garner the bulk of inflows into the category. The American Society of Civil Engineers estimates around USD 5 trillion is needed on infrastructure by 2025 covering ageing transportation, electricity, schools, and airports. The European Investment Bank estimates the transition to renewable energy will require annual spend on energy infrastructure to almost double to EUR 688 billion. More broadly, Oxford economics estimates USD 75 trillion of infrastructure investment is required globally by 2040.

Macquarie retains a targeted approach across its investment banking business, not actively seeking to take global players head on. In the Americas and EMEA, Macquarie holds less than 2% share. Macquarie continues to leverage its global expertise and reputation in infrastructure and energy to focus on deals in these markets, with success in the smaller end of the market sometimes underserviced by larger investment banks. It is also more active in advising the private equity space. The banking and financial services division includes a retail bank (around 4.5% of Australian home loans) and an asset leasing business heavily weighted to auto vehicle financing. Macquarie’s strategy to invest in technology to improve both the customer experience and the banks’ credit approval processes will continue to deliver above-market loan growth.

Financial Strengths:

The group balance sheet is strong, with Macquarie Bank having an APRA Basel III common equity Tier 1 capital ratio of 12.3% at June 2022. Based on internationally harmonized Basel III metrics, the common equity Tier 1 capital ratio was 15.6%. At a group level, Macquarie has AUD 10.1 billion in surplus capital above regulatory requirements. The dividend payout ratio target is 50%-70% of earnings. A high percentage of offshore earnings means dividend franking is currently 40%. Funding sources are well diversified, with minimal reliance on short-term wholesale funding markets. Customer deposits represent around 40% of total funding with bonds (20%) and equity and hybrids (15%) other large components of the well diversified funding mix. While Macquarie’s earnings are exposed to global markets, an increasing base of recurring income provides improved stability and the financial position is sound.

Bulls Say:

Macquarie’s position as the largest infrastructure asset manager globally leaves the firm well placed to benefit from underlying demand for assets and investors searching for maintainable income streams.
The expansion into funds management has produced more maintainable, less capital intensive, annuity- style income, which will prevent a GFC-like shock to earnings and return on equity.
A focus on niche segments of investment banking allows Macquarie to continue to increase earnings globally.

Company Description:

Macquarie Group began trading in 1969 as Hill Samuel Australia, obtained its bank license in 1985, and listed in 1996. It’s Australia’s only sizable listed investment bank, now internationally diversified, operating in asset management, banking and wealth, risk and capital solutions, and advisory.

(Source: Morningstar)

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