Half Year 2025 Macquarie Group Ltd Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Ed Henning - CLSA Limited - Analyst : Thank you, Ed Henning from CLSA. Couple of questions from me. Can you just touch a little bit more on CGM? And you talk about the supplier side issue that you're seeing at the moment. In the second half, it's normally a stronger result called the northern hemisphere winter. Can you just talk about what you've got in your guidance for the second half around the increase coming through? That is first question. And then the second question, as you look into '26, can you just touch on the impact of potentially selling the two large green assets in the MAM business? How much that expense base is and then the timing of when that rolls off? Shemara Wikramanayake - Macquarie Group Ltd - Chief Executive Officer, Managing Director of Macquarie Group, Executive Director, Member of the Executive Committee Yeah, and I'll let a few of the group heads contribute as well because Ben's online and Simon's here. But basically, on CGM, I'll just give a brief comment. Simon, I will let you comment. That we are seeing through this most recent second quarter that there is strong supply particularly in energy markets, but across the board in North America and Europe. And we haven't had demand destruction issues happening like extreme weather events, et cetera. So it's been a reasonably benign summer. And storage levels are very high. And you know, if I take Germany as an example, they've been able to reduce their energy demand by 20%, since the Russian invasion of Ukraine. Unfortunately, things like industry relocating to China, et cetera. But it's been meaningful, the reduction or the management of demand and then also the storage and supply that people are sitting with. But I'll let Simon elaborate in a moment. And then in terms of the green assets, as you know, we had quite a large portfolio that we brought across over to Macquarie Asset Management. Some of the new stuff we bought was held for the funds and it's going into the funds as they raise. But the old assets, as we've mentioned, we're looking to exit to third parties, because we don't want questions on the transfer price. The portfolios that we have been realized now is this year a green solar portfolio called [SERO] which will be realized either this financial year or early next year is probably the first one off the -- cab off the rank. And then we have an offshore wind portfolio called [Corio], which will probably be realized next financial year or early the one after. The expenditure in relation to those portfolios, we said will be broadly in line, it's several $100 million a year that we're incurring in OpEx and DevEx. And it varies as the assets go through their cycle. So at the moment, they're principally in development phase. I think possibly middle of next year as we get into construction on some of the assets, the expenditure could pick up. But I would say we're super disciplined in terms of which projects we proceed on what we invest based on whether we're creating value that we think we'll get return for. So whilst it might affect lumpiness of timing of income and expenditure, we -- the team are very experienced in investing in these asset classes and very disciplined about it. This year's expenditure is broadly in line with last year's. So I might, Simon, if you don't mind, let you just speak a little bit because others will probably be interested in this as well and what's going on in the financial markets is obviously going very strongly and clients growing but in commodities.

Question: Ed Henning - CLSA Limited - Analyst : That's right. Sorry. Can I just follow up just on the first one on CGM. Just what you've got priced because obviously the second half is normally stronger. What you've got priced in for elevated volatility coming through? Are you assuming the current conditions hold going forward and then you get that little bit of seasonality, I just want to understand -- Shemara Wikramanayake - Macquarie Group Ltd - Chief Executive Officer, Managing Director of Macquarie Group, Executive Director, Member of the Executive Committee Probably the latter is what we're assuming, given what we're seeing in each of the commodity markets at the moment.

Question: Ed Henning - CLSA Limited - Analyst : Thank you.

Question: Brian Johnson - MST Financial - Analyst : Thank you very much. Just a few very quick ones, if I may. The first one is, could you give us a handle on what you think the dividend reinvestment plan participation will be?

Question: Brian Johnson - MST Financial - Analyst : The second one, if I may, Alex like private credit is pretty topical at the moment. And previously, I'd just be interested if I just get three numbers from you if I can. So from memory, I think the life of the book is about three years, is that still case?

Question: Brian Johnson - MST Financial - Analyst : Okay. And the long run loss rate is about 30 basis points?

Question: Brian Johnson - MST Financial - Analyst : Okay. Can you tell me what the ECL balance is in respect of the book?

Question: Brian Johnson - MST Financial - Analyst : So it's -- so we've got about 300 basis points of cover on a long run loss rate of 30 basis points. So that's about three times -- is my maths wrong? Shemara Wikramanayake - Macquarie Group Ltd - Chief Executive Officer, Managing Director of Macquarie Group, Executive Director, Member of the Executive Committee 10 times.

Question: Brian Johnson - MST Financial - Analyst : Could I just have a go at wrapping this all together then. If I have a look at that slide 47, 9.9% is the return on equity you're doing. And you might say perhaps it should be a little bit higher. But the $9.8 billion is not practically deployable. So let's say it is 9.9%. Is that good enough? When we have a look at -- if we look, for example, at Macquarie Asset Management, we're probably getting a fantastic ROE on the private markets business, less so on the public markets. It's just -- Shemara, have we seen a fundamental change in the ROE outlook for Macquarie or when we start to get this tremendous pipeline of assets coming through, do we see that number pump back to where it used to be? Shemara Wikramanayake - Macquarie Group Ltd - Chief Executive Officer, Managing Director of Macquarie Group, Executive Director, Member of the Executive Committee Yeah, the main thing I'd point out Brian is that 9.9% is a first half return, and we had 14% as our average for the last 18 years. Last year in the first half, we did 8.7%. And the ROE is impacted in any particular short-term period by what by the lumpiness of earnings in some of our business is. So particularly Macquarie Asset Management and Macquarie Capital, where Macquarie Asset management at the moment is whole a particularly large few billion of assets on which the earnings are going to be very lumpy. So typically, their equity would be 1% of the equity under management in our funds. But at the moment, they have both the aircraft finance and the green assets in there that will -- as we've always said, realize over time, and if you look at the restated Macquarie Asset Management accounts, they reflect the big lumpy one off gains as we've historically had these big green positions that we lies in a lumpy way. So it'll create more volatility in their ROE for a period. But we're confident that we can get the ROE on those investments and that's why we have made the investments and continue to sit with them. Macquarie Capital's book has grown a lot, a couple of billion over the last few years as we've grown the private credit which delivers income as we invest. But also, we've grown in the four equity strategies. And those positions have lumpy realizations, and that book is seasoning. So we're going through a period where there's a bit of a drag on ROE in the short-term, both in terms of the Macquarie asset management green assets and the Macquarie Capital investments we're doing in our four equity strategies. But basically, we apply an ROE hurdle to all our businesses as we give them capital and it may be different for BFS, where we're investing in lower risk strategies to what it might be for Macquarie Capital when we're investing in venture capital, like [Newicks and Pexa], et cetera. And the check sizes will be different. But ultimately, there are different target returns for the different businesses. Another one for CGM, of course. And we do not deploy capital unless we're confident that our businesses can deliver those hurdles. As you can see, the long-term returns out of the businesses have been 22% in the what are called annuity style businesses and 17% in the market facing. And that has delivered a 14% net after holding large surplus capital positions like we always have had. So we feel comfortable over the medium term that we can be delivering these low to mid-teens ROEs after our large surplus capital positions. But in the short-term, you know, two of our groups have a large asset investment that we'll realize in due course instead of in this six months.

Question: Brian Johnson - MST Financial - Analyst : Just the point though, if I have a look at the pure infrastructure fiduciary businesses of those units, I get that the ROEs are where they are at the group level. But a lot of the narrative is that the infrastructure business is still that 40% plus level. Shemara Wikramanayake - Macquarie Group Ltd - Chief Executive Officer, Managing Director of Macquarie Group, Executive Director, Member of the Executive Committee As the same for us, we have $2 billion of equity in our $200 billion of equity under management and we're getting very strong ROEs on that. It's the business.

Question: Matthew Dunger - BofA Securities - Analyst : Yes, thank you very much. I just wanted to ask on the digital revaluations in Macquarie Asset Management. I was wondering if you could comment on the carrying value of Macquarie Capital digital assets on slide 31. It looks like you have a touch under $1.5 billion of digital infrastructure there. It doesn't appear that there's been any similar sort of mark up across that portfolio in mat cap. Is there any comment you can make there? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 31, 2024 / 11:00PM, MQG.AX - Half Year 2025 Macquarie Group Ltd Earnings Call Shemara Wikramanayake - Macquarie Group Ltd - Chief Executive Officer, Managing Director of Macquarie Group, Executive Director, Member of the Executive Committee I'll let Alex comment briefly. What we have to do with the fund assets is a different accounting standard where we basically as we move, when there's highly improbable risk of reversal, we have to recognize performance fees. So there's an obligation on us to be revaluing our assets in a very rigorous way. We are conservative in doing that because it's a highly improbable risk of reversal test. Whereas on the balance sheet, when we hold these positions, it depends whether we're equity accounting or consolidating, et cetera as to whether we need to mark.

Question: Matthew Dunger - BofA Securities - Analyst : Okay, fantastic. Thank you. And I just wondered if you could make any comments around -- we've talked previously about the GAAP between buyers and sellers on, on some assets. Is that closing? And how are you viewing from a Macquarie Group perspective, the value of some M&A opportunities out there, given your script trading at a 2.5 times book? Is this a more attractive environment to grow your business? Shemara Wikramanayake - Macquarie Group Ltd - Chief Executive Officer, Managing Director of Macquarie Group, Executive Director, Member of the Executive Committee Yeah, we've certainly seen as the rocketing we've had of interest rates globally has started to ease and investors have become more confident now as to where discount rates are settling that buyers and sellers are starting to meet on price, more an activity level has picked up in M&A. Certainly, in Macquarie Asset Management, we mentioned we've invested over $10 billion. So we're picking up again in terms of opportunities we're seeing to do capital in Macquarie capital as well. We've deployed capital and we probably at this stage, as I said, are focusing on recycling and seasoning our book. But we certainly in private credit have seen good opportunities. The $5 billion that we invested in the first half is equivalent to what we've been investing over a whole year recently, and we're getting the good returns as well, good quality investments at the spreads that we want. So activity level certainly is picking up. At the Macquarie Group level, it's up to each of our operating businesses strategically, whether they want to grow by acquisitions, not just investing in their equity strategies, but you know, does CGM want to do another acquisition? There was a time when we did Corona constellation, et cetera, but it is really driven by the businesses coming to us and saying they see an inorganic opportunity to grow. I think Greg in BFS, we're happy with organic growth for now. In CGM, I don't think we're having anything major put to us. There's nor in Macquarie Capital and Macquarie Asset Management. As we've discussed, there are a whole lot of structural changes happening in that sector, and we will evaluate whether we should look at inorganic responses to that versus organic growth. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. OCTOBER 31, 2024 / 11:00PM, MQG.AX - Half Year 2025 Macquarie Group Ltd Earnings Call

Question: Matthew Dunger - BofA Securities - Analyst : Thank you very much.