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Edited Transcript of MQG.AX earnings conference call or presentation 8-May-20 12:00am GMT

·110 mins read

Full Year 2020 Macquarie Group Ltd Earnings Call Sydney, New South Wales Jul 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Macquarie Group Ltd earnings conference call or presentation Friday, May 8, 2020 at 12:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Alexander Harms Harvey Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia * Daniel Wong Macquarie Group Limited - Global Co-Head of Macquarie Capital * Florian Herold Macquarie Group Limited - Head of Principal Finance - Macquarie Capital * Gregory Colin Ward Macquarie Group Limited - Head of Banking & Financial Services Group and Deputy MD * Martin Stephen William Stanley Macquarie Infrastructure and Real Assets (Europe) Limited - Global Head * Mary J. Reemst Macquarie Group Limited - CEO of Macquarie Bank Ltd * Michael J. Silverton Macquarie Group Limited - Global Co-Head of Macquarie Capital * Nicholas O'Kane Macquarie Group Limited - Head of Commodities & Global Markets * Nicole Sorbara Macquarie Group Limited - Executive Director, Global COO & Group Head of Corporate Operations Group * Patrick C. Upfold Macquarie Group Limited - Chief Risk Officer & Head of Risk Management Group * Samuel John Dobson Macquarie Group Limited - Head of IR * Shemara R. Wikramanayake Macquarie Group Limited - CEO, MD & Executive Voting Director ================================================================================ Conference Call Participants ================================================================================ * Andrei Stadnik Morgan Stanley, Research Division - VP * Andrew Triggs JP Morgan Chase & Co, Research Division - Research Analyst * Brendan Sproules Citigroup Inc, Research Division - VP * Brett Le Mesurier Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance * Brian D. Johnson Jefferies LLC, Research Division - Equity Analyst * Edmund Anthony Biddulph Henning CLSA Limited, Research Division - Research Analyst * Jonathan Mott UBS Investment Bank, Research Division - MD and Banking Analyst * Matthew Wilson Evans & Partners Pty. Ltd., Research Division - Executive Director of Financials * Richard E. Wiles Morgan Stanley, Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Samuel John Dobson, Macquarie Group Limited - Head of IR [1] -------------------------------------------------------------------------------- Good morning, everyone, and welcome to Macquarie's FY '20 results presentation, from -- in a virtual sense, at least. Today, you'll hear from our CEO, Shemara Wikramanayake; and our CFO, Alex Harvey. Also on the line today, we've got our group heads, who will be available for questions after the presentation. So with that, I'll hand over to Shemara. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [2] -------------------------------------------------------------------------------- Thanks, Sam, and good morning, everyone, and welcome from me as well. And I'm sorry we can't have many of you that usually join us in the room here with us today, but we're very pleased with today's technology to be able to bring you our results in this virtual format. And while we're talking about responding to the current environment and how we're all are dealing with it, let me just start, before going into the results, by mentioning a few things Macquarie is doing in terms of responding. And first of all, in relation to our employees, we've had now about 98% of our staff working remotely for 7 weeks, and people in Asia, a little bit longer. But we've managed to continue business with no material interruption. And importantly, we've been able to support our employee well-being through that period as they work in greater isolation like many of you are having to deal with. Then turning to our clients. We've also been able to continue to support our retail and our small business clients through hardship support, deferred payments, access to finance and also providing them the equipment they need to get on with keeping cash flows in small businesses through our leasing operations. And with the larger businesses, we've been, through Macquarie Capital, providing a lot of help on capital raisings and other financing solutions. Then looking at our portfolio companies, on the balance sheet and also in our funds, there, again, we're focusing on employee well-being, 240,000 people that work for us and our contractors there. And also financial and operational resilience of the assets, providing these essential community services as well as repurposing assets like airport carparks to do COVID testing, et cetera. And then lastly, in terms of our communities, we have allocated another $20 million to our foundation this year to help combat the impacts of COVID-19, and those grants are already starting to roll out. And in addition, our businesses are also helping where they can. So the BFS team with the increased demand in call centers, has managed to train furloughed employees and offer employment to them. So these are some of the things we're doing more broadly, but also we've been very focused on our shareholders. And turning to the results. You'll see there, as usual, we started with the page that outlines the operations of our 4 operating groups and shows the mix shaded in blue of our annuity-style activities versus market-facing. This varies depending on the external environment. And this year, we had a 63% contribution from the annuity-style businesses. Looking then at the half-on-half numbers. The second half result was down 13% in terms of profit attributable to shareholders on the first half, and it was down, pretax, 12%. But what I'd note on the top line of that slide is that our operating income was basically up 7%, and our operating expenses were down 2%. And the thing that drove that net drop was really the increase in credit and other impairment charges, which were about $140 million in the first half and close to $900 million in the second. So a $750 million increase in credit and impairment charges in the second half over the first. And taking into account those credit and impairment charges, the net profit contribution from the operating groups was down 10% on the first half and down 27% on what was a very strong half in the second half of last year, where we had big gains on investment realizations in Macquarie Capital and positive results out of the North American gas in the commodities and global markets business. Now looking at the full year result versus last year, you see a similar story to the half-on-half, where the profit attributable to shareholders was down 8% after tax and the EPS down 10%. And on a pretax basis, it was down 11%. But again, if you look at the top line, the operating income was broadly flat, slightly up on last year. And the operating expenses, which is 3 lines down from the other -- or fourth line down, was down slightly or broadly flat as well. And the big driver of the change in the result was, again, the increase in credit and impairment charges, which was about $450 million to $500 million up. And given the impacts of this, we thought this year we'd show you the results of the groups, excluding that credit and impairment charge -- other impairment charge, which is isolated on this slide in front of you now. And you'll see that 3 of our groups had record results. Macquarie Asset Management, up about $530 million; BFS, slightly up; and CGM also up on a strong result last year. Macquarie Capital was down because of that very large amount of investment realizations we had in the second half of last financial year. And again, the net profit contribution from the operating groups, after those provisions, was down 11% on FY '19. So putting all that together, looking at the full year, operating income post the credit and other impairment charges was down 3%. And as I mentioned, profit was down 8% on FY '19, and earnings per share down 10%. And the dividend, the Board has declared a dividend of -- that will give us a full year dividend of $4.30, which is down 25% on last year. I'll talk about that a little bit more at the end of my first section of comments. Before I do that and before we dive into the results from each operating group, as usual, I'll make some comments on the contribution by business mix and also by geography. And in terms of business mix, you see on this slide here the 5-year history of the contribution of the various operating groups. This year, we had 63% from the annuity style. But you can see on that slide, we've had good growth over the last 5 years in Macquarie Asset Management at the bottom of those bar charts, BFS just above it, commodity and global markets. And then Macquarie Capital, impacted very much by market conditions, timing of realizations, et cetera, It was a big year last year in FY '18 -- in FY '19, apologies, and a step-down this year, with those investment realizations having happened in the third quarter of last year. The assets under management are up to $606 billion, and that's up 10% on where we were at the end of FY '19. The big drivers there are the investments in the managed funds, net of divestments. And then also the FX movements contributed positively, and that was partially offset by the recent market movements and also the reduction in our contractual insurance assets. Looking at the mix by geography. The main thing to note on this slide is that we had a step-up in the contribution from Asia, which meant the relative contribution was slightly down from North America and EMEA. And in Asia, basically -- all 3 of our businesses that operate there, so BFS is the only one not active in Asia, but they've all had pleasing growth in terms of their earnings but also their business footprint and platform. And again, you can see here a 5-year history in terms of the geographic mix as well as we showed on the business mix. And this year, the 2 regions where we had a step-down in earnings were in Australia, which is where we had 2 of the large 3 realizations last year; and the Americas, where CGM had that strong result in North American gas last year. So turning then to looking at each of our 4 businesses and starting with our largest business, Macquarie Asset Management. You see this year, it contributed 40% of the group's income, and the earnings were up 16%. In the MIRA world, we had, again, a large amount of fundraising, over $20 billion, and over $21 billion of investments with divestments and realizations of over $16 billion. So that gave us just over $149 billion of equity under management to finish the year and dry powder of over $25 billion, so well positioned for the year ahead. As you know, we also, during this year, moved the real estate businesses into MIRA. We're growing the real estate asset management and the aircraft finance businesses as well as the infrastructure debt. And in the aircraft finance, where we're moving to more of a fiduciary offering, we were able to bring a second investor into that portfolio. So that the balance sheet now comprises 50% of it, and we have 50% managed on a fiduciary basis for external investors. We also were able to sell the European rail assets in the aircraft finance -- or the transportation finance business, and that will close -- or did just close in April. In the traditional asset management business, the assets under management are up about 6% to just over $382 billion, and that was driven, of course, by the Foresters Mutual Fund acquisition we mentioned during the year as well as foreign exchange, slightly offset by market movements and also the reduction in contractual insurance assets. So overall, we're placed there with a very good footprint to grow from in terms of asset management. And as you can see on the bottom of the page, we've implemented now a client solutions group to bring this broader scale of offering to our investors and continue to grow the business from there. Turning then to banking and financial services, which contributed 14% of our income this year. As you can see, the earnings from that group was up 2%, which is a good result post the provisions that were taken recognizing the environment at year-end and also expected credit losses moving forward that would have brought to account this year. That business, as you know, has been growing nicely in terms of Australian market share. And particularly in terms of the home loan portfolio, we're up more than 35% over the year to be over $52 billion now in terms of the size of that book. And we've particularly been focusing on lower LVR lending and owner-occupied lending. Also, the business banking book is up 10% to $9 billion. There, you'll know that we focus on professional services sectors, and this year, we grew much more into emerging health, built environment and technology as new sectors to focus on. And then in terms of wealth management, the funds on the platform, all up -- or down 8%, at about $79 billion. I'd note that net sales grew by 3%, but obviously, the funds on platform were impacted by market movements at the end of the year. And at the bottom of the page, the deposits are up 20% to now being over $63 billion. And in particular, the CMA deposits are also up 20%. So good funding being generated internally for that business. And lastly, the leasing portfolio, which was transferred into BFS over this year -- or in the last year and a bit, we continue to see decline in volume there with the runoff in the acquired portfolio that we have there and also declining new sales. But that business being integrated into BFS is able to access both efficiency and serviceability in terms of coordinating with the rest of the retail offering in BFS. Then turning to CGM, which was the second largest contributor, 32% of our income. The result there was flat on a very strong year last year in the current environment, a good result from CGM. We transferred the specialized asset and finance business into CGM, and that book had a stable portfolio over the year, with growth in both the telecoms, media and technology leasing and the energy leasing in the U.K. And also in terms of the slightly blue-shaded annuity-style activities, the commodities business also had good growth in its lending and financing activities. The commodity markets business last year, you'll recall, had a big contribution from North American gas. This year, the contribution was spread across a much broader set of its capabilities, in particular, global oil, EMEA gas and power, agriculture, and metals and mining were good contributors in that business compared to the big focus last year on inventory management and trading. And the other business lines in CGM also did well. In financial markets, we had increased revenue across all regions. In futures as well, we had increased client activity, offset partially by impairments in relation to a small number of counterparties. And in equity markets, we had an increase in revenue driven by market conditions as well. I should note that we are transferring the cash equity stock broking business from CGM over to Macquarie Capital to sit closer to the equity capital markets business there, or to sit alongside it. And that's probably a good segue to Macquarie Capital, which this year contributed 14% of our income. Now that result was down 57% on last year. But as I've mentioned a couple of times, we had 3 very large realizations in PEXA, Quadrant and Energetics in the third quarter of last year. The advisory fee -- or the overall fee income in that business was down, and that was principally because debt capital markets fee revenue was down, but the M&A revenue was up pleasingly, showing the growth in the corporate relationships and customer base there. And in particular, in infrastructure, we remain the #1 global infrastructure adviser. Also in the infrastructure and energy group, we continue our growth into the renewable energy area with 250 projects with more than 25 gigawatts in terms of the pipeline of projects we have. During the year, we made another $1.5 billion of investments and realized $700 million of assets, giving us a $1.7 billion book at the end of the year in terms of our renewable portfolio. So that's the earnings of the operating groups. I'll now just step through our financial position. And as you can see, it remains strong. Our funded balance sheet is shown on this slide, and our term liabilities continue to well exceed our term assets. We raised $26 billion of term funding during the year, principally at the bank level. And we also raised $1.7 billion of new equity capital, as you'll recall, during this financial year. In addition, our deposits, as I said, have stepped up 20% and are at $67 billion. Our capital position is also strong and stronger than we finished last year. So it's the surplus on the APRA bal, 3 basis has gone up from $6.1 billion to $7.1 billion. The main drivers of that are the earnings that we had in the period, since offset by the dividends that we paid; and then the capital raising, which was $1.2 billion net to $1.7 billion of equity raising and then the redemption of the bank capital notes. And then $2 billion invested into our businesses. And you'll see here where that capital was invested across each half in the businesses. The main areas of investment were in Macquarie Capital, where we invested in further assets net of realizations and also including FX movements. And then in the commodities and global markets in the first half, we mentioned the impact of SA-CCR, and then we also had the derivative book and FX movements impacting the capital used in that business. And that was offset by Macquarie Asset Management lease of capital driven by asset realizations, including that sell down of the Macquarie AirFinance portfolio that I mentioned as well as the MIRA performance fee recognition. Our regulatory ratios also remain well above the bal 3 minimum levels, and I particularly notice -- note that our CET1 ratio on the APRA basis is at a very strong and record level of 12.2%. So looking then in terms of capital management and the dividend that I mentioned that the Board had declared and what some of the thinking behind that was, we clearly have had our second highest earnings figure. We have a record surplus at the group level of $7.1 billion of capital. And we also have a record CET1 ratio at the bank level of 12.2%. But we are very conscious of and acknowledge the guidance by our regulator in early April in relation to capital management in this environment. And in light of that and together with the continuing uncertainty driven by the COVID-19 impacts, but having regard our strong capital position, the Board has resolved to declare a final dividend of $1.80, which is down 50% on the final dividend of FY '19. And in conjunction with the $2.50 paid in the first half, that results in a full year dividend of $4.30, which is down about 25% on last year's full year dividend of $5.75 and represents a payout ratio of 56%. Now this funded -- this final dividend is being funded entirely out of the nonbank group. The bank group has not declared a dividend in FY '20, and there's no dividend being declared out of the bank group at this time either. MBL, Probank Limited, will not be declaring a dividend. In addition to that, the Board has decided to neutralize or address the capital payment being paid by the dividend by issuing shares to satisfy the MIRA obligations and also by using a DRP at a discount of 1.5%. And those 2 actions, together with the fact that we have generated $1.2 billion of retained earnings after dividends this year and we raised $1.7 billion of ordinary equity during the year, result in our ordinary equity capital increasing by $3.7 billion over the year, assuming a $200 million take-up under the dividend reinvestment plan. Now our view is that these measures should position us well to provide a significant buffer for further and extended COVID-19-related volatility. And it will also allow us capacity for both business growth but importantly, to continue providing credit to the economy, in particular, the Australian economy, as we move forward. And I noted that we had managed to grow our mortgage book by 35% and our business banking book by 10%, and we're well positioned to continue providing this sort of service going forward. So I'll just finish then on noting that the dividend, as I said, $1.80 for the final dividend, $4.30 for the full year dividend and 56% payout ratio. Importantly, the dividend policy that the Board has in place will remain at a 60% to 80% annual payout ratio. So with that, I'll hand over to Alex to take you in more detail through the financial results. Thank you. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [3] -------------------------------------------------------------------------------- Thanks, Shemara, and good morning, everyone. As is usually the case, I'll take you now through some of the detail around the financial statements for the year ended March 2020. So starting first with the income statement and the key drivers, and perhaps looking at the second half of 2020 first. If you look at net operating income, it was down 5% for the period. And largely, you can see that's as a result of the substantial step-up in credit and other impairment charges that we took in the half largely as a result of -- primarily as a result of the deteriorating economic outlook as a result of COVID-19. From an expenses perspective, the expenses were down 2% in the second half of the year. Again, you can see a drop in employment expenses, and that's largely related to the profit share -- reduced profit share expenses consistent with the underlying operating performance of the business units across the half. Income tax expense, slightly down, resulting in a profit to MGL shareholders down 13% for the half at $1.274 billion. If you look on a full year basis now, again, starting with the net operating income. Net operating income for the period was down 3%. Net interest and trading income at the top of the P&L, they're up 4%, largely reflecting the growth in the loan portfolio in our BFS business. You can see the fee and commission income for the period, up [16%], excuse me. And that benefited from foreign exchange movements and increased base fees coming through our Macquarie Asset management business. You can see the impact of impairments and credit charges, about an [88%] step-up from the full year impact last year. And you can also see the reduction in investment income coming through the net operating income line. So net operating income overall, down 3% for the period. Expense is broadly in line with where they were in the prior year. You can see employment expenses slightly up as a result of the increase in head count, particularly in the support areas, unfavorable FX and also the accelerated amortization of share-based payments for retired KMPs, but partly offset by the reduction in profit share expenses, particularly in the second half of our financial year. Other expenses slightly up. And you can see those 2 increases actually offset by the reduction in brokerage and commission coming through from the restructure of the equities business during the year as well as the disposal of Macquarie Pacific funding business in BFS. Our income tax expense for the year was down 151. The effective tax rate just over 21%. So bringing that all together for MGL shareholders down 8% for the year at $2.73 billion for the year. Now turning to the income statement by operating group, you can see a big increase in contribution from MAM, 16% contribution from Macquarie Asset Management, largely flat in terms of the contribution from BFS and CGM, and a substantial reduction in the contribution from Macquarie Capital. From a corporate perspective, we -- a lower corporate expense, and that's reflecting both the increased utilization of funding across the group during the year as well as the reduction in profit share expenses over the course of FY '20. Tax expense, as I said, down $151 million from where we were at this time last year. Now before turning to the detailed financials for the operating groups, I thought it was important given the significance of the credit and other impairment charges this year to take you through some of the logic and some of the underpinning assumptions for our equity -- our expected credit loss modeling. Key, of course, to this is the dramatic change in economic conditions over the course of the latter part of our financial year, end of February into March and continuing today. And that forward-looking macroeconomic view needs to be factored into the ECL across our performing loan and lease portfolio. And of course, needs to be considered in terms of specific impairments that we saw coming through those loan books across the group. There are obviously many factors that influence the ECL. From our perspective, key to that is the gross domestic product that's happening to GDP, unemployment rates and, of course, the level of house prices. So over the course of the period, we developed 3 scenarios for the economic outlook. There's an upside scenario, which obviously has a substantial drop off and then a very rapid recovery. We think that's unlikely to be the scenario that emerges. We developed a baseline scenario, and a downside scenario, which are both described in the charts below. Obviously, in that baseline scenario, we expect that to be the probable outcome. In terms of the downside scenario, we think that's a possible outcome. And as we think about the ECL for the group, obviously, the ECL we've recorded this year is a weighted average of the expected credit losses across those 3 scenarios based on the weighting we applied to each of the scenarios. I note on the slide that 31 March 2020, the accumulated expected credit loss provision on the balance sheet is $1.54 billion, and you can see that in the middle of the page. So with that in mind, now talking to the credit and other impairment charges across the group. And as I said earlier, you can see the step-up from FY '19 to FY '20 about an 88% step-up over the period, and spread broadly across the organization. From a Macquarie Asset Management viewpoint, an increased impairment of about $126 million from last year, largely reflecting a small number of investments that we had to impair going into 31 March, including, in particular, an increased impairment associated with our holding of MIC in the United States. From a BFS perspective, there was an increased expected credit loss provision across the performing lease and loan liability, reflecting the deteriorating outlook that I talked about before, together with a small number of specific provisions we took in relation to some of the loan assets in our business banking portfolio. From a CGM perspective, again, we saw an increase in expected credit loss provision from the performing loan and lease portfolio in CGM. And we also saw a number of impairments on financing facilities that we provide in our futures and in our FICC business. Unfortunately, those -- we had to impair those facilities at the end of the year. So there's some specific provisions as well as that general ECL in CGM. And then from Macquarie Capital perspective, a similar story. Again, the ECL has increased over the loan portfolio in Macquarie Capital, reflecting that outlook -- that deteriorating outlook from an economic perspective and a small number of facilities where we had to take specific provisions as a result of the deteriorating performance of those credits, some of which was related to COVID-19 and some related to other factors during the year. And then from an overall group perspective, we've also taken an additional corporate overlay provision, and that really reflects a more conservative view on the outlook for the economy over the short to medium term. So now turning to the first of our operating groups, the Macquarie Asset Management group, which is the largest of our groups. As I said before, you can see a 16% step-up on the contribution for the year. A good increase in base fees, 20% up on where we were this time last year, reflecting the benefit of foreign exchange movements, reflecting the benefit of investment in the MIRA funds, the acquisition of the Foresters Mutual platform during the year, and the base fees that we get in relation to the Macquarie AirFinance fiduciary joint venture that we put together over the last 12 months. You can see performance fees stepped up $56 million this year. And pleasingly, the performance fees are coming from a wide variety of funds across the world, which is really encouraging in terms of diversity of the portfolio performance fees that we're seeing coming through MAM. A very significant step-up in investment-related income. There's a number of components for that. We had higher investment-related income driven by gains on the sale of assets in the MAM business. We also saw higher share of joint venture profits from the disposal of underlying assets in the MIRA funds. We saw the contribution from -- a joint venture contribution from the AirFinance business. And we also saw the payment of a termination fee in relation to MIRA's management rights in respect of the motorway asset in France, APRR. So all those things coming through, so a significant step-up in investment income during the period. Net operating lease income is down, largely reflecting the movement of those operating lease assets from the balance sheet into that fiduciary offering that we've talked about. And you can see credit impairment charges coming through. And you can also see a step-up in the operating expenses, mostly reflecting unfavorable foreign exchange movements. Also the full period effect of the acquisitions of GLL Real Estate platform and the ValueInvest platform in 2019, and of course, the expenses that we brought on board as a result of the Foresters acquisition in 2020. In terms of the underlying drivers, assets under management, obviously, a key driver for the business over the medium term. And you can see stepping up to over $605 billion. This year, reflecting favorable foreign exchange movement, the acquisition of the Foresters mutual platform as well as the investment of capital through the MIRA stable funds during the year. And of course, from a MIRA perspective, more particularly, equity under management being the key driver, just under $150 billion at 31 March. And you can see a significant period of capital raising really across the world and for a number of different mandates within the MIRA stable. And pleasingly, also, you saw equity return to investors at really attractive rates of return, which, of course, is an important part of the franchise that MIRA has built around the world. So turning now to our banking and financial services business, a solid result, up 2% this year. Noting that there was an increase in credit impairments of $80 million during the period. You see a very significant step-up in the contribution from our personal banking business, up $148 million. And that really reflects the growth in volume that we saw coming through the BFS business this year. That increase was partly offset by the reduced contribution from our business bank. Despite the increase in volumes, the 10% growth in volumes in the business bank. We obviously saw some pressure on business deposit margins coming through this year as a result of cash rate reductions here in Australia. Reduced wealth management income as we've reconfigured that business from -- towards a high net worth offering, so we had reduced brokerage income coming through. Pleasingly, though, we're seeing a reduction in the expenses, again, as we reduce the headcount and focused that wealth business on the on the high net worth private clients, as we talked about previously. Our underlying drivers of the business. Home loan's up 35% on a spot basis. Business loan's up 10% for the year. You can see deposits also up nearly $64 billion. Obviously, we saw the continued fall off of the vehicles portfolio, largely the amortization of previously acquired facility in motor vehicles and platforms affected by the market movements at the end of March. We thought it would be useful to provide a little more detail about the credit portfolio in BFS as part of this year's results. And so we set it on this page, a few things we hope you find useful. Obviously, on the left-hand side there, you can see the gross loan assets now over $75 billion. I draw your attention to the expected credit loss as a proportion of credit risk-weighted assets. You can see that's up at 1.32%. And you can see we've given you the number before the impact of COVID, and that was 25 basis points less. So you can see the real effect of COVID-19 coming through our expected credit loss provisions in BFS. On the right-hand side, this is a story that I think will be familiar to people. A lot of the growth we've seen in BFS in recent years has been in that low loan-to-value ratio product. We had an offering out there below 70% some years ago, and we've continued to grow in that area. So if you look at the portfolio on a dynamic basis, you see that 93% of the portfolio has a loan-to-value ratio of less than 80%. So very conservatively geared and a high-quality portfolio, which we think all as well in the environment that we now find ourselves heading into. And on the business loan side, again, the portfolio value is $9 billion at the end of the year. We've set out the -- in the secured lending. And we've set out the security that we have underpinning those business lines, and you can see it's largely residential property and commercial property and a diversified portfolio of things like rent roll and strata role supporting a lot of the business lending exposure in BFS. So I think the portfolio is very well positioned to weather what will inevitably be a challenging 12 to 18 months. Turning to the first of our markets-facing businesses, the commodities and global markets business, a really strong and pleasing result. And I think reflective of the fact that we have a very diversified offering in CGM and very much an offering that's focused on delivering outcomes for our clients. In the commodities business, we saw a reduction of $245 million in terms of the contribution. You can see the big reduction in inventory management and trading. So there's less opportunities for that part of the business over the last 12 months. But really pleasingly, you saw the risk management income step up by 20% during the period. We've been able to provide hedging solutions to our global oil clients, to our European gas and power clients, in the agriculture sector and also in the metals and mining sector. So really encouraging results in terms of providing solutions to clients to help manage their exposures in these more challenging markets. Pleasingly, we also saw the increase -- a continued increase in contribution from FX, interest rates and credit. Simon Wright spoke about this at the operational briefing, but the contribution for that business this year was up about 21% from where it was this time last year. And then from an equity perspective, up 46%. And that reflects a better trading environment, particularly in Asia and particularly for our warrants business. And so it was pleasing to see that come through during the period. The net operating lease income, up $75 million. This is the income we derived from the specialized and asset finance portfolio. A big step-up in that income, largely related to trading and some secondary assets that we got back at the end of lease period and also ongoing inertia revenue from our handset leasing business. And so it's pleasing to see that come through. Expenses, obviously flat for the -- broadly flat for the year. And you can see the result up at $1.746 billion for the year, up slightly on where it was last year, even after considering the increased impairments of $93 million that came through the group this year. Just in terms of the underlying drivers. You can see the customer base growing in commodities, growing in financial markets and futures, and the asset base growing in the specialized and asset finance portfolio, which obviously always well in terms of the client business, and also the annuity-style and income coming through CGM that we referred to earlier. Just in terms of capital, there has been a significant step-up in capital utilization for CGM during the year up to $5.9 billion. We spoke about SA-CCR before the regulatory change in terms of capital against on margin derivatives, so we saw that coming through. As the markets became more volatile towards the end of the year, we saw additional credit capital required from mark to markets, and a number of additional credit as a result of deterioration in counterparty credit profiles. You also saw unfavorable movements from an FX perspective coming through the CGM business. Of course, from a group perspective, we capital hedge our foreign currency exposures. And so you see an increase in the SCTR coming through the reserves that's balancing out the impact of FX within CGM. And market risk down $200 million for the year. In fact, as we went into the back part of the year, market risk was at multiyear lows in that business. Now turning now to Macquarie Capital, the last of our market-facing businesses, a more challenging period, down 57% for the year. Obviously, investment income down $760 million. Not unexpected. We talked a lot during the 2019 results and through the year about the significant realizations that came through in Macquarie Capital last year, and we didn't expect those to be repeated this year. We did see some good realizations, particularly in the green energy sector, so that was pleasing to see those realizations coming through. Fee and commission income down just over $70 million for the year. The DCM business, we talked about at the half, continued to show lower results than we saw in 2019, given the market conditions. Pleasingly though, the M&A business across Macquarie Capital and the M&A fee revenue across Macquarie Capital was up for the period. So that decline in DCM partly offset by the M&A activity across the group. Operating expenses up $95 million. The investment we've made in people in the U.S. and the European advisory business, together with skill sets that are necessary for our development activity around the world. So overall results, $755 million for the year. In terms of the capital, we have invested alongside the Macquarie Capital and its clients, you can see it stepped up 30 -- it stepped up $1.2 billion for the year. Pleasingly, you can see the increase in capital in the green energy space. You can also see -- which is a continuation of a story that we've been talking about for some time. And you can also see the increasing capital in infrastructure and technology across the year. So those sectors that we've invested in for a long period of time continue to be a feature of the Macquarie Capital business. You can also see an increase in the capital we've got alongside the debt portfolio in Macquarie Capital. Partly, that's a reflection of us moving the principal finance business from CAF into Macquarie Capital, and the principal finance team seeing opportunities to participate in debt raisings alongside Macquarie Capital clients. And partly, it's capital that's attached to our debt capital markets business in the United States. So turning now to some other elements of the group, compliance and the cost of compliance continue to rise. Obviously, the finance industry continues to see an increase in regulatory initiatives, and that's causing the increase in costs. You can see increased project costs as well as increased business-as-usual costs. The environment continues to evolve, and there is a lot going on in the regulatory front. And my expectation is this story of compliance will continue into the medium -- or cost on compliance will continue, obviously, into the medium term. In terms of the balance sheet, a really big year from a balance sheet perspective. $1.7 billion of capital raised in August last year, a very pleasing support from the shareholders. In addition to that, we raised $26 billion worth of term funding. $23.5 billion of that term funding was raised in Macquarie Bank Limited during the year. So really, a really, really big raise -- a really big period of capital raising there. Pleasingly, we saw $7.7 billion of that fundraising raised in the final quarter of -- our final quarter of the year into March. And in fact, we're able to raise $700 million of term funding in the month of March, which, of course, was a very difficult period. So a really strong period of capital raising across both debt and equity for the group. In terms of customer deposit growth. In terms of average growth rate over the last period from 2013, about 9% per annum. We saw a very big step-up in the financial year FY '20, up 20% from where we were this time last year, but a really nice continuing story of customers providing -- giving us deposits and a reflection, I think, of the service and quality offering that BFS are offering to their clients. So really pleasing growth in customer deposit numbers this year. In terms of the diversified issuance strategy, we talk about this a lot. Obviously, from a group perspective, we need to be diverse. From a currency perspective, a tenor and a type of funding. In addition, this year, we've been more active in the securitized markets in both with PUMA and SMART to support our mortgages and our motor vehicle leasing assets. So it's been really pleasing to see us continue to diversify the type of funding that the group is accessing. In terms of the weighted average life, 4.8 years, beyond 1 year. So nice maturity profile that we've been building over the last few years in terms of debt funding. The loan and lease portfolio up about 5% from where we were this time last year. You can see the growth in BFS loans, both home loans and business banking loans during the year. You can also see the growth in corporate and other lending in Macquarie Capital, and that's been partly offset by the reduction of operating lease assets as we've moved the aircraft from the balance sheet into that fiduciary offering and we brought partners in alongside us into that joint venture. And you can see the impact of that -- those partners coming into the joint venture in our equity investments. So the equity investments have gone up from $5.9 billion in March of 2019 now to $7.5 billion. And you'll see the big step-up in transport, industrial and infrastructure. And that's really the inclusion of the 50% interest that we still retain in MAF on to our equity investments balance sheet. So you can see that coming through the numbers over the last 12 months. In terms of regulation, as I said before, there is a lot of regulation activity that continues. On the 30th of March, APRA, of course, announced the deferral of -- the scheduled implementation of the Basel III reforms in Australia by 1 year. And that was, of course, a part of allowing ADIs to focus on the implications of COVID-19 and, in particular, to continue to support the Australian economy. So we've set out the particular initiatives in the deferral timetable that's now been announced by APRA. We also note that APRA's in discussions with Macquarie on resolution planning and intragroup funding. Those discussions continue, and we're working on these initiatives in consultation with APRA. Just a quick update in relation to Germany. Obviously, Macquarie continues to respond to a request for information from the German authorities in relation to their investigation of dividend trading. In total, the German authorities have now designated as suspects approximately 100 current and former Macquarie staff, I note that most of whom are no longer with Macquarie. The total amount of the issue, as we've said before, is not material and has been provided for in the financials. In terms of the bank group CET1 ratio, a really strong 12.2%. You can see the contributions to that over the year from 11.4% last year to 12.2%. Obviously, the profit coming through the bank. The capital injection; the impact of SA-CCR, which is obviously a negative in terms of CET1; the business capital requirements, that's the growth largely in BFS and CGM; and of course, the other movement is the foreign currency translation reserve, that capital hedging we do of our foreign currency investment exposures across the group. Liquidity remains very strong, nearly $40 billion of cash and liquid assets available to the group at 31 March, and very strong liquidity coverage ratios as well. In terms of capital management, just a couple of things for me. The -- on the 30th of March, we announced the withdrawal of our replacement BCN2 hybrid capital instrument given the significant uncertainty in market conditions at that point. I do note that subject to those market conditions, Macquarie Bank Limited is considering launching a BCN2 in the near future. We also redeemed the Macquarie income securities during the period, and the BCN, the $429 million of Macquarie Bank Capital notes was redeemed during the period. The Board has resolved to issue shares to satisfy the employee grants this year. And I note that the issue price for those shares will be the average of the daily volume weighted average price during the period from the 25th of May 2020 until the 5th of June. In relation to the DRP, I note that the second half '19 dividend and the interim dividend for FY '20 DRP were acquired on-market. The Board has, however, resolved to issue shares to satisfy the DRP for the second half '20 dividend at a discount to the prevailing market price of 1.5%. And with that, I'll hand you back to Shemara. Thank you. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [4] -------------------------------------------------------------------------------- Great. Thank you, Alex. And before I go on to talking about the factors driving our short-term outlook, I thought it was worth dwelling for a minute on the business activity we've had over the recent period by group. And starting with Macquarie Asset Management. I mentioned that the group ended the year with $25 billion of dry powder. Investment activities have continued, as you can see there across North America, EMEA, Asia and Australia. Fundraising has also continued. And out of that $20 billion raised last year, I'd note $1.9 billion of it was raised in the last month of March. And then also in terms of asset realizations, I mentioned the sale of the European rail portfolio closed in this month of April. And MIM continues to deliver good results for its clients across fixed income and equities. Then looking at banking and financial services, the growth that we've been experiencing in deposit volumes has continued through this financial year. And we also continue to provide credit -- extend credit to the economy within our typical prudent lending standards. In the market-facing businesses in Macquarie Capital, we are basically seeing opportunity to support our clients with fundraising with $6.8 billion of equity raised for our clients by the Macquarie Capital team since the 1st of March and also help on other financing solutions for our clients. And then in the development and construction activity across our infrastructure and renewable energy projects around the world, activity is proceeding, but clearly under very tightened health and safety conditions. And then lastly, in the commodities and global markets business, what we've seen in this financial year is heightened client activity as there's been repositioning of portfolios happening. And we also saw a renewal of our borrowing base facility in the commodities business there, which shows the support that our counterparties have for our business. So looking then at the factors driving short-term outlook by group. Starting first, again with Macquarie Asset Management. We expect base fees to be broadly in line, but we expect net other operating income to be significantly down due to the expected delays in realization of assets. In the Banking and financial services business, the higher deposit and loan values will impact the results in that business, but the platform volumes will depend on market movements. And we expect competitive dynamics to continue to exert margin pressure in that business. Then in terms of Macquarie capital, the transaction activity is continuing but the challenging markets mean that we expect that the completion rate of transactions or the successful completion of transactions will be impacted, and we also expect an increase in the time to completion. And then in the principal investing side of that business, including energy and infrastructure, the time to realization is also going to be delayed, and that will impact results. And then lastly, in commodity and global markets, we're expecting subdued activity levels from clients over this financial year. But I'd note that the specialized asset and finance business has still that stable balance sheet and annuity flows, which should drive results. We also have the diversification by product and sector that should give that business some resilience to its earnings. And we may find opportunities from the continued volatility. So pulling all of that together, market conditions are, of course, likely to remain challenging. And that's particularly so, given the significant uncertainty being caused worldwide by the COVID impacts and the uncertain speed of global economic recovery. So to the extent these conditions are impacting our FY '21 profitability, that remains uncertain and that makes short-term forecasting extremely difficult. Accordingly, we're unable to provide meaningful guidance for this year ahead. And I'd also note the year-end results and the results of the year remain subject to, in addition to the COVID-19 impacts, the normal factors in the completion rate of transactions and period-end reviews, market conditions and the impact of geopolitical events, the impact of foreign exchange, potential regulatory changes and tax uncertainties, and the geographic composition of our income. But we continue to maintain a cautious stance with a conservative approach to capital funding and liquidity, and that should position us well to respond in the current environment. Looking at the medium term, as we often say or always say, we think we're well positioned given our deep expertise in specialist niche areas like our global specialist asset management capability, our Australian banking franchise that we have, our global commodities platform. And then in our investment bank, our service capability together with the principal finance balance sheet available and the infrastructure and energy specialization. So we also have a diversity in terms of business sectors and geography. We have an ongoing focus on cost management, we have our strong and conservative balance sheet, and we also have our proven risk management framework and culture, which should continue to support us going forward. And you can see that in the last slide I'll speak to that shows our medium-term results that we've delivered, where in our annuity-style activities, over the last 14 years, we've delivered a 22% return on average and 24% in this last financial year. And in our market-facing activities, we've delivered a 16% return on average and 14% in this last financial year. And after taking into account our record surplus capital position of $7 billion, that gives a net return to shareholders this year of 14.5% return on equity. So with that, I'm going to hand back to Sam for questions. But I would note that joining us virtually, in addition to yourselves, we have Martin Stanley, the Head of Macquarie Asset Management in London; and also Dan Wong, the co-Head of Macquarie Capital based in London, where it's getting close to 2:00 a.m. now. And also the Co-Head of Macquarie Capital, Michael Silverton joining from New York, where it's more leisurely getting close to 9:00 p.m. And then here in Australia, we have Florian Herald from Macquarie Capital as well, another of our Executive Committee members. And we have online Nick O'Kane, the Head of the Commodity and Global Markets business; and Greg Ward, Head of Banking and Financial Services. And then in relation to our support groups in the room with me as well as Alex Harvey, our CFO, we've got a very wide distance in the auditorium here: Nicole Sorbara, our Chief Operating Officer; and I know Michael Herring, our General Counsel, is available; and Patrick Upfold, our Chief Risk Officer, is also on the line from Melbourne; and lastly, Mary Reemst, CEO of Macquarie Bank Limited and Head of the foundation, is also available for questions. So with that, I'll hand over to you, Sam, for questions. Thanks. -------------------------------------------------------------------------------- Samuel John Dobson, Macquarie Group Limited - Head of IR [5] -------------------------------------------------------------------------------- All right. Thanks, Shemara. As Shemara said, we're going to open the lines for questions. It will be facilitated by the operator, so I'll hand over to the operator. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question comes from Matthew Wilson with Evanson Partners. -------------------------------------------------------------------------------- Matthew Wilson, Evans & Partners Pty. Ltd., Research Division - Executive Director of Financials [2] -------------------------------------------------------------------------------- Two questions, if I may. Firstly, on the commodities and global markets business, obviously, inventory management and trading went from positive $302 million to negative $124 million in the second half. But given the oil price pressure, and most of that came in April, can you talk us through the performance of that line since the March month-end? And also, I note there's 180 less heads now in that business. And perhaps if I ask a second one as well, Macquarie AirFinance, there was no impairment recognized in relation to investment in Macquarie AirFinance, which sits at about $789 million. There was a small one in the vehicle. Can you talk us through that decision and what factors are driving the valuation of that or the current value of that investment going forward? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [3] -------------------------------------------------------------------------------- Yes, I'll kick off and hand over to Nick O'Kane, who's with us, to answer your first question. But in relation to the inventory management and trading income, you may recall last year we had a situation in the North American gas market where there were constraints in physical infrastructure in transportation and storage that created an opportunity for us to make a particularly strong gain, and that didn't repeat this year. But the results in the commodities business, as I mentioned, were spread across many areas. Global oil, particularly strong contribution over the year. And then also good results from the EMEA gas and power business and the metals, mining and agriculture. So I'll let Nick talk to that. And then we'll come back, Nick, and we'll talk about the AirFinance and the vehicle provisions. -------------------------------------------------------------------------------- Nicholas O'Kane, Macquarie Group Limited - Head of Commodities & Global Markets [4] -------------------------------------------------------------------------------- Thank you, Shemara. That is correct in terms of the way you've represented that outcome in the business. What we did see was the opportunity for other parts of the business to contribute largely around the risk management product and the risk management side of the business. But we didn't see a repeat of the opportunities in some of our businesses in the North American gas markets, particularly that we had seen in the previous months. So that was what was driving that result difference -- or the difference in the results between the 2 halves. -------------------------------------------------------------------------------- Matthew Wilson, Evans & Partners Pty. Ltd., Research Division - Executive Director of Financials [5] -------------------------------------------------------------------------------- But any comment, post-March, given that's when we've seen the most sort of calamity in oil? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [6] -------------------------------------------------------------------------------- Nick, I was just going to say we mentioned, when I talked about the activity levels, that we've seen good activity level. And for our services, that's been positive given the rebalancing of our client portfolios over the month of April. So I think -- I don't know, Nick, if you have anything to add to that, but I think that's the comment we'd make is that when there's activity from our clients and we're able to provide services, that is generally good for the commodities and global markets business. -------------------------------------------------------------------------------- Nicholas O'Kane, Macquarie Group Limited - Head of Commodities & Global Markets [7] -------------------------------------------------------------------------------- That's right. So the volatility that we have seen has meant that our customers have exposures that they've needed to hedge, and we've continued to assist them with that over the course of the last month. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [8] -------------------------------------------------------------------------------- Okay. If that covers -- sorry, Alex, please go ahead. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [9] -------------------------------------------------------------------------------- And Matt, in relation to MAF, as you say, we've moved that portfolio of aircraft into the fiduciary JV, and so we now have an equity account interest of -- in $700 million in that portfolio. And so we had -- we obviously, as you could imagine, given the difficult environment for airlines, had a very good look at the carrying value of that equity investment. In terms of the way we think about that, you're obviously comparing the value in use basically to the carrying value that we have on the balance sheet. And the portfolio, as you know, is about 190 aircraft and pretty diverse in terms of the lessees that we have in the portfolio, largely narrow-body and largely contracted for an extended period of time. And so when we tested the value in use, it holds up, obviously, very well in comparison with the cost. We are seeing our clients ask for deferrals, and obviously, we had to think about that in terms of the value of the stake in the joint venture. And obviously, with these long-life assets, a relatively short period of deferral has no impact in the value in use. We did take, through the joint venture, a small single-digit impairment on a couple of aircraft that are back with us to reflect the longer period of time for re-leasing and a reduced lease rate. But generally speaking, we're very -- obviously very comfortable with the carrying value of those assets. And that's well in -- the value in use, at least, well in excess of the carrying value on the balance sheet. Finally, if -- as it goes longer and aircraft get handed back, we'll continue to review that. But as we sit today, we're very comfortable with the value of it. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [10] -------------------------------------------------------------------------------- And the motor vehicle leasing, do you want to cover that question? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [11] -------------------------------------------------------------------------------- Sorry, did you have another question about... -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [12] -------------------------------------------------------------------------------- It was just a question about the motor vehicle. -------------------------------------------------------------------------------- Matthew Wilson, Evans & Partners Pty. Ltd., Research Division - Executive Director of Financials [13] -------------------------------------------------------------------------------- That was more AirFinance, but if you wanted to add anything kind of on vehicles, always happy to get more information. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [14] -------------------------------------------------------------------------------- I think we covered it. I can't quite hear you, Matt. I think we covered -- you're interested in MAF, so I think I've covered that. -------------------------------------------------------------------------------- Samuel John Dobson, Macquarie Group Limited - Head of IR [15] -------------------------------------------------------------------------------- We've covered that. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- The next question comes from Ed Henning with CLSA. -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [17] -------------------------------------------------------------------------------- First one, can you just run us through your thoughts on your equity investments? Obviously, we've seen very little impairments in this half. Assets have fallen globally, just the outlook on that to start with. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [18] -------------------------------------------------------------------------------- Yes. In terms of the equity investments, we've obviously gone through investment by investment and considered impairments. And there have been ones that are particularly impacted by this COVID-19 environment where we have taken impairments. Alex mentioned Macquarie Infrastructure Company in the U.S., where we have a private jet terminal business, Atlantic Aviation. We've had some oil-related assets that we've taken impairments on. We've had investments in a small cruise business we've taken impairments on. But we've gone through them position by position and taking impairments where appropriate. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [19] -------------------------------------------------------------------------------- I mean obviously, maybe just to add to that, Ed, a lot of that -- those equity investments obviously sit in Macquarie Capital. And as you know, the predominance of activity in that business is really the development, that construction stage of infrastructure and green energy. And so a lot of those assets are at cost, and they're obviously supported by revenue contracts that underpin the value of the assets. And so in effect, we think those assets obviously are well supported even in the current climate. But as Shemara said, we've obviously done a detailed review across the portfolio in Macquarie Capital and elsewhere in the group and had a look at position by position to make sure that we're comfortable with the carrying values. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [20] -------------------------------------------------------------------------------- And then other equity positions, we have a co-investment in our funds, where we have essential service long-term infrastructure assets. So it's been a small portion of the book that's been impacted in terms of equity investments by the current environment. -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [21] -------------------------------------------------------------------------------- Okay. Just a second question, following on for Matt, just on CGM. Can you just touch a little bit more -- do you have any mark-to-markets on oil, if you've got any storage there. And also, just touch on April, just a little bit more on what you're seeing in the gas market there as well, please. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [22] -------------------------------------------------------------------------------- Yes. I'll let Alex comment in more detail on what we're doing in terms of the storage assets of which we do have some. But again, what we've done is Alex talked through the approach we've taken on our expected credit losses, but we've taken a forward perspective, looking at the scenarios that we've put in place and looked at how our positions can be impacted. We've had some situations where we've had counterparties with particular issues as well where we've taken credit impairments. But ultimately through the XVA adjustments in our derivatives exposures and the ECL adjustments in terms of where we have credit positions, we've gone through position by position and taking those into account. Storage, particularly obviously has increased in value in this environment. And Alex can talk through the accounting that we use on the storage. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [23] -------------------------------------------------------------------------------- So in terms of – thanks, Ed. In terms of the storage assets, I mean, obviously, a feature of the CGM business around the world, particularly in North America, is that physical inventory movement, whether it be across pipelines or into storage assets. And so as part of that physical business, the team does have access to storage assets. And as Shemara said, with oil price, the recent oil price movements, those storage assets generally are going up in value with the contango coming into the market. So the team over in the U.S. is actively working to generate return from those storage assets. And one of the things we saw in the latter part of FY '20 was, I guess, you had oil price coming down. You had storage value going up. Oil prices, obviously, for us, we mark-to-market through the group's P&L. Storage is accounted for on an accrual basis. So what you saw at the back end of FY '20 was the drop in oil price coming through, which was going through our P&L. But not the related increase in storage value that's implicit in the portfolio that the team have access to. -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [24] -------------------------------------------------------------------------------- And sorry, can you just touch a little bit more what you're seeing on the North American gas trading side, please, in April. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [25] -------------------------------------------------------------------------------- Yes, so Nick, you can jump in. I mean, obviously, what we are seeing, if you think about the general view, oil production is obviously under pressure with the prices coming down. And what we've seen over the recent times as gas is a byproduct, that oil production. And so one of the things that's happening in the gas markets in the U.S. is a narrowing of the spreads between regions. And that's partly a function of the fact that as people anticipate oil production coming down, you're obviously seeing gas prices rally relative to where they were. And I think that was -- that's sort of a feature of what we've seen over the last quarter or so. And maybe I'll let Nick talk about what you're seeing in April. -------------------------------------------------------------------------------- Nicholas O'Kane, Macquarie Group Limited - Head of Commodities & Global Markets [26] -------------------------------------------------------------------------------- Yes, that's right, Alex. So we have seen some volatility in the benchmark natural gas price over the course of the last month or so where we're seeing the market test [a low] and then rebound. But as you look further down the curve, we've actually seen the strengthening in natural gas prices due to the factors which Alex has just outlined. And the expected impact on future production that would be linked to production of other hydrocarbons. So we've actually seen that market recover faster than some of the other markets in the North American energy space. Aside from that, trading conditions have been relatively normal in the month of April for natural gas. -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [27] -------------------------------------------------------------------------------- Okay. So you're just seeing pressure at the moment, basically being able to trade the big volatility swings in price. -------------------------------------------------------------------------------- Nicholas O'Kane, Macquarie Group Limited - Head of Commodities & Global Markets [28] -------------------------------------------------------------------------------- So there has been some volatility in the [prompt] month, but it's not particularly significant (inaudible) pressure. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- The next question comes from Andrei Stadnik with MS. -------------------------------------------------------------------------------- Andrei Stadnik, Morgan Stanley, Research Division - VP [30] -------------------------------------------------------------------------------- Just I wanted to ask 2 questions, one at a time, if I could. Firstly, just thinking about the dividend, you've noted that the outlook for the dividend policy remains 60% to 80% with the dividend dipping to mid-50s on this occasion. And the dividend was really in the second half carried entirely but the nonbank group. How should shareholders be thinking about the dividend for FY '21. And is that 60% to 80% target range still relevant in the current conditions. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [31] -------------------------------------------------------------------------------- Yes, the Board has maintained its policy in terms of dividend payout ratio being in the 60% to 80% range. This year, as you noted, it was 56%, but I think we stepped through the extenuating circumstances that have driven the thinking behind what the dividend should be this year. But going forward, the policy of the Board is a 60% to 80% payout ratio. -------------------------------------------------------------------------------- Andrei Stadnik, Morgan Stanley, Research Division - VP [32] -------------------------------------------------------------------------------- And in terms of in terms of outlook for fundraising in MIRA, you raised about $20 billion this year. What should we be thinking about in terms of potential for FY '21? Just kind of noting that some of your American European peers have been talking about more difficult raising conditions. And what are your investors are saying because infrastructure assets sells through the financial crisis, 10-plus years go relatively well. But have there been -- some of that are being tested much more severely in the current condition. So what kind of feedback are you getting from your clients on the MIRA side. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [33] -------------------------------------------------------------------------------- Well, given Martin is on the phone at this late hour -- I'll hand over to him. But I guess I'd make the broad couple of comments that there's a lot of liquidity out there in the world at the moment despite the issues in the real economy. Investors need more than ever to find good places to put that money in terms from return for risk and then defensive assets and yielding assets. And the track record of the MIRA team is very, very strong and the franchise of investor relationships it has is very, very strong. So the backdrop for MIRA in terms of fundraising is good. Having said that, our investors are obviously dealing with multiple challenges at this time. So why don't I, Martin, hand over to you to elaborate. -------------------------------------------------------------------------------- Martin Stephen William Stanley, Macquarie Infrastructure and Real Assets (Europe) Limited - Global Head [34] -------------------------------------------------------------------------------- Yes, sure. Thank you. In the portfolio of around a 160 assets around the world, despite what we're seeing at the moment, and despite what we're looking at in the future, we've got a very small handful of assets that have got either liquidity or financing issues, and that's predominantly because we've taken a very cautious approach over the last few years in terms of our financing arrangements. So much of our debt was termed out. Much of our covenants were adjusted, such that as we sit today, we're actually in a very strong position. So the portfolio around the world has held up very well. Any assets that we got issues with are generally in the areas that are reasonably obvious the sort of aviation space. And in those cases, we've got our relationship banks and our relationship banks are being very accommodative. So I think in answer to your second point about how investors are feeling, I think they're all feeling pretty good. So we -- obviously, they've got a whole bunch of other issues around the world to deal with at the same time. But we have communicated as much as we can with the investors. We've engaged with them on an individual fund by fund level. We've held conference calls with them. And the general feedback from the investor community is very positive at present. -------------------------------------------------------------------------------- Andrei Stadnik, Morgan Stanley, Research Division - VP [35] -------------------------------------------------------------------------------- Can I just double check. In terms of repeating $20 billion raised in FY '21, would you say that's fairly unlikely? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [36] -------------------------------------------------------------------------------- You go ahead, Martin. -------------------------------------------------------------------------------- Martin Stephen William Stanley, Macquarie Infrastructure and Real Assets (Europe) Limited - Global Head [37] -------------------------------------------------------------------------------- It depends on the -- obviously, it depends on how the world unfolds as we go through the next few months. But we've actually had a very strong start to the year. So over the course of the last month, for example, we've raised around $3.5 billion of capital during the course of this short period. Now some of that's sort of -- we've got existing products in the market, so people are supporting those existing products. But we've also had good support for some of the co-investment transactions that we're doing. So we've actually got off to a pretty good start despite the conditions. And we've got some of our strongest products in the market for this year. So let's see how we go. But at the moment, things are looking reasonably promising. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- The next question comes from Andrew Triggs with JPMorgan. -------------------------------------------------------------------------------- Andrew Triggs, JP Morgan Chase & Co, Research Division - Research Analyst [39] -------------------------------------------------------------------------------- Just 2 questions, please. First question, just on the very strong second half to total of other operating income and charges of $1.2 billion, which was really driven by gains on associates and JVs. Just interested in some more color on what are those related to, please. And then second question, just perhaps some -- any comments on the performance and outlook for the principal finance book just in the current economic backdrop. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [40] -------------------------------------------------------------------------------- Do you want to do the first one? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [41] -------------------------------------------------------------------------------- Yes, sure. Thanks, Andrew. Yes, it was a good period in the second half, as you say. If you think about where that joint venture income comes from really what drove the performance in the second half was largely the sale of the underlying assets in the MIRA business. And so you'll recall last year that we had -- we announced a number of a number of transactions in that MIRA business where we've sold assets in some of the European funds and some of the U.S. funds. And so we saw that -- those transactions completed, and that obviously brings the equity accounted income forward to us. So that's the primary driver. Obviously, we're also seeing, in that investment income category not so much as the JVS, but yes investment income more generally in the second half we saw the disposal of the MIRA's investment in the low U.S. real estate platform in the second half. And we also saw a termination fee paid to MIRA in respect of its management role in APRR, the French toll road that I mentioned earlier. So all of that came through in the second half. And then I guess the other thing that's coming through the share of net profits and losses of associates is as we've moved the aircraft business from the on-balance sheet operating lease business into the fiduciary business into the joint venture, we're now -- we were for the year, a 75% holder. We're now a 50% holder. And so you saw our share of that joint venture profit coming through that line as well. And it obviously stepped up in the second half following the completion of the sale -- the first sale of 25% to PGGM. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [42] -------------------------------------------------------------------------------- And on the principal finance, again, given we have Dan Wong on the phone at a very late, I should say, very early hour his time. Might let him comment on the portfolio of renewable energy developments. We have, Dan, the 250 projects, which we're constantly investing in and realizing what we see there across geographies and commodity types. And then Florian Herold is on the phone here in Sydney. So Michael, we might get Florian to talk about the ACS side, et cetera. So Dan, do you want to go first? -------------------------------------------------------------------------------- Daniel Wong, Macquarie Group Limited - Global Co-Head of Macquarie Capital [43] -------------------------------------------------------------------------------- Yes, sure. Thanks a lot, Shemara. Yes, look, in relation to the principal investments that we have in infrastructure and energy, as Shemara’s mentioned, it's a business that is focused on the development and construction of projects across infrastructure and energy and in particular, green energy. So we go into this new financial year with a strong book of investments that are coming through the construction phase and the development phase. They're all projects that are continuing. And despite COVID-19 having had some impact on activity on -- in the main, we're seeing construction activity continue, albeit under some constrained environments with the social distancing and the like. But overall, governments remains supportive for that really continue, which is important as our projects mature into late-stage construction and into operations, which obviously then puts it into a position for us to bring new investors in or divest them outright. We also have a strong pipeline of development activity. Over 250 projects, in particular, in green energy. And this is one of the most exciting parts of our business and growing parts of our business. And these are long-term activity. So while COVID-19 has had an impact on some of the activity as everyone moves to working from home because the long-term development cycle of these activities over in the main, it's a relatively small impact, and these projects are moving along. But we're expecting these projects to continue and demand for them, both in terms of the green energy that is produced off the back of it. We're seeing good demand from corporates continuing as they're all on their journeys to decarbonize their own operations. And then also in terms of the investor market, whilst it's still relatively early, similar to Martin Stanley's comments, we're expecting it to be relatively resilient in that these projects are stable cash flows and also in the direction of sustainable infrastructure, which is a good risk return for investors as well. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [44] -------------------------------------------------------------------------------- And I guess I'd say, overall, we, like Martin said, in relation to the infrastructure, since we're going to have to watch how things play out because the environment is so uncertain. But at the moment, we've got small exits going on in regions, in sub commodities, and we're seeing good interest. We're just going to have to wait and see and keep the market updated as things develop. And then Michael Silverton on the phone from New York, do you want to just give some preliminary comments. And then Florian can talk about in sectors beyond infrastructure and energy, what we see for realization opportunities in principal finance. -------------------------------------------------------------------------------- Michael J. Silverton, Macquarie Group Limited - Global Co-Head of Macquarie Capital [45] -------------------------------------------------------------------------------- Sure. Thanks, Shemara. The overall portfolio, we feel very good about, and we're obviously invested across the capital structure with some good running yield from our debt positions. But the timing of exits, obviously matter, and we can see those shifting out. The deployment rate has been good. We have been seeing good opportunity. And obviously, we've been engaging with our clients extensively over the recent period just to see how we can be supportive, and we have extensive sponsor relationships where our ability to move across the capital structure can assist them through this time. So I think we see good opportunity there. And maybe, Florian, you want to add to that? -------------------------------------------------------------------------------- Florian Herold, Macquarie Group Limited - Head of Principal Finance - Macquarie Capital [46] -------------------------------------------------------------------------------- Yes. I'd really just add that the book is a combination between debt and equity and where we have positions they are almost entirely. First ramping more senior in the capital structure. So we feel well positioned there. And equally, the current environment we are in bring interesting opportunities alongside clients and in the market. But I would otherwise equity comment that Michael already made. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [47] -------------------------------------------------------------------------------- Okay. Thanks, Macquarie Capital team. As I said, I mean our next update will be at the AGM full for yearly update. So we will probably have a better sense of how things are tracking by then. But at this stage, we can't really say much beyond what the team has because the environment is so uncertain. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- The next question comes from The next question will come from Jonathan Mott with UBS. -------------------------------------------------------------------------------- Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [49] -------------------------------------------------------------------------------- I've got a question. It goes to the structural impact of the crisis and how it impacts your operations and assets. If you look at an asset like an airport or a toll road, they meant to be defensive and an annuity base. But some of these assets have seen activity levels down 70%, up to 90% and above 90%. And if you step back and think about it, it's a second or maybe even the third time we're seeing these are black swan events over the last 20 years. So when you consider that they're defensive in a normal condition, but every 10 years or so, we're having these black swans. Do we need to sort of stop and reconsider the gearing levels of these assets. And are there any other structural issues that you think are going to come out of the crisis that we need to consider. And secondly, a follow-on question, which really relates to travel restrictions because at the moment, a lot of the deals that you're doing across your assets under management, your principal investments, even M&A in Macquarie Capital. A lot of it is international cross-border. And if the travel restrictions stay in place for several months or potentially a year of Australia as the Board is closed here. But even internationally, how is that going to impact your ability to execute transactions across so many different parts of your businesses? So those 2 structural questions, please. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [50] -------------------------------------------------------------------------------- Yes. Thanks, Jon. In terms of your question about black swans, they're all completely different, which is what makes them black swans. If it was the same sort of issues over and over again, then they become part of doing business. We have had events -- the GFC, for example, was a very different sort of black swan, where we did learn lessons about matching funding, about liquidity, about capital positions being financially very robust. And frankly, gearing levels have come down in assets since then. And we are very prudent. Martin could speak to it about the leverage we put into the assets in our funds. We take the same position with the assets on the balance sheet. Here, we have a very different issue, which is a health-related pandemic, which has led to governments having to shut down economies to get over the health issue and then try and reopen economies without lasting damage. And what that does with so many people out of work, or if they are on welfare or wage subsidies, not feeling comfortable about spending. We have demand destruction, we have travel and movement disruption. So assets like transportation assets, which are only a small part. We have a lot of utility assets there and waste assets and all of these that continue to be used. But roads and airports may have traffic hit for a period. Whether that period is going to be 6 months or even 12 months, these are very, very long-dated assets. They have 10-, 20-, 50-year lives. So it's unlikely that the demand destruction, unless it has a long-term impact, is going to materially impact the valuation of those assets. But we are early in this latest black swan, and there will certainly be lessons to be learned from it. And we like everyone, have learned some early lessons but we'll be watching how we evolve and taking away lessons from that in terms of how we run business in the future. Now one of those lessons structurally is lots of people have had to deal with working remotely. There was a time where we would have thought it would take a very long time for us to get set up to work remotely. We had a whole lot of disaster recovery facilities in place, et cetera. Nicole's here with us. Basically, she and the operations team have managed through technology through HR to send 98 of our people to be able to work from their homes, and we've been doing that now for 7 weeks. And activity levels continue. I mentioned some of that in the outlook slides that I talked about, the activity levels going on this year, but the MIRA funds have managed to do investments with Cincinnati Bell in the U.S., -- in Europe, the LG CNS assets in Asia, the AirTran assets here and in Asia. Deals are still happening. The MACCAP people have managed to do advice, 3 transactions. We've managed to sell our European rail portfolio. We've done a lot of equity raising over the last period. I mentioned $6.8 billion. The ASX has been the biggest trading market in the world. It's been quite phenomenal how we've been able to keep business going in this environment where the real economy is materially impacted, and we're able to do it without having to travel. So it may bring people to question how much they need to travel going forward. Having said that, we're all ultimately social creatures, and we need to interact with each other and build relationships, et cetera. So I think once the travel restrictions are lifted, people will start to engage more. But we're managing to get business done. Because of -- Nicole, I might, Nicole, let you make any comments on what sort of disruption we're seeing around the world having to work in this environment in terms of allowing our businesses to continue operations. -------------------------------------------------------------------------------- Nicole Sorbara, Macquarie Group Limited - Executive Director, Global COO & Group Head of Corporate Operations Group [51] -------------------------------------------------------------------------------- Thanks, Shemara. I think the key point is, by and large, it's business as usual. And this is a result of a long-term investment in building capability. Yes, we have had to do a lot of work to allow 98% of our people globally to work from home. But given we are a global business, we're in 30 countries around the world, we've been able to connect seamlessly, as you say, business has continued. All of that has worked very well. We do expect to see domestic travel to open up well ahead of international travel, and we are planning for that at some stage. So it is also showing that there are different ways of working. And we are also able to effectively connect large groups of people remotely, whereas in the past, we probably would have had a lot more physical travel to allow those groups of people to come together. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [52] -------------------------------------------------------------------------------- Yes. And then Nicole also covers our office space footprint. And on the one hand, we're finding people are able to function much more working in remotely and out of office. On the other hand, when people come back, we'll probably have stronger social distancing, so potentially need more space because of that. But it's probably early in this particular Black Swan to make big calls on what the long-term implications can be. We are learning some short-term lessons. -------------------------------------------------------------------------------- Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [53] -------------------------------------------------------------------------------- So just following on from one of your comments in there, Shemara. I think you said that deals are still happening, and you mentioned a lot of the transactions that have completed in this period. A lot of the due diligence to that probably would have been done before the pandemic really exploded and travel restrictions came in. So do you think cross-border international transactions, asset sales, M&A will still be able to happen in due diligence will still be able to be completed, while we're in global travel restrictions, and I mean, international travel not working from home. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [54] -------------------------------------------------------------------------------- Yes. Look, activity level is continuing across borders. For example, you've seen the investment-grade market operating very strongly in the U.S. and a lot of issuance. And not just in the Yankee issuance as well happening in there. So people are able to evaluate businesses all around the world and decide whether to allocate capital to them. Having said that, as we said in the outlook slide, we do think activity level will be subdued because people won't be able to get around, but also people will be cautious about making calls until they know exactly how this is going to play out and impact various businesses. So there'll be implications both ways for now, as I say, it's early. So we're waiting to see, at the moment, we've managed to have decent activity at levels, decent client activity reasonable realization of assets. But as we said in our outlook, we're assuming that there will be a significant delay in realization of asset exits and in terms of less activity levels. Have to see how it plays at the moment, 1 month or couple of months into it, there's still activity going on. -------------------------------------------------------------------------------- Operator [55] -------------------------------------------------------------------------------- The next question comes from Brian Johnson with Jefferies. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [56] -------------------------------------------------------------------------------- And I’m going to say congratulations on a pretty reasonable result in a difficult set of circumstances. I had a few very quick questions on specific slides. Just going to Slide 48, which is the equity investments one, and it might seem a small point. But the transport industrial and infrastructure says that you've got an equity investment of $600 million, but a lot of the narrative today would suggest the MAp's residual investment is somewhere between $700 million to $800 million. Can I just get my head around the difference between those 2 numbers? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [57] -------------------------------------------------------------------------------- I think hundreds last year. Alex, do you want to cover that on Page 48, it's it was $0.6 billion, March '19, and it's $1.3 billion now. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [58] -------------------------------------------------------------------------------- Yes, it's gone up $0.7 billion there. So there's obviously some other investments in that category, Brian, that are moving around a little bit. The carrying value of the interest in MAp is actually in the accounts. It's sort of $780 million. So it's a component of that movement. So you've got foreign exchange movements going through there, and you've got some ins and outs on some other investments that are in that portfolio. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [59] -------------------------------------------------------------------------------- Just on that issue, Alex. You said today that you're working with airlines. Now my understanding is that in that business, normally, the airline gives less or about 3 months cash upfront. When you're working with them, are we talking about moratoriums? Or are we talking actually about waiving of rental payments? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [60] -------------------------------------------------------------------------------- No. They tend to be more -- to date, Brian, it's been more deferrals. And so there's obviously an ongoing dialogue across the customer base. But mostly it's about deferrals, and they're vary in range, but you're probably talking about 3- to 4-month type deferrals where we're relieving them of sort of 50% of the rent. That's sort of the nature of it. Obviously, it's changing a bit. And there are a number of airlines in there that we're talking with, but generally, sort of 3 to 4 months deferrals, so 50% of the rent. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [61] -------------------------------------------------------------------------------- Okay. And then just before we wander off that slide, Alex, there's something that strikes me. When we have a look at a large chunk of these assets, they're probably equity accounted and when you think about it logically, a lot of your peers, for example, superannuation funds, mark-to-market their unlisted investments, whereas when our equity account are more than likely during the early phase of them actually reducing the carrying fee which reduces the impairment risk. And when I have a look in the MIRA business, because you don't recognize the performance fee at the end, it's not as though you’re market to market. I was just wondering if those 2 dynamics that mean that your impairment charges probably are not as big as some of the guys that actually marks up to market or am I barking up the wrong tree? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [62] -------------------------------------------------------------------------------- Well, in relation to the -- in relation to the balance sheet investment in the funds, they're obviously held at cost, as you say, Brian. But we don't mark them up to carrying value. We don't put that markup in carrying value through the P&L, so they're at cost. And so obviously, some of the other investors in infrastructure have obviously -- for the point of purpose of reporting to their investors are carrying assets at fair market value rather than cost. And we've seen some of that come through. But in our case, it's -- in our case, they're held at cost. In relation to the second point, yes, I mean, a lot of these investments will be either associates. So you'll see if there's losses in that entity, you'll see the losses actually reducing the carrying value of the asset. And some of the assets under IFRS 9, if you've got a small equity interest in an asset set. So it's below an associate. You actually fair market -- you actually account for that as fair value through P&L. So some of the exposure here will be fair value through P&L as well. But the points you're generally making it right. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [63] -------------------------------------------------------------------------------- Yes. So some it is Alex is right that we hold the assets at carrying value at cost, and that's why you see the investment gains only booked when we realized and exit the asset. But the situation of super funds is different. They've got people switching from various offering or balance to growth, et cetera, and so they need to make sure they're marketing to market and the people that remain in the funds that others exit from get fair valuations. So different valuation criteria, I guess, or approaches. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [64] -------------------------------------------------------------------------------- Okay. The next one, just on Slide 30. You've detailed the 3 scenarios that we're working to the upside, the baseline and the downside. I was wondering, Alex, if you just fill in the last little bit, could you give the probabilities that you've assigned to each of those? Is the upside 0? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [65] -------------------------------------------------------------------------------- Brian, we obviously... -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [66] -------------------------------------------------------------------------------- I'll give an example. Westpac has given those numbers. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [67] -------------------------------------------------------------------------------- Sure. No, I noticed that some have, and we've obviously chosen not to. And the reason for that is I guess, pretty obvious. At the end of the day, Brian, these scenarios are running through a whole range of models. And so the specificity around a particular percentage is probably slightly less relevant than at least in our view, the directional perspective. So if you look at what I said about the baseline, we're saying that's a probable baseline. And so that's obviously north of 50%. And if you look at the possible, obviously, that -- I'd say that's less than 50% is probably less than probable. And then from an upside viewpoint, I said it was unlikely. So I'm not saying it's 0. I mean, there is a case that we put together that sees a rapid bounce, but it's unlikely. And so it's been attributed that weighting in terms of the outlook. What we did do, as you can see from that slide, Brian, is just above the charts. We actually calculated what the provision would be if you assumed 100% of upside, 100% downside and 100% baseline. So -- and obviously, the provision overall is 1.54. And so you can -- I mean, I guess, you can't get it quite exactly, but you can probably triangulate roughly where those percentages are. And then you can obviously form your own view on where you'd like to be on our 3 scenarios. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [68] -------------------------------------------------------------------------------- Exactly. Alex, I'm going to assume that you've gone with 5%, and then everything else flips out of that. Just the next one, if I may. Shemara, you've spoken about dividend reiterating the policy, can I just get a feeling on what your thought is on future DRP issuance when your capital position is already so strong. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [69] -------------------------------------------------------------------------------- Yes. I think when I spoke to the dividend thinking that the Board had applied I mentioned that this year, in particular, we've had guidance from our regulator, APRA on the 7th of April, that the Board took into account. And we also believe that we want to be particularly strong to be -- to have capacity to support the economy through this. So I think this year, there have been particular factors that have been driven -- turning on the we historically have not done this. But this year, the Board decided it was important if we're going to pay a dividend to raise enough new capital to more than compensate for the dividend payment impact. And end up with a stronger capital position after the dividend payment, which I'll note was a payment out of the group, not out of the bank. But the DRP will help us. The MIRA fee's $600 million and then the DRP will help us with a position that's even stronger than the dividend payment than just neutral. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [70] -------------------------------------------------------------------------------- The next one, Alex, if we go to Slide 52, kind of step through, (inaudible) -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [71] -------------------------------------------------------------------------------- Which slide -- Brian, what did you say. What slide? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [72] -------------------------------------------------------------------------------- 52. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [73] -------------------------------------------------------------------------------- Slide 52. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [74] -------------------------------------------------------------------------------- 52 okay. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [75] -------------------------------------------------------------------------------- So on Slide 52, what's just kind of there is that this year, your core long suffering staff don't get actually the share sale facility, the benefit of that. Could we get a feeling for the -- basically the timing of when we should expect to see those shares hit the market and what you might think the size of that would actually be? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [76] -------------------------------------------------------------------------------- The -- in terms of the timing, the -- I mean, obviously, the staff sale -- the window for staff selling will open next week. I think I've got the -- I'll come back to you the exact date, Brian, but next week. And so you'll obviously see some staff selling during that period. You can have a look in the accounts in relation to the volume of MIRA that's coming out. But it will be in the -- I guess, it will be in the high 500s in terms of release out of MIRA. Now obviously, Brian, not all of that necessarily what we sell. Obviously, it's a choice that people make at that time to either sell our shares or not sell the shares. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [77] -------------------------------------------------------------------------------- But that's historically, that's how you pay tax bill isn't it? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [78] -------------------------------------------------------------------------------- I guess that's the case for -- yes, for some, for sure. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [79] -------------------------------------------------------------------------------- Okay. Just the final one, if I may. Shemara, I'm sensing that you're messaging here today seems to be that COVID disrupts the realization, the time of the realizations and the velocity of capital rather than ultimately, a lot of the fees basically coming through. As you even commented yourself, the U.S. debt markets and investment-grade seem to be opening up pretty quickly with phenomenal issuance in such a relatively short period of time. Can we just get a feeling on how -- what is it that slows down the realization? Is it basically investors not being able to get debt? Or is it just investor uncertainty? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [80] -------------------------------------------------------------------------------- I think it's going to be both of those things, Brian, because it's the investment-grade market where we're seeing a lot of issuance at the moment. Our debt capital markets business operates much more in the B leverage loan type market. That could come back as confidence increases, or it could very easily be disrupted because things are quite fragile at the moment in the market is moving constantly. As Nick mentioned, we're seeing a lot of volatility in. So I think in terms of accessing finance, cost of funding, obviously, has gone up a lot even though spreads have come in since the pandemic first started. They've certainly blown out from where they were. And availability of finance as well. Banks are being prudent in terms of where they're making funding available. So availability of debt is an issue. And then generally, investors, I think, really need to think through the implications of this pandemic and how it's going to impact the assets they invest in. So I think those things can impact. We did say that we expect our base fees to be broadly in line. But asset realizations, both in the asset management business and in Macquarie Capital, we expect will be delayed quite a bit. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [81] -------------------------------------------------------------------------------- So Shemara, when do we actually get to the realization phase on some of the kind of like as of -- the like the unlisted fund. And the next bar of the asset is coming in is trying to re gear them. Which bit of the debt market are they particularly relying on? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [82] -------------------------------------------------------------------------------- Yes, Martin talked to that already. And Martin, I might let you comment again in terms of how our assets are going. Our assets are well placed. But it's the purchases in terms of debt funding that I was commenting on. Martin, did you want to -- -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [83] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Martin Stephen William Stanley, Macquarie Infrastructure and Real Assets (Europe) Limited - Global Head [84] -------------------------------------------------------------------------------- Yes. Look, I think one of the -- there's a couple of practical issues as well, Brian, like you can do a certain amount so there's a lot of due diligence that's going on remotely, so people doing posting stuff up and you're doing remote management meetings and things like that. So there's people being reasonably ingenious about how they're going about this stuff. But there are some practical issues that ultimately, you want to go and see the assets. You want to have a look around and you want to look at the management team in the eye, et cetera. So some of that will have practical implications about slowing things down. I don't think, as far as our assets are concerned, generally, our assets are assets with good credit. And as a result of that, the debt markets are open. There's a slight change in pricing for some assets. But broadly speaking, it's -- the markets are open for good quality credit. It's when you move into the -- it's when you move into the poor high-yield debt market. That's when it starts to get a bit sticky. But I don't think debt is an issue. You've also got to remember, of course, the risk-free rates are one of the drivers as well for asset valuations. And one would imagine that we're going to be seeing pretty low risk-free rates post this period for some time. -------------------------------------------------------------------------------- Operator [85] -------------------------------------------------------------------------------- The next question comes from Brett Le Mesurier with Shaw and Partners. -------------------------------------------------------------------------------- Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [86] -------------------------------------------------------------------------------- I've got a couple of questions. Firstly, the derivative assets tripled over the past year and most of that happened in the past 6 months. What additional credit risks does that present to you? And then secondly, on the realization front of assets you own, presumably, a number of them are in funds that wind up at various stages. How many of those assets are in funds that are winding up in the next 12 months. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [87] -------------------------------------------------------------------------------- The fund assets, basically, we have discretion to delays there. So, the infrastructure funds typically have a 10-year life and can have up to a 2-year extension. So I don't think unless -- Martin contradicts me there are any assets that we were planning to exit where we have pressure to sell within this financial year, if we don't want to Martin, correct? -------------------------------------------------------------------------------- Martin Stephen William Stanley, Macquarie Infrastructure and Real Assets (Europe) Limited - Global Head [88] -------------------------------------------------------------------------------- No, there are no there are no -- we're under no pressure in terms of sales of assets. And most of our funds are -- have got plenty of time to run. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [89] -------------------------------------------------------------------------------- Yes. So we will basically realize at the time where we think we'll get the best return for the investors in those funds. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [90] -------------------------------------------------------------------------------- And then -- and Brett, in terms of the derivative assets, you're right, they've expanded significantly during the year. Obviously, that's a reflection of the volatility we've seen in markets and the mark-to-market impact, both on the asset and the liability side, so that the assets have gone up to $45 billion and the liabilities have gone up to 38. So you've seen a big expansion on both sides. Basically, volatility and mark-to-market across the derivative portfolio together with FX that's coming through. And in terms of the risk attached to that, in that slide that I put up for CGM, you can see the -- that of the movement in capital over the period, $500 million of that was credit capital attached to derivatives. And obviously, as we -- as that mark-to-market has occurred, and in some cases, the deterioration in counterparty credit, we've increased the amount of credit capital, we've got largely against on margin derivatives. -------------------------------------------------------------------------------- Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [91] -------------------------------------------------------------------------------- But what would be the average credit rating of your counterparties? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [92] -------------------------------------------------------------------------------- Look, Patrick Upfold's on the phone, our Chief Risk Officer, why don't we let him comment on that. And Patrick, generally, how your approach is going in terms of risk management through this period on both derivatives but also credit and equity positions counterparties. -------------------------------------------------------------------------------- Patrick C. Upfold, Macquarie Group Limited - Chief Risk Officer & Head of Risk Management Group [93] -------------------------------------------------------------------------------- Yes. Brett, just in terms of the movement in the derivative book. It's the consequence of that will depend on exactly what it is that we're hedging and what counterparty that we're facing. So by and large, a significant amount of our hedging activities that we're facing in exchange. And so we're netting down against an exchange. So that will be one of the credit risk that we are facing that we'll be posting margin and initial margin against an exchange as those positions move. We may be providing hedging services to our clients. We're in hedging out that position. We're facing an exchange, so we've got an exposure to those clients. And that will increase our credit risk. Now we anticipate that when we extend credit to those extend credits to those clients. That we don't probability weight movements in markets. We essentially ask ourselves, we'll have that to get in the market, and what is our ability of our client to withstand that movement in the market. So that will increase, obviously, our credit risk. But we feel pretty comfortable about, by and large, obviously, there's exceptions to the rule by much, we feel pretty comfortable about our exposure to our clients. The third area, of course, that we may well be hedging physical commodities. And so while you may see a rise on one side of the equation in terms of that derivative, we'll also hold physical positions, which will have an offsetting position. So in that sense, what we might be facing exchange. But we'll have -- either will own or be secured against the physical commodity. Does that answer your question. -------------------------------------------------------------------------------- Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [94] -------------------------------------------------------------------------------- Sorry, you can't comment on the credit quality of the counterparties? Are they substantially AA or are they substantially BB, for example? -------------------------------------------------------------------------------- Patrick C. Upfold, Macquarie Group Limited - Chief Risk Officer & Head of Risk Management Group [95] -------------------------------------------------------------------------------- Look, as I say, look, it's across the board. Obviously, if we're facing exchange, the credit risk that we're taking is fairly small, but we will be dealing with lower-rated counterparties a BB counterparties. In those circumstances, we'll tend to be looking to take some form of security in respect to those clients. And I think actually in the accounts table there that you should be able to see in the back page of the notes to account, the accounts -- a distribution of our clients according to investment-grade level. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [96] -------------------------------------------------------------------------------- That's right, Patrick, you can. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [97] -------------------------------------------------------------------------------- But I think the level of our provisioning that we've had to take reflects the discipline of our risk management processes in terms of evaluating these counterparty credit risks and making sure we have proper collateral and security where they are lower credit-rated counterparties. -------------------------------------------------------------------------------- Operator [98] -------------------------------------------------------------------------------- The next question comes from Richard Wiles with Morgan Stanley. -------------------------------------------------------------------------------- Richard E. Wiles, Morgan Stanley, Research Division - MD [99] -------------------------------------------------------------------------------- Shemara, I had some questions in relation to Macquarie Investment management. Firstly, it's a $380 billion asset manager. Do you think it has sufficient scale? Or would you like it to be a lot bigger? Secondly, do you think the current environment accelerates consolidation in the global asset management industry. Thirdly, would you contemplate a large acquisition, like you did in 2009. And finally, what are your existing capability or geographical gaps in the traditional asset management business. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [100] -------------------------------------------------------------------------------- Yes. Well, certainly, scale is a big driver of return in asset managers. I think the footprint we have now, we have reached scale where we're making very good earnings and return on equity because we can afford to have this global footprint -- the operational footprint, where we invested in Aladdin and also a new data warehouse capability. We have teams on the ground managing money in all 4 regions of North America, Europe, Asia and here. And we have distribution capability now into all channels and geographies. So we're at good scale. Having said that, if acquisition opportunities did come up where basically, we could take on revenue without having to incur materially greater costs, given we have the platform, that would be appealing. We're very disciplined in terms of looking at acquisitions, though, as you know. So we made the Delaware investment more than 10 years ago. And since then, we've only done small add-ons. And in terms of where we see gaps of -- obviously, we don't have a big presence in Europe. We have a big presence here in Australia and in North America. So a platform there would be complementary. But frankly, the business is chugging along fine without it. In North America, we have the ability to do in-market inorganic growth and get great scale benefits there. In terms of strategies where we have gaps, obviously, global equities was one where we saw a gap, and we took on the value invest team there in terms of global value equities. So those sort of strategies would appeal. And I think we're constantly on the lookout for good teams we can bring on to a platform where we don't have as strong capabilities. We're growing emerging market debt, high yield, et cetera. And also where we have the ability to take on a whole platform and get the synergy benefits of that. -------------------------------------------------------------------------------- Richard E. Wiles, Morgan Stanley, Research Division - MD [101] -------------------------------------------------------------------------------- And Shemara, just broadly, do you think the current environment will accelerate consolidation in the industry? Or do you think it just continues at as much the same pace? I mean, is this a significant event for the industry overall? Or just a speed bump along the way? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [102] -------------------------------------------------------------------------------- I think to the extent there are people that end up with distress, it will accelerate consolidation. And there may be a few of those. Last time, as I said to Jonathan Mott, the crisis was driven by different factors that meant banks and insurers had capital challenges, and had to exit assets like asset managers that were really good quality portfolios on terms that were attractive for investors. This time, it's a health-driven pandemic. And so it really depends how the good quality asset managers are placed in being able to access equity and debt on their own funding to continue. So we may not have as many distressed offerings come to the market. So I think the consolidation may pick up a little, but we're not expecting it to move to the extent it did with the global financial crisis. -------------------------------------------------------------------------------- Operator [103] -------------------------------------------------------------------------------- The next question comes from Brendan Sproules with Citi. -------------------------------------------------------------------------------- Brendan Sproules, Citigroup Inc, Research Division - VP [104] -------------------------------------------------------------------------------- Apologies, I think I got cut off earlier. My question relates to Slide 58, looking at the capital that you have invested across each of the divisions. I was wondering if you could help me understand what sort of capital requirements that -- or how will COVID I guess, uncertainty affect the capital requirements in these businesses. So for example, in business and financial services, what are you expecting from risk-weighted asset inflation in commodities and global markets? What are you expecting from counterparty credit risk, but also higher VAR as you try to sort of take advantage of the trading activities. And then lastly, in sort of Macquarie Capital, I guess, to some extent, asset management, to what extent do you need to hold more capital to get some of these equity investments given the movement we've seen in equity prices? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [105] -------------------------------------------------------------------------------- Yes. It's in relation to the last 2 that you asked about, Macquarie Asset management is a very capital-light business. We basically put money into co-invest alongside our funds. And positions like MIC are unusual positions, but we're generally co-investing a small portion of that fund, so that we're aligned. And those positions are pretty resilient. We're not expecting that we have to put materially more capital in or capital weight the assets that we have there more because the risk of them has not changed materially in our view. In relation to the CGM business, I'll let Nick comment in a minute, but we haven't had Greg Ward speak yet from banking and financial services. So I might let him speak to that question. But I mentioned in the introductory material that Greg and his team have really been focusing in terms of where they put on assets in their businesses. For example, in mortgages with lower LVR and more owner-occupied in SME with clients that are professional services. Alex showed you in his slide how well collateralized those business loans are. So Greg, did you want to comment a bit on BFS and the capital that we're seeing that we'll need to put into the business. And Slide 37 has a lot of material there on the nature of Greg's book. -------------------------------------------------------------------------------- Gregory Colin Ward, Macquarie Group Limited - Head of Banking & Financial Services Group and Deputy MD [106] -------------------------------------------------------------------------------- Yes, of course, Shemara. I think the only real impact -- we have -- or the most significant impact in terms of capital, obviously, is from business growth. And as you say, we've got a very we think comparatively safe portfolio, given our niche approach. So -- but the growth will come from capital from business growth. The only other impact will be somewhat procyclical, which is the result of longer workout periods from customers, the payment pause and so forth. So we'll see -- we expect a lot of the loans to be on balance sheet for a longer period of time. And that might increase the capital between sort of 5% to 7%. But it's -- that's just a guess at this point. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [107] -------------------------------------------------------------------------------- Yes. But the BFS business as well is a good return on capital business. And we don't expect material increase. The commodities business, together with BFS, and sits in the bank. Mary Reemst, you're on the phone, did you want to comment at all on the potential for capital increase in the bank. The nonbank, I've commented on MAM. I can comment on that MacCap as well. But did you want to comment on that? -------------------------------------------------------------------------------- Mary J. Reemst, Macquarie Group Limited - CEO of Macquarie Bank Ltd [108] -------------------------------------------------------------------------------- Yes. So in terms of the bank, the bank is well capitalized. And I think, as Alex pointed out in his slide, we had additional $1 billion of capital put into the banking in March, so well positioned. Greg's talked about the potential in terms of BFS and CGM, they're the 2 main businesses in there. I think it all depends on what happens in terms of the outlook and as things progress. But in terms of sufficiency of capital in order to meet growth, et cetera, the bank, I think, is well capitalized with a strong CET1 ratio, the strongest that it's ever had. And so I think we're feeling fairly comfortable in terms of the ability of the bank to meet the growth of both those businesses. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [109] -------------------------------------------------------------------------------- And on growth in CGM, I think we covered, Alex, in your slides in mine, that we have actually stepped it up. You can talk about the SA-CCR, the derivatives, the FX. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [110] -------------------------------------------------------------------------------- I think -- I mean, the only other thing to say, Brendan, is a bit to the point that Greg's making. Obviously, yes, there's a period of time with some of the loan exposures where the workouts and the clearing of that provision won't be possible, but you're expecting to see, under the ECL provisioning, some of those exposures going to default. So we'll be holding those exposures for a longer period of time. And as Greg mentioned, the 5% to 7% step-up in risk-weighted assets in BFS. From a CGM viewpoint, obviously, part of the movement in the provision this year was expected credit losses across the loan and the lease portfolio in CGM. And again, similarly to Greg, some of that exposure, obviously, we'll take an extended period to work out. And so you'll see a little bit of capital accretion as a result of that delay and work out of those positions. And then the other thing I think we're expecting -- we'll expect to see over the next 12 months, particularly in the base case, you will see some counterparty downgrades just as the baseline scenario rolls through from a probability weight today to a reality over the next 12 months. And so I think from a credit risk-weighted asset perspective in CGM, again, you could say, depending on a whole range of things, you could see a step-up of that, again, that sort of 6% to 8% in terms of increased capital draw on CGM. But obviously, that depends a little bit -- quite a lot on how the baseline or how the economic scenario unfolds over the next 12 months. And just where the exposures actually emerge across that business. But hopefully, that gives you a sense of what we see is that as the rollout over the next 12 months. -------------------------------------------------------------------------------- Patrick C. Upfold, Macquarie Group Limited - Chief Risk Officer & Head of Risk Management Group [111] -------------------------------------------------------------------------------- And Alex just on the VAR, not that it's a significant part of our overall capital base. But certainly, the events that we've seen in the areas in which we're active over the last few months have been extraordinary. And for those maybe with mathematical modeling of bar is more heavily weighted towards more recent events. And so all things being equal, we can expect to see VAR to increase as we're putting on new deals, the amount of VAR that we're going to need to hold behind those deals will increase. But of course, we would be expecting that our returns in respect to those trades that we put on would more than compensate us for the increased capital that we're holding. I don't know whether Nick is going to be anything further out on that. -------------------------------------------------------------------------------- Martin Stephen William Stanley, Macquarie Infrastructure and Real Assets (Europe) Limited - Global Head [112] -------------------------------------------------------------------------------- Yes. I think that is a very good point, Patrick. The recent market events will be flowing through to the models and we'll like-for-like show a greater volatility. And hence requirement for capital, but not dissimilar to what we've been through in the past. One other thing, which may also impact our capital going forward would be the growth in the underlying – drive portfolio as well. Over the course of the last few years, the CGM client business has grown and where we intend to continue to grow so that could flow through to increase capital at some point also. But as you would say, that would be -- you would expect to see the commensurate returns in step with any increase there. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [113] -------------------------------------------------------------------------------- And I think as I mentioned in the capital management slide, we are taking all this into account, sitting with very good capital buffers. Mary mentioned $1 billion put into the bank and the 12.2% record CET1 we're sitting at to support CGM in growth and BFS. And at the group level, we've got this $7.1 billion surplus. And the capital position will be stronger after the dividend. So we are positioning ourselves if there is increased capital demand to be able to deliver. -------------------------------------------------------------------------------- Brendan Sproules, Citigroup Inc, Research Division - VP [114] -------------------------------------------------------------------------------- Can I just ask a follow-up question. Obviously, you've been deploying capital in the last couple of years. Particularly to new business opportunities, and the green energy portfolio stands out as a place where you place capital. Has COVID and the effect of that meant that, that is likely to slow down over the next 12 months? Or is that a portfolio that continue to be invested at the same velocity? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [115] -------------------------------------------------------------------------------- Dan, do you want to comment on that? I think Slide 42 shows the growth in the green. And we mentioned the stats as well, but in terms of opportunity to invest in renewable energy projects we're working on. We've been migrating from operating to construction to development projects which require typically less funding and more human capital. But over to you, Dan. -------------------------------------------------------------------------------- Daniel Wong, Macquarie Group Limited - Global Co-Head of Macquarie Capital [116] -------------------------------------------------------------------------------- Yes. Let me ever go at that. So I mean, clearly COVID-19 is impacting some of the activities in the green energy business. I think I've mentioned it before. In terms of projects under construction, we're continuing. And also development in terms of the time frame, the current impact is relatively small in the scheme of things. But if you look forward, the nature of our business is split into 2 types of activity. One is investments that are into projects that are under construction. That's where we really need to step up the amount of funding or capital required in the activity as we move an investment from development stage into financial close in its construction state. In terms of our development activity, that is a substantial part of our activity. And I referred to 250 projects or 25 gigawatts under development. Now that activity is largely expensed as we take that activity through. But when those projects mature, it creates the opportunity for us to invest into those projects and step up the amount of capital we use. We also participate in investing in projects that other people develop, whether they be by developers or utilities or contractors. And we invest into those projects that move into construction phase, and that steps up as well. The final thing I will mention is in terms of deal flow, the overall market for developing infrastructure and energy, we feel pretty good about. The long-term sectoral trends here are strong. And frankly, I think, do not change through the COVID. The world still needs sustainable infrastructure and to build a lot more of it in terms of infrastructure and energy and in particular, green energy. So we see more deal flow coming through there. The question is whether we can position our business to capture our share of it, and I'd like to think that we can. -------------------------------------------------------------------------------- Operator [117] -------------------------------------------------------------------------------- There are no further questions at this time. I'll now hand back to Mr. Dobson for closing remarks. All right. -------------------------------------------------------------------------------- Samuel John Dobson, Macquarie Group Limited - Head of IR [118] -------------------------------------------------------------------------------- Well, as there are no further questions. Thank you, everyone, for dialing in. Thanks for your support. And we look forward to catching up with you over the next couple of weeks. Thank you very much. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [119] -------------------------------------------------------------------------------- And I also wanted to say thank you again to everyone for dialing in and for your support. And also a big thank you to our team. I guess, like with all of your teams, it's just been a very challenging recent period. And as you've heard, as we've had this discussion, people have really stepped up to the plate very well. So thanks to all of our team.