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Edited Transcript of MQG.AX earnings conference call or presentation 31-Oct-19 11:00pm GMT

Half Year 2020 Macquarie Group Ltd Earnings Presentation

Sydney Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Macquarie Group Ltd earnings conference call or presentation Thursday, October 31, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander Harms Harvey

Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia

* 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

* Nicole Sorbara

Macquarie Group Limited - COO & Head of Corporate Operations Group

* Samuel John Dobson

Macquarie Group Limited - Head of IR

* Shemara R. Wikramanayake

Macquarie Group Limited - CEO, MD & Executive Voting Director

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Conference Call Participants

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* Andrei Stadnik

Morgan Stanley, Research Division - VP

* Andrew Triggs

JP Morgan Chase & Co, Research Division - Research Analyst

* Brendan Sproules

Citigroup Inc, Research Division - VP

* Brian D. Johnson

Jefferies LLC, Research Division - Equity Analyst

* Edmund Anthony Biddulph Henning

CLSA Limited, Research Division - Research Analyst

* James Ellis

BofA Merrill Lynch, Research Division - Director

* Jonathan Mott

UBS Investment Bank, Research Division - MD and Banking Analyst

* Richard E. Wiles

Morgan Stanley, Research Division - MD

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Presentation

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Samuel John Dobson, Macquarie Group Limited - Head of IR [1]

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Okay. Well, good morning, everyone. Thank you for joining us. Thanks for joining us on our first half 2020 results announcement.

Today, you'll hear from our CEO and Managing Director, Shemara Wikramanayake; and our CFO, Alex Harvey. Shemara will go through the result overview, Alex will go through the detail as normal, and then we'll go back to Shemara for the outlook. We have questions at the end. We'll start with the room and then go to the lines.

If I could ask you to turn your phones either to silent or off in the presentation, that would be great.

And I'll hand over to Shemara. Thanks very much.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [2]

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Great. Thanks, Sam, and welcome, everyone. So as Sam said, I kick off with an overview of the half year result. And on this first page, you will see we slightly adapted the presentation of our operating groups, reflecting the realignment that we've been doing over the last 12 months. And now we have 4 operating groups, it's streamlined down to a reasonably recent simple structure of the global asset manager, Macquarie Asset Management; the domestic banking business in BFS; the global futures fixed income and commodities trading business, CGM, which is also a banking business; and then Macquarie Capital, which is a global investment advisory and principal investment business. And I might, given the changes we've done, just spend a minute reflecting on what's in each of those businesses.

So starting with MAM, which you see contributed 39% of our income in the half year, we now have a fixed income equities business and then a global alternatives capability, where we have the legacy infrastructure business where we're the largest manager in the world. In real estate, we bought the GLL core real estate business and put that together with -- from Macquarie Capital value-add core-plus type businesses in areas like logistics, manufactured housing, et cetera. We also have the private credit capability based heavily off our infrastructure debt capability. We have Agriculture, in which we are probably the biggest manager in agriculture as an institutional asset class given the focus elsewhere is on timberland. And we've moved the aircraft leasing businesses into that asset management offering as well, the alternatives asset manager, from the balance sheet. And that's reflecting the fact that the investment opportunity is basically becoming bigger than we can support on the balance sheet, but our fiduciary investors would very much like in the current environment to have access to another asset class that's defensive yielding, a sort of real asset class. So that positions us with a very good global alternatives capability to grow from in a world where [savers] are looking for a lot of these types of investments. That's MAM.

In the Banking and Financial Services business, and we've got Greg Ward with us here who heads that group, that contributed 13% of our income in the half year. The main change we did there is we moved the motor vehicle leasing business from CAF into that business so that all our Australian retail customer-facing businesses are now under the one umbrella with our personal banking offering, our business banking, the motor vehicles and the wealth offering.

Then in Commodities and Global Markets, we moved the CAF Asset Finance businesses in May, which fit well with what the commodities business has been doing. That CAF Asset Finance now called Specialised and Asset Finance, so its acronym now is SAF, was involved in telecommunications, equipment but also energy and mining equipment leasing, which fits very well with CGM's focus in those sectors. And together with the SAF business now and the previous lending and financing business we had in CGM, we have a component of CGM that also is annuity business, and that was 8% of our income this year. The other part of CGM contributed 32% of our income this year, and it's a business, as I said, that operates in interest rates, in futures, in foreign exchange and then a very big presence in commodities in terms of providing risk management services to customers, financing and also storage and transportation solutions.

And then lastly, Macquarie Capital is a global investment advisory and principal investing business, a strong focus in infrastructure and energy but across all other asset classes. And we moved the CAF principal financing business into that group so that all our investing capability as well as our origination and structuring capability across the non-infrastructure and energy groups are now together there and position us well to respond.

So putting all of that together then, we have 60% contribution in this half from the annuity-style businesses and 40% from the market facing. And all up, the businesses we're able to deliver an 11% increase in net earnings to shareholders driven by 8% of the operating income level and 9% at the expense level compared to the prior comparable period. The tax rate was down slightly from 22.2% to 20.5%, and the ROE was up slightly from 16.3% to 16.4%. You will have seen that the Board has declared a dividend of $2.50 up from the $2.15 in the prior comparable half, and that reflected the earnings increase on the prior comparable period but also the desire to have the composition of our dividend over the halves better reflect the composition of earnings over the half. So the dividends are up 16% versus earnings up just 10%. And -- sorry, 11%. Apologies. Earnings up 11%.

Looking at [fee] contribution from the operating groups, it was up 10%, and the annuity-style businesses were up 15% on the prior comparable half and the market facing up 4%. You can see there the composition of each of the annuities-style and market-facing businesses in the 2 columns. You'll also see on this slide now we're showing across the 2 rows the businesses that are in the bank and outside of the bank, and that's because this presentation is intended for our equity and our debt investors, so gives a clearer articulation of the banking versus the nonbanking businesses.

And if we look at the 5 past halves, including this half, you can see that trend is upwards on operating income, profit and earnings per share absent, of course, the very large step-up we had in the second half of last year. We had a high number of realizations in Macquarie Capital and a very strong half in a particular part of the Commodities and Global Markets business but, absent that, trending up nicely.

In terms of assets under management, we are at record assets under management. And again, Alex and I will speak in a little more detail about what drove that, but it's at the $563.4 billion. And the main contributors at a high level were foreign exchange made a difference, market movements in the MIM business and also investments in the MIRA business partially offset by realizations in the MIRA business and net flows in MIM.

And then looking at the diversification by geography, this will be quite familiar to you that at the moment, we're making about 30% of our income from each of the Americas, EMEA and Australia, Australasia and the balance from the Asian region. We've shown there our 15,700 staff, but we've also shown across our managed assets, there's another 120,000 people we're responsible for in those businesses, and we've shown where they all work and where the assets are which they work on by region.

And you can see here in terms of that diversification that we've had again a nice trend in terms of growth across all of Australia, the Americas and the EMEA region over recent halves. We had a particularly strong step-up, obviously, in the last half and particularly in Australia where we had those realizations. But what's interesting is that Australia is continuing to grow, but our weighting to the Americas and EMEA is stepping up even though they're growing at a similar rate because they are growing in much bigger markets in absolute terms. Asia contributes continually solidly, and it's a great source of capital for our global business as well as being the fastest-growing region in the world and the place with the biggest contributor to world GDP is. So over the medium term, we're very committed to growing that footprint as well.

So looking then in a little bit more detail at the operating groups, and Alex will take you in greater detail through the impacts on earnings from those groups, but I just note a few things. First of all, Macquarie Asset Management, the result was up 32% on the prior comparable half and, as I said, contributed 39% of our income. Some of the features of that is that the equity under management is at $134.4 billion, and we raised $5.6 billion in this half, including hitting our hard cap on our sixth European fund, MEIF6, with a EUR 6 billion raise. And just after the half year closed, in our Macquarie Agriculture Fund, Crop Australia, we also hit our hard cap of $1 billion there.

Together with that raising, we also were able to invest $8.7 billion in the half, which meant our dry powder now is down to $20.5 billion. And we also were able to realize $7.7 billion, and you saw there were good performance fees generated out of that, up materially on the prior comparable half. I'd also note the aircraft financing business, as I mentioned, has come into that business. We brought in PGGM as a 25% investor, and the intention is to continue to bring fiduciary investors into that asset class because it's a good offering for our investors, but we also see a lot more opportunity to invest beyond the capability of the balance sheet.

Then with the MIM business, $361.1 billion of assets under management driven, as I said, mostly by market and FX, offset slightly by net flows. We, after the end of the half, had the Foresters acquisition closed, which is USD 12 billion of assets as we've mentioned previously. I'd also note that the Aladdin program, which is our global platform investment to help portfolio managers across that business, has now completed the U.S. phase and is rolling out around the rest of the world.

Then with Banking and Financial Services, basically, good results there as well. It's up 2% and contributed, as I said, 13% of our result. But volumes are up in our deposits, personal banking mortgage loan portfolio, our business banking book, the funds on the platform in our wealth business, and that's slightly offset by a reduction in volumes in our motor vehicle leasing business. Alex will talk more about the contributors to results there, but the underlying growth, again, just like the asset manager, is looking good in terms of the metrics that drive that for the medium term.

Commodities and Global Markets, which, as I mentioned, contributed 40%, and 8% of that was -- is from the annuity-style portion of it, 32% from the balance. It's up 32% on the prior comparable period, and that was because the annuity-style businesses, the SAF book was broadly consistent, but the lending and financing businesses were down slightly. It was mostly agricultural lending where the demand was a little bit less. But the rest of the business was basically up across the board. So we had better results in foreign exchange and the interest rate business driven by client activity across all regions. Also in futures, we had a strong result primarily driven by the U.S. And in equities, we had a strong result as well, again, driven mostly by trading activities this time in the Asian region. The only place where we had challenging market conditions in that business is in the cash equities business in the U.S. and in Europe, and we're focusing now on our core capability in the AsiaPac region in that business.

But then lastly, the commodity markets part of that business, very strong result across the board in oil, Global Oil, both in physical and financial and then in gas and power in the EMEA and the European region and also in Agriculture and Metals and Mining. So we experienced favorable market conditions across all our businesses in CGM in this half. But importantly as well, we saw our customer base continue to grow, which is what drives medium-term growth. So just like the other 3 groups, very good underlyings in terms of medium-term trend.

And then lastly, Macquarie Capital, it in this half only contributed 8%, and the result was down 56% on the last prior comparable half. The main drivers of that were even though our M&A activity was up, that was post offset by our DCM earnings. And you may recall in the operations briefing, we talked about how, as we are going to North America, we have a big focus on the sponsors as a customer base. They were very active in LBO activity in the first half last year and this year, much less compared to that. So the DCM earnings that we had in this half were much less than the strong half last year. We also had the CAF Principal Finance business move into the advisory and capital solutions part of Macquarie Capital, as I mentioned, and that business is now pivoting from debt weighting more to equity weighting. So it means the stable income that we had when the investments were more debt in nature have now moved to more equity-style income, where the timing of realizations can vary more.

We still saw good opportunities to invest there. We made the PTSG investment, which is a fire and safety monitoring services business in the U.K., which we're very pleased about, and then in Dovel, which is a defense business that we had there. We made a follow-up investment in Ace Solutions (sic) [Ace Info Solutions]. So we're seeing good opportunities to keep investing at attractive terms.

And then in the infrastructure and energy vertical of that division of that Macquarie Capital business, we still continue to see great opportunity there, particularly in green energy where we have 250 projects in development and construction and $1.3 billion book there. We made another 400 -- $800 million, sorry. Principally, East Anglia ONE, $800 million of investments, and we had about $400 million of realizations, which were the offshore wind investment in the U.K. and the Covanta waste-to-energy asset in Ireland. So continuing again medium term to see good drivers of opportunity there, but the reason the result was down was because we had some development expenditure and also specific impairments in some assets in that area. So that was Macquarie Capital. That was performance from the operating groups.

In terms of the balance sheet, funded balance sheet's still strong. We had $1.7 billion equity raising in this half, and we really appreciate the support we had from institutional and retail investors in that raising. It means our equity position is stronger as you see on that graph. But also in terms of our debt position, our term funding well exceeds our term assets. We did $10.8 billion more of new term funding, and again, Alex will give you further detail of that, and our retail deposits are sitting comfortably up 5% at $58.8 billion.

In terms of capital as well, the position is stronger over this half. We had $6.1 billion of surplus capital under the APRA Basel III basis at the end of the last financial year. We then paid out $1.8 billion in terms of the dividends for the full year last year. We've earned $2.1 billion this year in the half, and then we've had the step-up of $1.7 billion for the capital issuance offset by an absorption of $1.4 billion into our businesses, giving us a $6.7 billion APRA Basel III surplus at the end of the half. And in terms of where we invested that $1.4 billion, you can see on this chart that half of it, roughly $700 million, was largely comprised of the SA-CCR changes, the introduction SA-CCR from the 1st of July which impacted the commodity and global markets business.

And then in Macquarie Capital, we had a $700 million increase in capital into that business. Part of it is the DCM book at the point in time on 30 September had some large balances we were holding, but it's also investments of $1.4 billion across IEG and ACS net of realizations of $700 million. We were expecting the Formosa 2 transaction also to close in that period, which would have lifted that $700 million to $1 billion and the $3.9 billion across the year to $4.2 billion, but Formosa 2 actually closed in October, so it's not included in these numbers.

And then our regulatory ratio is also sitting well above the regulatory minimums. In particular, the CET1 ratio is sitting well above the strict regulatory minimum of 7%, at 11% or 14% on a harmonized level at the bank group. And the last thing I'd mention again is that our dividend was $2.50 that the Board declared for the first half. That's up from $2.15. It's a 61% payout ratio, and I explained the factors that drove that step-up.

So with that, I'll hand over to Alex, who will take you in much more detail through the operating result by group and across the whole group.

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [3]

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Thanks, Shemara, and good morning, ladies and gentlemen. As Shemara said, I'll take you through a little more of the detail in the financial statements for the half.

Starting with the income statement, operating income for the period was up 8%, driven by an 8% growth in net interest and trading income. A similar growth in our fee and commission income across the group. We had a 38% step-up in our investment income offset by an increase in credit and other impairment charges as you see coming through the P&L there. So overall, operating income up 8% for the half.

In terms of operating expenses, up 9% for the half of where we were this time last year. Largely, that reflects an increase in employment expenses. There's a couple of things happening there with the increase. The negative effect of foreign exchange, depreciation of the Australian dollar. Also, we had an increased profit share based on the operating performance of the group and also an increase in accelerated share-based payments expense as a result of the retirement of key management personnel through the half. So operating expenses, up 9%. From a tax perspective, income tax expense, flat for broadly where it was this time last year. So overall, net profit up 11% for the period.

In terms of the income statement by operating group, you can see the big contribution there from Macquarie Asset Management, up 32% from where we were in the first half of 2019; a similar increase for CGM, again, up 32% for the period offset by that result in Macquarie Capital down 56%. And you can also see the increase in Corporate reflecting share-based payments expense and profit share expense across the group.

Just turning to a little more of detail for each of the operating segments. You can see Macquarie Asset Management up 32% from where we were in the first half of 2019. Base fees up 8%, largely reflecting the investment through the MIRA business, the investments that we made in the first half. A really strong performance from a performance fee perspective, nearly double what we had this time last year. And the interesting thing about the performance fees is just the breadth of where they're coming to. So we're seeing performance fees out of our European funds. We're also seeing performance out of the United States and also here in Australia through some divestments we've done down here. So it's great to see the breadth of that performance fee income coming through.

In terms of the net operating lease income, down a little bit on where we were last year. That really reflects the completion of the sale of our aviation portfolio into the joint venture with PGGM. That happened at the end of July. And so we had a small decline in the net operating lease income coming through that portfolio offset by an increase -- or partly offset by an increase coming through from the Rotorcraft acquisition that we made and we announced to the market at the end of our full year results for 2019.

You see expenses up a little bit, suffering from the foreign exchange movements as well as an increase in head count, largely the full year period effective GLL and the ValueInvest acquisition that we made across the MIRA and MIM business, respectively, that we talked about last year. But overall, up 32% for the period.

In terms of the drivers, assets under management, up 2%. Largely, that reflects the deployment of capital through the MIRA business. You can see a nearly $12 billion increase in assets under management through that. From a MIM perspective, flat on where we were last year. We had outflows across small fee earning, fixed income and general insurance account, balancing favorable impacts from an FX viewpoint and market movements that we saw coming through the markets over of the course of the period.

In terms of the key driver of the MIRA business, equity under management, as we've talked about before, up 5%, to $134.4 billion. A strong period of capital raising, $5.6 billion of capital raised during the period. Primary drivers of that were the completion of the MEIF6 raising of EUR 6 billion, so a very pleasing result in terms of our sixth European fund. We also saw capital raised in our real estate asset management platform. We've talked before about our desire to increase our focus and exposure to the real estate asset management business, and we also sold our 25% interest in our aircraft portfolio which is coming through -- or partly 25% interest coming through equity raised during the period. So we ended the period with $134.4 billion. Of course, that's a key driver the performance of the business on a medium-term basis.

In terms of the second of our market -- annuity-style businesses, the Banking and Financial Services business up 2% from where we were this time last year, a continuation of the strong result in our personal banking business, and our mortgage volumes on an average basis were up 14%. We saw our business banking down $15 million from where we were in the first half of 2019. Largely, that reflects a few small impairments in our business banking book that we had to take during the period, partially offset by the increase in volume that we saw in loans to our SME clients across Australia.

We also saw a decrease in the contribution from the wealth management business. That reflects the refocusing of that business to high net worth segments, and we saw some revenue come out of that business. But you see also a decrease in costs. The head count in BFS has come down from about 2,900 this time last year to 2,600. That largely reflects the, again, the focus on the high net worth segment, and therefore, the head count has come down. So overall, up 2% from where we were this time last year.

In terms of the underlying drivers as Shemara mentioned, really strong result across mortgages; across the business loans; the funds on platform, up at $91.5 billion now; and deposits. Partial decline, a little bit of decline in our mortgage -- in our motor vehicles business. I think as everyone aware -- will be aware, new car sales in Australia are obviously down. So that's partly coming through. And we also saw the continued runoff of the Esanda portfolio that we met -- we bought in 2015 as well as a smaller -- a lesser exposure to dealer finance across the country.

In terms of the first of our market-facing business, the Commodities and Global Markets business, really strong period, up 32%, continuation of the strong performance that, that business has had over several periods now and, I think, reflecting the scale of platform that the team has put together. A pleasing result from the commodities perspective, up $243 million, and notable, I think, is the increase in income from risk management products. That's where we're providing hedging, price management solutions across the commodities complex. We saw a strong period of activity there reflecting the growing customer base, reflecting also the environment that, that business -- or our clients around the world are experiencing. So good contributions from Global Oil, good contributions from our European Gas and Power business and North American Gas and Power business. Also, we saw an improved performance from Agriculture, Metals and Mining and gold hedging in particular coming through during the period. So a strong result from a risk management viewpoint.

In terms of FX interest and credit, we saw a continuation of that growth story we've seen over the last [sort] of period where we were providing largely FX-type solutions to clients around the world, working a lot more with Corporates and also Private Equity, and so we saw an increased contribution from a number of regions, Asia, the U.S. and also Europe. So that's good to see that build -- that business building out.

And in terms of equity, as Shemara mentioned, we have a better period for our warrants business, in Asia in particular, I guess, reflecting the volatile nature of markets up there, so there's an improved result from that. We also saw some opportunity in our index arbitrage business in Asia, and we saw some revenue coming through from that activity as well.

Expense is up during the period. We are investing in technology, in compliance, in regulation to support the growth of the CGM business and, obviously, meet our obligations around the world. So we saw some head count step-up there, and of course, we saw the impact of unfavorable FX coming through that business as well, a really strong performance overall.

You can see we put this chart up for the last few results. Underlying driver of this business, of course, was the growth in the customer numbers. And you can see that continued growth in commodities, you can see the continued growth in financial markets and in futures. So that's a good sign in terms of dealing with more clients across more products in more geographies and underpinning the medium-term outlook for that business.

In terms of our Specialised and Asset Finance portfolio, so the business we moved from CAF into CGM. You can see the book is largely flat there from where it was this time last year, but we'd expect a consistent performance from that business going forward.

In terms of Macquarie Capital, a more challenging half, down 56% from where they were in the first half of 2019. I'll take you through the -- a little bit of the detail of the movements. In terms of the investment income, you can see down $23 million for the half. We had a lower contribution from interest income on the debt book that we moved from principal financing to -- into Macquarie Capital. We also saw a larger share of losses coming through joint ventures, including, as Shemara mentioned, one asset in particular, where we've had to take an impairment through an associate. That was offset -- or partly offset by a really strong period of realizations in our green energy investing business in particular. You see the returns from that up 20% in terms of realizations. And we had a couple of very significant realizations during the period, including the Dublin waste-to-energy asset as well as a portfolio of U.K. offshore wind farms that we acquired as part of the Green Investment Group acquisition back in 2017, and we've now been able to divest that successfully during the half.

In terms of fee and commission income, you can see, down $111 million. Largely, that reflects a more subdued environment for our debt capital markets business in the U.S. As Shemara mentioned, the LBO market, particularly, Private Equity activity, in the second and the third quarter was a little lower. And so that's that come through our DCM business, partly offset by an improvement in our M&A business, particularly here in Australia.

We saw an increase in credit and impairment charges over the period, a small number of positions across the group which are underperforming our expectations, and as a result, we had to take some impairments during the half. And you can see an increase in operating expenses. Partly, that's foreign exchange, the effect of foreign exchange coming through, but also, the group is investing in additional resources, particularly in our advisory and capital solutions business in the U.S. and Europe where we've added teams of people to focus on sectors where we think we have comparative advantage. We've also been adding head count to our infrastructure and energy group. One of the things we're seeing here is that the business is moving, I guess, more toward the development phase of activity. You can see there's 250 developments that the team are working on around the world. So in the IEG business in Macquarie Capital, they've been adding staff to support that development activity in all sorts of parts around the world. And so we saw a step-up in operating expenses to support that activity.

Pleasingly, we saw an increase in the capital that the group has invested in Macquarie Capital alongside Macquarie Capital's clients, so we increase the capital by $700 million. And you can see in the block above investments, you can see where a large portion of that activity is occurring. It's really coming through the green energy portfolio, particularly, East Anglia ONE, which is a large transaction the team did for U.K. offshore wind asset during the half. You can see those realizations coming through again. All of the realizations have been in that green investment area. But overall, we have $3.7 billion invested alongside Macquarie Capital at the end of the period. And obviously, that cycle of investment and realization is something we've talked about before, and the $3.7 billion should all [go for good] results in terms of future periods for Macquarie Capital.

In terms of the group activity, maybe just to summarize a little bit of that, cost of compliance, the slide we put up now, for a few years. The finance industry does continue to see an increase in compliance, in regulation, investment in technology and data and so on to support our activities around -- and we're no different from the broader industry. And so we did see an increase in compliance spend of 15% from where we were in the first half of 2019, and my expectation is that will continue into the medium term.

And in terms of balance sheet highlights, a strong period of fundraising, nearly $11 billion of term funding raised during the period. Unlike in prior halves where a lot of activity has been in the group, the last 6 months, we've seen a lot of activity in the bank supporting the growth in our BFS business, in the lending activity in BFS, together with the activity in CGM, so well supported by a whole range of investors around the world. A familiar story, we continue to diversify the sources of funding supporting our group. And in terms of the weighted average maturity across the group, 5.1 years, so we've funded ourselves, we think, conservatively and with some length to support the activities of the group around the world.

In terms of deposit growth, up 5% on the period. This is if you sort of wind this back to 2013 about an 8% per annum growth rate in deposits, so very pleasing to see a continuation of the deposit growth across the group.

In terms of loan and lease portfolio, down a little bit on where we were this time last year. If you look at the middle of that page, you'll see operating lease assets down from $8.9 billion down from $1.6 billion. Largely, that reflects the movement of the Macquarie aviation business from an on-balance sheet business into the joint venture we formed with PGGM, so that reduces our operating lease assets. And you can see that partially offset by the growth in the retail mortgages and in the -- and the business banking that we've talked -- I've talked about before in relation to BFS.

In terms of the equity investments, up from $5.9 billion to $8.5 billion. The other side of that transaction we've done with Macquarie AirFinance is our remaining 75% interest in that business. You can see that on the second line down, the $1.6 billion. That's our equity we have invested in that aircraft portfolio. And as Shemara mentioned, that's now been moved into Macquarie Asset Management and is more of a fiduciary-type offering for our clients.

In terms of the regulatory update, there is a lot going on. APRA are currently undertaking a series of reviews across the financial services industry, which we're a part in many cases. I wasn't planning to go through in detail. This is a slide that we've had up for the last few results presentations. The only thing I would note is that based on our current -- the currently available information, the strong surplus position that Shemara referred to before, we'd expect that any additional regulatory impost as a result of the reviews, we can accommodate within that strong surplus. I would note, of course, some of those discussions are still in early stage of discussion and hence uncertain as to the outcome.

In terms of the United Kingdom, I'm pleased to say we have now secured our banking license in Ireland. So we now have all 4 licenses that we require to operate in Europe, so that's a very pleasing result, and no update in terms of the disclosure we've made in relation to the German matter.

As you've come to expect, from a CET1 viewpoint, a strong CET1 ratio, 11.4% at the end of the year, the move largely reflecting the impost of SA-CCR that came in from the 1st of July 2019. And you can see that down, 11.4% now with a strong CET1 ratio as you'd come to expect similarly from a liquidity position -- strong liquidity position across the group.

In terms of capital management, we raised just under $1.7 billion during the period, $1 billion from institutional investors, $670 million from retail investors through the Share Purchase Plan. So we're very happy with the support we received during the period. And as Shemara mentioned, the Board today has declared a dividend, an interim dividend, of $2.50, franked to 40%. We are endeavoring to more closely align the interim and the final dividend with the timing of earnings and. Based on our guidance for 2020, it's likely to lead to a lower gap between the interim and final dividend pay -- dividend per share for FY '20 than we've seen in recent years. The Board, of course, has maintained a dividend policy between 60% and 80%.

And with that, I'll hand back to Shemara. Thank you.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [4]

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Thanks. So I'll now have a look at the outlook both for the short and the medium term. And starting with the short-term outlook, again, looking at it by operating group as we always do, Macquarie Asset Management, as you've seen, base fees were up on the prior comparable period in first half, and we expect base fees to be up over the full year compared to the prior year. On performance fees, investment-related income net of impairments and net operating lease income, we expect this to be broadly in line over the full year. And then turning to Banking and Financial Services, we, as we guided at the beginning of the year, see higher deposits, loan portfolio and platform volumes, but we also see competitive dynamics continuing to drive margin pressure in that business.

For the Commodities and Global Markets business, you saw the strong customer base as well as the favorable market conditions driving results in the first half. We expect that strong customer base to continue to drive consistent flows across all of our businesses in fixed income, in futures, in foreign exchange and commodities. And with a Specialised and Asset Finance businesses, as Alex said, we expect a stable balance sheet to drive the results in that business. Now the first half of this financial year, as I said, did benefit from favorable market conditions across the whole platform, and we'd note that those have not persisted historically.

And then lastly, with Macquarie Capital, we're assuming market conditions will be broadly consistent with the FY '19 financial year, and we expect a solid pipeline of investment realizations as well, but we don't expect investment-related income to be as high as last financial year where we had those big realizations of PEXA and Quadrant in the second half. And then at the Corporate level, compensation ratio, effective tax rate and mix of business, we expect to be broadly in line with FY '19. So putting all of that together, we would note that the impact of future market conditions does make forecasting difficult, but with that in mind, we continue to expect the group's results for FY '20 to be slightly down on FY '19.

Our short-term outlook, of course, remains subject to a number of factors, which include the completion rate of transactions and period-end reviews, market conditions, impact of foreign exchange, potential regulatory changes that Alex stepped through, tax uncertainties and the geographic composition of our income.

And then for the medium term, we continue to remain well positioned to deliver superior performance. I've talked about the drivers in each of the operating groups, but it's basically, we sum it up, the deep expertise we have in our key markets and the strength of the business and geographic diversity we have that gives us resilience. We also have an ongoing program to identify cost savings and efficiency initiatives, and we also benefit from our strong and conservative balance sheet and our proven risk management framework and culture that we've had over the last 5 decades.

So the last thing for me is just to look at the ROE across the businesses over the last 13 years and in this half year. And for the annuity-style businesses, that was 22% for the last 13-year average and 24% in this half. And for the market-facing businesses, that was 16% for the last 13 years and 18% in this half. And then after allowing for our surplus capital at the group level -- at the full group level, it's 14% over the last 13 years and 16.4%, as I mentioned, in this half.

So with that, I'll hand back to Sam to take questions. And I would note that here in the front row, we also have a few of our Executive Committee members and group heads. So Nicole Sorbara is the Head of our Corporate Operations Group; Michael Herring, the Head of our Legal and Governance Group; Greg Ward, as I mentioned, Head of Banking and Financial Services; and Florian Herold, Head of our -- ex-CAF Principal Finance Business but now running the Principal Investing in Macquarie Capital in ACS and a fellow executive committee member.

As you know, we have a very global leadership team now, the rest of our Executive and Management Committee are in places like Houston, New York, London, San Francisco and Hong Kong as well, so they sadly -- and Philadelphia, so they sadly are not with us in the room, but Alex and I will try to cover on their behalf. Thanks, Sam.

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Questions and Answers

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Samuel John Dobson, Macquarie Group Limited - Head of IR [1]

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Thanks, Shemara. We'll start with questions in the room. Let's start with Andrei.

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Andrei Stadnik, Morgan Stanley, Research Division - VP [2]

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Andrei Stadnik from Morgan Stanley. Can I ask 2 questions? And they're slightly related. The first one is in terms of performance fees. There were a number of funds that drove performance fees in this half, in particular, MEIF1 and 3. And so the funds that drove performance fees in this half, are they still open for business so they could drive further performance fees in the second half? And specifically, MEIF2 was missing from that lease. Is MEIF2 getting closer?

And then second question, just thinking more broadly about the asset realization outlook. Some of your global peers (inaudible) have struggled to complete realizations recently given some market volatility around value versus momentum. So how are you thinking about the asset realization outlook in the period ahead given some of the recent changes on investor appetite?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [3]

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Yes. Well, first of all, covering the question on performance fees and where they've come from, what's been pleasing about this result is we have had a huge range of where our performance fees have come from, not just in the infrastructure funds but also across real estate, et cetera. With this half, you mentioned MEIF1 and MEIF3, the Brussels realization, which we had recognized largely in the prior half, was finalized in this half and so we had some performance fees from that, that impact MEIF1 and 3 that hold that together.

But our first North American fund, MIP I, sold its final assets, so Puget and the ports that it had, Halterm and a Pennsylvania port. So we had performance fees from that fund, which is pleasing because it was invested at the time of the global financial crisis but still delivered a performance fee result for investors in the fund. So there's one small port left in that, Fraser Surrey Docks. We also in MIP II, the second North American fund, had realizations that delivered performance fees, and that fund has got a few assets left in it. So I'm just going to have a look to remind myself: Midtown Tunnel, Broadrock Renewables, Leaf River and still -- a portion of the WCA Waste asset.

MEIF2 was also a GFC period fund, so it will be touch and go whether we have performance fees in that. The APRR road is in there. Arqiva's in there. I think the Czech towers are held between MEIF2 and 3. But there's a really broad range of funds now delivering performance fees across the whole platform. So I think, as we mentioned in the outlook, we expect in this full financial year to have performance fees and investment-related income net of impairments in line with last year, which was a good year of performance fees.

Then in terms of realization of assets, you can see that we're managing to realize assets very well, particularly the MIP I result where -- that was a fund where at one stage was not going to hit its hurdle for performance fees. We're actually managing Puget [with their] big Washington state utility. There was very strong demand for that. Part of the driver is there are a lot of other infrastructure funds with dry powder that need to get invested, so we see interest from them, but we're also seeing strategics and direct investors show a lot of interest in these.

Now it's a world where there is $300 trillion of savings, where returns are low in terms of traditional fixed income and equity returns as equity markets taper off as well, and so there's a lot of appetite for these long-duration, defensive-yielding assets, which you are seeing in the huge amount of money flowing to funds in this area. So we haven't had to pull any realizations over the last years, and we're seeing good demand for things that we bring to the market.

We also had, I should mention, realizations within Australia with the GIF funds. So Hobart Airport was realized, and so we've had performance fees come through in those series of GIF funds as well, which are Aussie funds and, again, really good demand for those assets. Gdansk was another asset we realized in GIF as well, the container terminal in Poland.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [4]

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Jon? He's down the front. Thanks.

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Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [5]

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Jon Mott from UBS. I wanted to follow on just from a comment that you said there, and a lot of infrastructure funds have dropped out and want to [buy.] And if you then compare that to the chart that you've put out, especially for MacCap, you can say that there is a lot less equity investments going into traditional infrastructure, especially when you compare it to the slide that you would have put out 2, 3, 4, 5 years ago, and it's now moving more and more into green energy.

So wanted to get a feel when you move out of infrastructure, more into green energy, what are the IRR opportunities that you're seeing now? Is it much -- is this a less competitive area, less developed an area that you think you can get higher IRR in green energy than traditional infrastructure? And is there also a different risk profile given you're going more into development in green energy, so you therefore are taking more risks to get the higher IRRs?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [6]

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Yes. What I'd do first is distinguish between investments we make on the balance sheet and investments we make in the fund. The funds have a mandate from our investors to invest in more operating type assets that are moderate return but certainly, much lower risks, so further along the development curve.

So to the extent we're looking at renewable energy in the funds, we're looking at operating assets. On the balance sheet, we're much more a developer and creator of assets, and we've always done that. So in green energy, the balance sheet, historically, was investing a lot in construction phase of assets, and we're still continuing to do that where, because of our deep presence in that sector, we're sourcing good construction asset still, but we're doing more development investing as well. And that's where we're finding the best returns, where the balance sheet are at the moment in development. That checks are smaller and the whole period shorter, but the complexity of execution is greater. And that's why Alex mentioned we're investing a lot more in people and headcount and growing that expertise. We had a very deep expertise initially in Europe, and then we had the Green Investment Group team come onboard. We have about 350 people in that area at the moment, but we've been growing more into Asia and into North America and here in Australia, we've done 2 wind projects and 1 waste-to-energy.

And basically, what we're finding is we need to pace our growth with how much we can build the expertise and the team. So we're being patient about that and learning our way as we go more into Taiwan, Japan, Korea across the U.S., et cetera. So there are different risk-return offerings on -- for the Funds versus the balance sheet's. Fund is -- Funds are just raising our renewable energy fund, and that will be focusing on operating assets.

Previously, the infrastructure funds invested in that space. For developed assets, the returns have come down because it's a lot of demand for renewable energy assets. So we've raised a pool of money from fiduciary investors who want to invest in developed assets at the return that's available now. In the meantime, the balance sheet is creating assets there.

And we are finding, with all the dry powder that's in the world, exit is easier at this time realization, but investment is what's challenging, and ultimately it comes back to the capability of our people, whether it's on the balance sheet or in the funds to source investments that are not seen by others and where our expertise, our human capital side, can be delivering superior return on the balance sheet or sourcing them for the funds as well. So you'll see the Funds are still managing to get well invested. In Asia, there's less competition. But in North America and Europe, we're having to focus in the areas where you get better returns, so a lot of communications assets in the Americas, fiber optic networks, data centers, carrier hotels. Anything, Alex, you want to add?

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [7]

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No, the only thing I was going to say, Jon, is that there's still quite a lot of activity in the traditional infrastructure space within Macquarie Capital. It's obviously smaller -- tends to be smaller check sizes, because this tends to be us developing PPP-type activities, so we refer to the Silvertown tunnel and the A9 as traditional infrastructure investing.

But it tends to be a small dollar amount. What you're seeing coming through the balance sheet, East Anglia ONE, [for the sake of an example,] is a construction stage asset. So you get a dollar commitment there. Most of that development activity, whether it's infrastructure or renewables, a lot of that still in the early-stage. We're expensing that, so that -- you are obviously at a point where you're developing the asset. At some point in that development phase, it gets to a point where you start to capitalize those expenses when you feel like you've grown an asset. But a lot of what you're seeing coming through the P&L is actually expenses on development activity.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [8]

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But we mentioned at the half, at the operations briefing, there's another $4 trillion of capital by 2030 estimated to be needed to be put into renewable energy projects. So there's a lot of capital needed. There's a lot of expertise needed. And that's probably where the constraint is because we really are originating these projects around the world, having to set up the regulatory framework, get permitting, get grid connections, bring operators in, debt providers, equity, et cetera, go through constructions.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [9]

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Brian? Just in the front.

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Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [10]

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Brian Johnson, Jefferies. I have 2 questions, if I may. The first 1 is we talked a lot about MIRA, which no doubt is a powerhouse. But MIM, once again, the AUM basically looks flat, and if there's 1 area of disappointment is that it hasn't -- just doesn't seem to go the way it should.

Could you just run us through why and what can be done about it? And the second one is I'd just be interested to find out, because you equity account these development projects when you go in principal in green energy and they're presumably making an accounting loss in the early period, the investment is basically going down but the expense goes through the P&L, is that correct? So the carrying value ends up being quite conservative?

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [11]

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Maybe I'll take the second, and then you can talk a bit to the first.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [12]

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Okay, fine.

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [13]

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Yes. Certainly, those early stage developments, Brian, where it's an idea or where we're in the early stage of development, typically, that's being expensed through the balance sheet. Partly, that's through the P&L, partly that's coming through equity accounting losses. And so, where it's equity accounting losses, we'll have a -- it will be -- we'll be in a partnership with somebody developing an asset. It's also coming through other expenses because, in some cases, we're actually doing this development on our balance sheet.

But generally speaking, in the early stage, we're expensing those development expenses. Obviously, at some point along the way, you get a [CFD,] you get a feed-in tariff, you get to a point where you actually start to create an asset. But generally speaking, it's being expensed through the P&L certainly for early-stage investment.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [14]

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And then with MIM, it's basically a multi-boutique business, so we have equities teams, we have fixed income teams. The place where we've had the outflows is in fixed income, a large insurance account as well as a large fixed income mandate in particular in this half that are single-digit basis point fees compared to the equity strategy of sort of 60, 70. So if you look in the MD&A, you'll see the equity's portion in MIM is up, the fixed income is down. So even though we have net flows that in AUM are negative, the main focus I guess is on the fee revenue and base fees are up.

So yes, MIM is impacted a lot by each of those boutiques and what's going on, and there are areas in which [no] U.S. large cap value, emerging market equities, we have some large equity boutiques. And then fixed income, we have the big team in North America, the team here, and we're integrating the team much more globally over recent years with the team in the U.K. and Austria as well. Did you want to comment?

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [15]

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The only other thing I was going to say, Brian, on the MIM piece is at the end of the day, it's performance of the underlying teams. And so, we look at the 3- and 5-year performance, about 80 -- a little over 80% of the strategies that we have in place are actually outperforming their benchmarks over 3 and 5 years. So the team is very focused on making sure we deliver good return to investors. We're making some investments in the platform to ensure that the operating platform is fit for purpose in delivering to our investors. At the end of the day, that performance of the underlying portfolio management teams is we think a key to driving the success of that business.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [16]

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And because it's more [letting the] driver rather than the cyclical flows to grow sort of value, et cetera.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [17]

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Andrew?

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Andrew Triggs, JP Morgan Chase & Co, Research Division - Research Analyst [18]

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Andrew Triggs from JPMorgan. Just a few interrelated questions on MacCap please. Firstly, if you could just sort of help us with the -- get kind of idea of what the medium-term ROE profile looks for that business, given continued capital deployment and sort of disappointing period this period and some restatements inclusions into that group as well?

And then 2 questions on the green energy space. Firstly, you mentioned some underperforming green energy assets, just a bit of a flavor for the natural geographies of those underperforming assets? And just an update on, I guess, the competitive nature of the market. I understood that the offshore wind market had become quite competitive but I do note that's a couple of areas of recent investment for the group.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [19]

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Yes. Okay, so there were questions in terms of the ROE for MacCap, what the green investment opportunity looks like, and what was the third one? It was -- where the underperforming assets were, is that right?

Just in terms of the MacCap business, there are so many elements to it. So in the infrastructure and energy and the ACS, there's a fee-based element to it in both of those businesses, and then there's a principal investing portion of it. In the fee-based side, this half's impact, as we said, was impacted by what happened in DCM, where we had a strong LBO performance in the prior comparable half for our sponsors, and that didn't happen in this period.

And then also in terms of the fee-based side, the CAF principal business, which was earning a lot of debt returns as the book is weighted more to equity, has less of that ongoing income. So both of those were factors in the MacCap result.

And if you have to look at the page where Alex mentioned the period on period movement, a lot of the step down was in that fee and commission box. It was $111 million, I don't know if you have the page handy to put up, whereas the investment-related income was only a $23 million turnaround. There's the page there, yes, $111 million, and then the operating expenses were up as well, which is $89 million of the turnaround. I mentioned we are investing for the medium term, so the headcount is up in both of those verticals.

The investment-related income, which is where the impairments come in, Alex mentioned it was particularly 1 asset that we had that offset some of the gains that we had on realizations of things like the wind offshore, wind asset in the U.K. and the waste asset in Ireland, and the [devex] that we expensed there as well. In terms of that specific asset, are we prepared to share...?

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [20]

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Andrew, it's a position we got on in one of the Asian assets...

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [21]

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Yes, so you wanted the region, I think that...

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [22]

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[It's specific to the] particular asset. But we continue to work on these things. Even when we take the impairment, obviously, the team is in there trying to make sure that we achieve the return we expect in the first place, [it's an Asian project.]

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [23]

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And the timing of realizations is impacting that half within half, so that's why in this half, we had less realizations versus the prior comparable half. And then you were asking about competition in offshore wind assets. The developed assets, it's very competitive now. The required returns have come down basically to single-digit levered IRRs in developed assets. But in the developing and the construction phase, it's still very good returns to get, particularly in East Anglia ONE, we came in late stage in construction. There's not long left to run. We've come in at returns that we're very happy with and with a partner we're very, very happy with.

So hopefully, we'll continue to see some of those late-stage construction opportunities just because of our relationships and what we bring to partners, but we will be doing a lot more of the development stage. So the 2 wind farms and the waste project we did here, we started from blank dirt and built those.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [24]

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James? James Ellis?

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James Ellis, BofA Merrill Lynch, Research Division - Director [25]

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James Ellis from Bank of America. Just 2 questions. Firstly, the effective tax was a little bit lower during the half. Just wondering if that was merely compositional mix or are there other factors driving it?

And then secondly, the compensation expense ratio was higher in the half compared to both 2 sequential halves. Just wondering if you sort of stripped out the accelerated amortization of those -- you said it was for retiring executives, whether there was any underlying movement.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [26]

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Yes. I'll let Alex comment further on the ETR, but it was composition related. And then on the compensation ratio, there are 2 main contributors as you pointed out. It is the amortization in terms of these senior retiring executives, where we had a big line up between Nicholas, Ben Brazil, Andrew Downe, Garry Farrell. And then the other contributor was headcount is up because we are investing a lot.

I mentioned in Macquarie Capital we are investing to build our capability. But also in BFS and CGM, we're investing a lot in terms of technology at the businesses [we have,] and I don't know, Greg, if you want to comment. But in the environment we're in today, technology is a big part of how you compete. And then Nicole, I don't know if you also want to comment on CGM, but that's driven the compensation ratio because we put on a lot of headcount in those areas like tech, finance projects that we're doing, regulatory. Do you want?

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Gregory Colin Ward, Macquarie Group Limited - Head of Banking & Financial Services Group and Deputy MD [27]

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I guess we've -- the technology's key, so we've reinvested. Headcount is down, but we've reinvested in the technology space where a lot of the headcount there is more expensive, so that's probably had a little impact on our comp-to-revenue ratio.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [28]

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Yes, so the direct headcount in BFS is down, but the tech teams that fit in Nicole's world is where we've been investing.

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Nicole Sorbara, Macquarie Group Limited - COO & Head of Corporate Operations Group [29]

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That's right. And from a CGM perspective, there's a lot of investment around regulatory compliance, data architecture as well, more automation front to back.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [30]

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Yes. So like -- I mean, like all our peers in the industry, we're investing a lot in these areas. That was another driver of comp expense. Then if you could just cover...

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [31]

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In terms of the ETR, we operate in a range of different markets around the world, James, with different tax profiles around the place. So the primary driver this half was a combination of where the income's being generated. Some of those markets offshore have lower effective tax rates than here, but also the nature of some of the income coming into the group as well, where there's different tax regimes that are applicable for different jurisdictions around the world. It's a combination of those two things.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [32]

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Richard?

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Richard E. Wiles, Morgan Stanley, Research Division - MD [33]

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Richard Wiles, Morgan Stanley. Shemara, yesterday, ANZ told us they're lowering their hurdle rate, partly because interest rates are low, and partly to make sure they don't miss out on any growth opportunities in their institutional bank.

I'm interested in how you're thinking about your hurdle rate. You clearly are getting good returns. You also seem to be finding plenty of growth opportunities. But would you consider lowering your hurdle rate in order to accelerate any of those growth opportunities?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [34]

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Yes, ANZ, a part of our business overlaps with ANZ's business, and that's principally the business Greg does in banking and financial services. And I think in that sector, there are challenges, but Greg is still managing to generate very good returns partly through as he talked about the investments we are making in technology and the service we offer to our customers.

I think, Greg, you've had very good growth in your mortgage and your business banking book, basically because of agility and ability to service customers. So we're not dropping hurdle rates in BFS. Do you want to chime in?

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Gregory Colin Ward, Macquarie Group Limited - Head of Banking & Financial Services Group and Deputy MD [35]

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Yes. No, we're not dropping hurdle rates in the retail part of the business. I think ANZ's ROE is about 10.9% or something like that. I suspect on the retail side, it's higher than that and might be a bit lower in the institutional side, but I haven't looked in detail.

We're finding really strong growth as you saw in mortgages. We'd like growth to be faster in business banking. We think we've [done a better job] on growth there. The returns on equity and wealth are very good. Where it is lower is in the motor vehicle space, and we are finding some good efficiencies there, and we think we can lift those returns over time.

But at the moment, we think -- we don't think we're missing any growth in the retail space through our prices at this point in time, so we have no plans at the current point to lower ROE hurdles.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [36]

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So we're...

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Richard E. Wiles, Morgan Stanley, Research Division - MD [37]

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All right, just more broadly?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [38]

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Yes, I was going to say so. Greg's business stepped up really impressively, bringing the motor vehicle leasing business in and aligning that for customers. And so, we're seeing very good growth in that business. But as you saw, it's 13% of our income. The other businesses around the world, we're not changing our ROE targets in this environment. We still are seeing -- the MAM business is very high ROE, because it's not a capital-intensive business, and we're continuing to grow assets and earnings, base fees and performance fees, and the capital required for that is basically to seed and bridge investments, and then to align our investment. But we're getting much greater leverage as the business grows. For example, MEIF6 was a EUR 6 billion fund, and we've co-invested EUR 60 million. We used to put in EUR 50 million when the funds were 1 billion, so we're getting much better leverage of our capital in that services business.

In the commodities business, that is more a balance sheet based business, but again, we're able to leverage in terms of the service income that we generate there the return's much better. So you saw that the market-facing businesses between them generated 18% in this half, and it was up on the 16% average over the last 13 years. We're still finding that we're able to invest capital at similar attractive returns. And as you know, we're very disciplined about looking at our returns as well when we put capital out of the door. So anything further on it?

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Samuel John Dobson, Macquarie Group Limited - Head of IR [39]

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We'll take 1 from Ed, and then we'll go to the line.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [40]

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It's Ed Henning from CLSA. Just a couple of quick questions. Just following on that -- on BFS. You mentioned a lot of investment in systems there. Can we expect continued cost to drop out of BFS once the investment's done?

And just secondly, a clarification. In the CGM outlook statement, you removed the comment reducing impact of impairments. Can you just touch on where the impairments are coming through in the CGM business, please?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [41]

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Yes. Sure. I might let Nicole and Greg first talk about technology, either of you or both, whatever you want to.

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Gregory Colin Ward, Macquarie Group Limited - Head of Banking & Financial Services Group and Deputy MD [42]

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Yes. No, we do expect to see cost continue to come out, so you've seen that in this prior half and in this half, in employment cost, part of that is, as Alex explained, the concentration in wealth to the private bank higher net worth segment but part of that is just efficiencies as well, so about 300 headcount reduction.

We see that continuing over time, as we've just got the first release of an originations platform in business banking. That's taken 55 weeks to build. That's the first part of that, so that will improve over time the efficiency of our business bank operations and credit areas, which means we get to [involve] more volume with a less number of people.

There's a continued investment in the personal banks, so we've had this very big volume increases in mortgages with less headcount in the personal bank overall. So that's from the origination and core banking platforms that we've invested in there, so that's been a positive thing.

And likewise, in wealth management, we've just started and we are 3 or 4 application releases into replatforming the Wrap platform, and we think when that is done, eventually that will also generate further efficiencies in the Wrap business. So -- and likewise, might I say in the leasing business, we have identified many manual bespoke processes in our motor vehicle leasing business that we think we can automate and make that a much more efficient platform as well.

So in this period, we've seen our cost to income reduce by 2 percentage points, and we think that trend should continue.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [43]

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And then technology stuff, will the projects will come off, Nicole? Did you want to comment?

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Nicole Sorbara, Macquarie Group Limited - COO & Head of Corporate Operations Group [44]

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I think Greg will see a sustained level of investment in technology because it is resulting in a lot of the savings that Greg is talking about. Also, we are accelerating our infrastructure program, so continue to move to the cloud. So there's a level of investment there, but then the ongoing run cost will come down.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [45]

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Yes. So we -- basically we're investing to reduce the long-term investment there. And then you asked about impairments in CGM. Basically, I think we took them out because they are immaterial now relative to the other factors. I think we had, in the prior comparable half, it was an $864 million result, and we've had a $1.138 billion in this half so we focused more on what has driven the step up and what will impact the full year in terms of where we see outlook and the impairments are just now immaterial in that context.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [46]

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We'll go to the line. We've got a caller in the line, and we'll come back to the room.

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Operator [47]

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The telephone question comes from Brendan Sproules at Citi.

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Brendan Sproules, Citigroup Inc, Research Division - VP [48]

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I just got to have a couple of questions. Just firstly, on your business capital requirements on Slide 18, you've actually had quite a bit of investment across the businesses, particularly MacCap and the commodities business over the last sort of 2 or so years. But you've also had high period of realizations. Could you maybe talk to the outlook for sort of that growth investment looking forward across the business lines? And then I've just got a second question on tax.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [49]

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Sure. Principal investing is a large part of Macquarie Capital's business together with the advisory services, so I think we'll constantly see investment and realizations just by the nature of what we're doing there.

There are a whole range of sectors we invest in, and as we discussed in terms of the renewable energy sector, we're probably going to see smaller checks, shorter term holds as we move more from construction phase to development phase. But the average hold there is about 1.5 years. Alex can expand if he wants to, but 1.5 years to 2 years. So it's quite quick holds and the balance sheet's turning quite quickly, and we're looking for pretty attractive returns because it's at the higher risk end of the curve.

But equally, we invest in things like Quadrant Energy that we realized last year, which was held for about 4 years, 4 to 5 years, as we worked through redeveloping, repositioning that asset for sale and then we have other things like PEXA, which was there for 6 or 7 years, where we were looking at rolling out e-conveyancing nationally, could have held it a bit longer but received an offer that we thought was attractive at the time.

So the whole period will vary, but there will be constant investment and realization, and the check size will vary as well by sector. We really focused on where we have deep expertise and infrastructure and energy is one of those areas and then with the CAF principal moving in to Macquarie Capital, we're looking at a whole broader range of sectors where our bank [has a deepened] sectors originating and structuring and the CAF principal team have expertise alongside with the MacCap ex-principal team in due diligence and investment.

Florian, I don't know if you want to comment briefly on investment versus realizations, because we've got Florian here as well. And then we'll move on to your second question.

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Florian Herold, Macquarie Group Limited - Head of Principal Finance - Macquarie Capital [50]

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Not much to add, other than to say that we've had a decently strong origination last 6 to 12 months that will take some time until realizations follow from those investments, and our current focus and activity level has been weighted towards the northern hemisphere as opposed to...

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [51]

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Yes. You have probably seen a lot more opportunity [after putting the] 2 teams together as well, I presume.

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Florian Herold, Macquarie Group Limited - Head of Principal Finance - Macquarie Capital [52]

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Yes, exactly. And the -- and sort of bringing the teams together, integration has started off really well with new opportunities coming out of the advisory network and the client relationships that exist around the firm, which benefits us greatly.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [53]

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And then your second question?

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Brendan Sproules, Citigroup Inc, Research Division - VP [54]

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Yes. Just on the tax. It's just some of the benefits we've seen in this result of performance fees, and obviously commodities had a very good result and that broader market's business seemed a little more offshore. To get sort of a broadly in line tax rate, you'd have to shoot up in the second half. What are some of the factors -- should we be forecasting sort of a 24% tax rate to get back to the average of 22% in the second half?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [55]

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Well, Alex was reading your mind, because he just wrote me a note saying the second question's on tax. So I'll let him answer that.

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [56]

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I didn't read your mind. I think you telegraphed it. I mean, obviously, the -- obviously, when you think about the tax rate across the group, it's a reflection of, I guess, where we see the income coming from in terms of geography and also just the nature of the income. As I was saying before to an earlier question that James was asking, we operate in a range of different tax environments around the world, and the treatment of the income that we generate around the world varies from jurisdiction to jurisdiction. And so, yes, it's a combination of those 2 things. I think from what we see in terms of the outlook based on the nature of the income we expect to receive for the rest of the year and the geographies, we'd expect a broadly in line tax rate for the year.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [57]

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Brian?

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Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [58]

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Brian Johnson, Jefferies. If we have a look on Slide 37 and 38, we can see the operating lease assets have gone from $8.9 billion down to $1.6 billion and the narrative says that's because the transfer of the aircraft leasing business into the new JV.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [59]

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Yes.

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Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [60]

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And then if I have a look at the next slide, I can see $1.6 billion of equity appearing there.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [61]

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Yes.

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Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [62]

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My understanding, perhaps I'm wrong, was that the -- those aircraft leases were effectively in -- what's happened to the debt? And the second leg of the question is the $1.6 billion of residual investment -- you've got 75% is pretty chunky. What is the likelihood you can sell that down for a gain? And how quickly could we expect you to sell that into a MIRA fund?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [63]

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Yes, so high level kind of say, we were providing the debt, but now we have third-party debt, if you want to elaborate, please go.

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [64]

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And so on Page 37, Brian, that's effectively a reflection of the assets, and so we have $8-odd billion worth of assets, aircraft assets, sitting on the balance sheet under operating lease. It was obviously funded by on-balance sheet debt. We moved -- you recall about 12 months ago, we've raised limited recourse debt against that portfolio of about $5.5 billion.

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Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [65]

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So it moves to the JV, not [on the] balance sheet?

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [66]

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And so we move the debt into the JV.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [67]

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Yes.

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [68]

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And then in terms of we've sold down 25% interest in the joint venture, which you can see coming through the increased equity under management in MAM and the residual interest being our 75% is sitting in MAM as an equity investment inside the MAM business.

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Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [69]

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So that $1.6 billion is the equity investment [in it]?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [70]

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Yes.

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Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [71]

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And with the new fund that you create with that, would you anticipate it would grow? So is there a chance of a gain when you flick it into the fund? And also, do you anticipate it growing or is this just a one-off solution to basically get rid of the asset?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [72]

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No. The intention, as I was saying earlier, is we're seeing a lot of opportunity to invest in the aircraft space. We have a team of 62 people who are very experienced in originating and maintaining those assets, exiting them, et cetera. But they have capacity to invest now beyond our balance sheet, which is why we brought partners in. They'll come in originally by buying into the existing portfolio, but then we'd like to grow that portfolio together.

So we have PGGM in for 25%. Yes, our intention very much is to bring a couple of other investors in initially alongside us. And as they come in, we're not really looking to sell down the assets. There's a profit we're looking to bring in. Asset management income is -- the intention is that we partner into these assets and they pay us asset management fees going forward, which is what PGGM is doing, paying us for our expertise in this asset class by coming into the assets and agreeing to pay us fees for managing the portfolio.

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Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [73]

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I suppose it's worth observing though, Shemara, is that a lot of that probably goes back to the AWAS days?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [74]

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To the? What was that?

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Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [75]

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In AWAS, isn't that...

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [76]

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Yes. We've done enough.

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [77]

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It's not -- it's a combination of AWAS...

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Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [78]

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And that was bought -- that debt was bought on incredibly high yield basically as distressed debt? So isn't there a -- basically an uplift on the valuation when you transfer it in?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [79]

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We've had those assets now for quite a long time, and they've been running off, so we've actually been having to invest in new leases, so the original book had a life, but we've continued to invest more over that time. So people are basically coming in at market value today, but the big thing is that we're creating an annuity business, which will be a very good fee business because it's a high return business, so we get high fees on it -- base and performance.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [80]

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Okay. If there's no other questions, thank you all for attending. We'll likely see some of you as we go around. Thanks very much.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [81]

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And I also wanted to say thank you, everyone, for coming again. And also, thanks again to the Finance and Investor Relation teams for all the all nighters that have been put into this.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [82]

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Thanks, everyone.