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Edited Transcript of MQG.AX earnings conference call or presentation 3-May-19 12:00am GMT

Full Year 2019 Macquarie Group Ltd Earnings Presentation

Sydney Jun 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Macquarie Group Ltd earnings conference call or presentation Friday, May 3, 2019 at 12:00:00am 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

* Andrew Downe

* Gregory Colin Ward

Macquarie Group Limited - Head of Banking & Financial Services Group and Deputy MD

* Martin Stephen William Stanley

Macquarie Infrastructure and Real Assets (Europe) Limited - Global Head

* 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

* Timothy Cameron Bishop

Macquarie Group Limited - Chairman of Macquarie Capital

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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

* Anthony Hoo

Deutsche Bank AG, Research Division - Research Analyst

* Brendan Sproules

Citigroup Inc, Research Division - VP

* Brian D. Johnson

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 - Head of Research - Australia

* Simon Fitzgerald

Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst

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Presentation

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

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All right. Well, good morning, everyone, and thank you for joining us for Macquarie's Full Year 2019 Result. If I can just do the housekeeping. If you can turn your mobile phones to silent or turn them off that would be appreciated. So today obviously we'll go through the result through our CEO, Shemara Wikramanayake; our CFO, Alex Harvey will take you through the results and obviously we'll have a chance for Q&A at the end of the briefing. We have about 1.5 hours, so actually there'll be enough time to get through everything. We have group heads in the front row, most of the group heads. So they'll be happy to answer your questions as well.

Thank you, and I’ll hand over to Shemara.

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

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Welcome, everyone, to our 50th year of delivering results and also our 50th year of unbroken profitability. So as usual, we will start with just looking at an outline of our 5 operating businesses, which, as we always say, are key to understanding Macquarie. And as we go through this year's results and the outlook, we will be doing that through these 5 businesses. Not a lot has changed in relation to the 5 businesses in terms of the outline of what they do, but what I would note on this slide is the annuity-style businesses again delivered very solidly and contributed 53% of our earnings, but what's changed is that we had a very strong year, as you will have seen from our market-facing businesses, and they stepped up from a 30% contribution to a 47% over this year.

So I'll now go through the results in terms of half-on-half, second-half-on-first-half and then year-on-year numbers. And kicking off with the half-on-half, as you can see, we delivered $1.672 billion in the second half and that's up 28% on the first half and a 28% increase in both profit attributable to shareholders and earnings per share. That was driven by a 19% increase in operating income and a 15% increase in operating expenses, which then you see the operating leverage of the 27% increase in pretax profit. Tax rate up 35%, delivering that net to 28% after-tax. The other thing I -- couple of things I'd note is that the return on equity annualized was 19.5% in this second half, up 20%; and the Board has declared a second half dividend of $3.60 so that our total increase is -- the increase on the first half is 67%.

And in terms of contribution to that second half result, you can see that both the annuity-style businesses and the market-facing businesses both stepped up strongly in the second half compared to the first half. Annuity-style business is up 25% and the capital -- market-facing business is up 51%, so that the contribution from the operating groups was up 36% in total on the first half. And then looking at it year-on-year, the result for the full year for FY '19 was $2.982 billion, that was up 17% on the previous year, both at profit attributable to shareholders and earnings per share. That was driven by a 17% increase in our net operating income and a 19% increase in total operating expenses, and Alex will talk through the detail of this more when he goes through the financial results after I finish. But the operating income before tax, up 12%. Tax charge broadly in line with the previous year. So the effective tax rate was down from 25.7% to 22.8%. And the return on equity was 18% in this year, so up 7% on a 16.8% from the previous year.

The dividend for the full year then comes to $5.75, which is up 10% on the previous year's dividend.

And looking at the contribution then from the operating groups to that result, you can see that all up -- they were up 21% in terms of operating income compared to FY '18 for the performance from -- contributing from the operating groups. And looking through the group, the annuity-style businesses were down 4% on last year with MAM down due to the increased base fees being offset by slightly higher operating expenses and a lower contribution from the combination of performance fees and investment-related income. And that was mostly because we had a particularly strong year in FY '18 in terms of that category of contribution.

The CAF business, the asset finance business, was down. We didn't have a repeat of the U.S. vehicle leasing business sale that we had in FY '18. And the Principal Finance business was broadly in line due to the -- particularly the realization of the Energetics business in CAF Principal Finance after many years of investing in and developing that business and realizing it. And in the Transportation business, the portfolio is broadly in line there.

And BFS, increase across our deposits. Our loan portfolio is in retail and business banking and also our funds on the platform offset partly by a decline in our vehicle finance portfolio and also increased investment into the technology expenses in that business to keep delivering our and developing our offering to our customers.

The market-facing business is up strongly, 76% up on FY '18. In CGM, we were up principally because of commodities and financial markets business, having had a strong first half, that continued into the second half, and another strong performance together with strong results from our futures business and our fixed income and currencies business, offset to some extent by reduced results in our cash equities business due to market factors that you will all have seen.

Macquarie Capital also up on FY '18 and that was due to increasing our fee- and commission-based part of the business, but also a big step-up in our investment-related income due to, as you saw, very strong realizations in this year, including the Quadrant and the PEXA realization.

So that increase strong performance from our operating businesses builds on 5 years of ongoing increase in operating income profit earnings per share and dividends per share.

And in this next slide you can see the contribution of the mix from the various operating business driving that consistent increase. The big thing to note is at the bottom right-hand side there in FY '19, we -- in the gray bars, you can see we have had a very strong step-up in FY '19 from both our market-facing businesses. But the annuity business is, of course, continuing to deliver consistently and you can see there are assets under management up to $551 billion, which is up 11% on previous financial year, and that was driven by investments in the MIRA business as well as FX and market movement impacts, and that was partially offset by the realizations of assets in the MIRA funds and the net flows in MIM.

And then a couple of slides looking at rather than the business operating groups diversification, the regional diversification. You can see here where we make our income by region as well as where our people are and our assets are. And Australia's still the largest contributor at 34%, in fact, a little bit stronger this year because of the realizations we had here. But the Americas and EMEA continuing to contribute strongly, at around 30% each. And as we mentioned at the operations briefing, a lot of room to grow in those regions where we're a small share of big regions. And Asia, a solid 9% contribution, but also, I'd note, with Asia as we mentioned at the operations briefing, it provides support to the whole global platform through both capital for our business around the world and our shared services team being there supporting our global operations.

And the changes in the diversification by region over the year were mostly driven by that step-up in Australia, with the realizations I mentioned and the Americas because of the strong result in noncommodities business.

So looking at each group and what drove results over the year, starting with Macquarie Asset Management business, as usual, we were down 4%, but the business has finished the year in a very strong position. So MIRA, the business overlap contributed 24%, by the way, this year; and MIRA is at $116.9 billion of equity under management at the end of the year, having raised $18.9 billion this year. Also investing $10.9 billion and realizing $8.7 billion to finish up with $25.5 billion of equity to deploy at the end of the year.

The other thing I'd note about MIRA is that we really started expanding our real estate platform over the year with both the GLL acquisition that closed during the year and also the fiduciary real estate business from Macquarie Capital moving across into MIRA.

In Macquarie Investment Management, the assets under management are up 8% there to $361 billion, and that was largely driven by foreign exchange and market movements and the acquisition of ValueInvest. And I'd also note that at the end of the year in April, we announced that we had agreed to acquire the assets of Foresters' mutual fund assets and manage part of their general account, which once it closes will add another USD 12.3 billion to the assets under management in MIM.

Then the CAF business contributing 17% to the group. As I mentioned, was down on FY '18. The principal finance portfolio, however, is up 2% on previous year and that through growth in all of our portfolio, so across technology, energy, resources as well, and the ship finance business.

And on the Principal Finance side, the book is down a bit due to loan repayments and realizations, down 12%, and that included the large energetics realization. But the transportation finance book is up 5% to $9.2 billion and that included as a result of the investment we were able to make in the Rotorcraft portfolio during the year.

In addition to that, I'd note that in April again we announced that we have entered into an agreement to bring a third-party investor in for 25% of our portfolio there and deconsolidated our air finance portfolio. What that does is give us opportunity to continue to grow that business with third-party capital, which is an exciting development.

And the last of the annuity businesses, Banking and Financial Services contributing 12% over the year. We were up 3% there and I'd particularly note, at the bottom of the page, that our deposit base was up 17% in BFS and so were all our portfolios across the banking business. So our mortgage portfolio up 18%, the business banking book up 12% and funds on the platform up 4%. That was offset partially by a 5% decline in our vehicle finance portfolio, partly due to the decline in new car sales, which you all have seen as well as lower dealer finance.

Then turning to the market-facing businesses. The commodities and global market business in Andrew's final year contributed 25% and were the largest contributor to Macquarie out of the operating groups this year. And even more compellingly, was up 65% on the previous year. Now a big driver of that this is the strong result across the commodities platform, which included the North American Gas and Power, the Global Oil and the EMEA Gas and Power, and I'd particularly note the strong contribution from the North American Gas and Power business, which was driven by the supply-demand imbalance across some U.S. regional centers.

We also had strong results in that business with the growing franchise in the fixed income and currency business and the futures business and a step-up in the results from credit, as I mentioned, partially offset by the equity contribution given market conditions.

And Macquarie Capital, again, stepping up a lot, 89% to contribute 22% of Macquarie Group's income in also Tim's last year as group head of that group and both the business lines in that group contributing strongly. The advisory capital market -- capital raising and balance sheet investment business had an increase in fee and commission income across all of its regions. And some of the notable things that we were involved in there, here in Australia, we had the Wesfarmers demerger of Coles and we had 9 Fairfax merger that we advised on. In the Americas, we advised KKR on its acquisition of BMC Software. And in the EMEA region, we acted for consortium in the take-private of the John Laing Infrastructure Fund. So meaningful transactions and a growing presence for us, showing addition to the strong position we have here in Australia. We also had the PEXA realization in that business, which drove a strong result.

And then in infrastructure and energy business line in Macquarie Capital, again a strong result, driven by a high level of realization. So we mentioned all the renewable assets that we realized at the operational briefing and we also had the Quadrant realization there. But pleasingly, the platform continues to grow with the investment in the Conergy portfolio in Asia and investments in green energy of $1.1 billion over the year to March 19. And again, Alex will take you through in more detail the realizations and investments in that book, but the book continues to be at the sort of levels we've had throughout the year.

So that's the contribution from the 5 operating groups. Now that's supported by our ongoing strong balance sheet and capital position. So the funded balance sheet remains strong and term funding continues to exceed our term assets with another $13.3 billion of term funding raised over this year, and also our deposit position continues to grow, up 16% to $56 billion across the group.

In addition, our capital position has strengthened from the end of last year, with $6.1 billion of capital now across our -- above our regular pre-minimums, increasing from $4.2 billion last year, and that was driven partly by the $3 billion of profit that we generated approximately this year offset by the $1.8 billion of dividends, $1.3 billion of hybrid issue, which you saw, and $0.8 billion absorbed into the businesses to fund their growth.

And that $0.8 billion is broken down in this slide in terms of which of the operating businesses that went into. Just briefly going through them all with MAM, what we had was investment in MIRA in terms of alignment capital into our funds as well as our real estate book offset by obviously the realizations we had and also a decrease in underwriting positions. We had short-term underwriting positions that feed assets in the MAM business.

In CAF, as I mentioned, we invested in the Rotorcraft portfolio that we acquired, but that was offset by the realizations in the Principal business, including Energetics and loan repayments. And it was also assisted by the CAF Principal's Finance and Transportation Finance businesses being transferred to the nonbank.

BFS, we invested in the increasing mortgage and business banking loan portfolios, partially offset by the reduction in the vehicle finance portfolio.

And in CGM, the increased trading activity meant that we had more capital put into market-risk capital given the volatility in that area. And that was offset by realizations of equity positions and some impairments, again, which Alex will take you through.

Macquarie Capital, we had $1.5 billion of investments, net of $1.5 billion of realizations, which included Quadrant and PEXA.

And then lastly, in the corporate area, we invested capital into the MAM place development, which is being quiet, kindly, for this presentation, but normally you would hear it bustling along in the background.

Also with our capital ratios, we remain well above our regulatory minimums. So the CET1 ratio, in particular, at the bank level I've noted 11.4% and 14.3% at a harmonized level, but we're also sitting above our regulatory minimums for leverage ratios, LCR and NSFR.

And as I mentioned, the Board has declared a final dividend of $3.60, taking the full year to $5.75, payout ratio of 66%, which is within the range of 60% to 80% that we've guided to the market.

And before I hand over to Alex, I just wanted to finish by noting some of the management and leadership renewal changes that we've had across the group. As we mentioned previously, Andrew Downe, who is here with us today and flown in from Singapore this morning, is stepping down as group head of CGM and from the executive committee as of 31 March. He is continuing to run the cash equities business, but -- and support Nick in the transition, but he basically has made a massive contribution to Macquarie 37 years with us, 22 of those on the executive committee and saved what has become in his final years, I'd say, the biggest contributing group to Macquarie.

We are also fortunate that Andrew has been transitioning with Nick to succeed him for some time with Nick having been on the executive committee since June '17. Nick has had 24 years with us and worked all over the world. And most recently, he has been heading the Commodities and Financial Markets business out of Houston. Now he has been building that business since 2007 and it also stepped up to give huge contribution this year. And Andrew and Nick are working closely to help Nick spread across the rest of the CGM business as he takes over from Andrew.

Also, we announced this morning that Tim Bishop, who has been leading Macquarie Capital for a long time, will also be handing over the group head and the executive committee rolled at the end of May this year. Tim came over with Bankers Trust Investment and has been with us 20 years and been on the executive committee for about a decade, but has been heading up Macquarie Capital since 2012, so 7 years. And the group has really transformed in that period since Tim took over. The earnings have grown materially. Tim also has been grooming leadership under him, and so Dan Wong, based in London, and Michael Silverton, based in New York, will take over as joint group heads of Macquarie Capital and joint executive committee. Both of them like Nick O'Kane. They have been with us 20 years, have worked all over the world in a lot of regions and business lines for us and, importantly, like Nick had built the big divisions or couple of huge divisions inside Macquarie Capital, with Dan heading that infrastructure and energy group globally from London, big contributor to earnings; and Mike Silverton from New York heading the Americas, Europe and Asia group in the fee and commission income business, which also made a strong contribution.

So we're very fortunate to have had many years of contribution from Andrew and Tim, who are both here with us, and also fortunate that they're leaving us with succession and a deep bench in Nick, Dan and Michael.

And with that, I'll hand over to Alex to take you through the financial analysis of the results in more detail.

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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 more of the detail of the financial analysis for the year ended March 2019.

Starting with income statement by key drivers. I thought I would start with the second half in comparison with the first half and then turn to the full year results. So net operating income for the second half up 19% on where we were for first half 2019. Key driver there is the fee and commission income up 8% from where it was for the first half. You can also see a significant step-up in investment income up over $1.1 billion versus where it was in the first half. As Shemara mentioned, you can see a step-up in the credit and impairment charges and these are a small number of positions across our CGM business and Macquarie Capital that were underperforming over the short -- over the recent period, and so we had to take an impairment through our profit and loss this half. So you can see that coming through.

Operating expenses for the period up 15%, resulting in operating profit before tax up 27% on where we were this time halfway through the year. Income tax expense you can see up about 35%. Obviously, that's reflective of all the increased profitability coming through the group and the geographic nature and nature of income coming through the P&L. So effective tax rate for the second half of 23.2%. So bottom line, profit arbitrable to shareholders, up 28% on where we were for the first half of 2019.

We now turn to the full year result. On the similar bases, net operating income up 17% for the period, so a strong growth in net operating income. You can see that being driven by net interest and trading up 15%, fee and commission income up 18% from where it was in 2018, and you can also see that step-up in investment income coming through, about 17% step-up in investment income for the full year on where we were in 2018, so a strong result from the revenue viewpoint.

In terms of operating expenses, up 19% for the period and I'll spend a bit more time in a moment just talking about the components of that -- so operating profit before tax up 12%. Tax rate for the year overall 22.8%, really reflecting the geographic composition of income and nature of income coming through and the benefit of the reduction -- the full year benefit of the reduction in the federal income tax rate in the United States. So you can see net profit up 17% for the full year period to March '19.

Turning now to the operating expenses. As I said, up 19% for the full year. I have given you a breakdown of some of the key components there. Obviously, in the middle of that page, you can see employment expenses up nearly $600 million on where they were for the full year 2018. That's reflective of the acquisitions that the group made over the year. It's also reflective of the average head count up over the period of time and, of course, increase in performance-based compensation that came through, reflective of the improved performance of the group. You can see the impact of foreign exchange, unfavorable foreign exchange movements, about 5% depreciation in the Aussie dollar against our currencies across the use, so you can see that coming through. You can see the impact of AASB 15, which is the new accounting standard on revenue recognition. Previously, we were able to net off the revenue expenses. We now have to gross up revenue and gross up expenses. So you can see that coming through the operating expenses. And we also had an increase of nearly $340 million in other category, which really is reflective of business activity that's been going on across the group, the higher technology spend, and I'll spend a bit of time as we go through the groups, indirect tax expenses and some one-off items and legacy items that we took through the P&L over the course of the year.

In terms of the income statement by operating groups. You can see again obviously the overall result up 17%. You can see the key drivers there. CGM up 65% for the period; Macquarie Capital up 89% for the period, offset by about a 4% reduction in the contribution from the annuity-style businesses; and an increased contribution from Corporate. The Corporate reflects mainly higher performance-related compensation and share-based payments expense as well as other corporate expenses coming through the P&L over the last 12 months.

Turning now to each of the operating groups, starting with Macquarie Asset Management. As Shemara said, 24% of the group are down 4% on where we were for FY '18. You can see base fees up 15% from the prior year, reflecting the acquisitions that the group made during the period, the deployment of capital in the MIRA business and favorable foreign exchange movements coming through there. Performance fees up 28%. The great story from a performance fees viewpoint was the diversity of the fees that came from all of the major operating regions within the MIRA business, so it was great to see that coming through the P&L. We also saw lower investment-related income. People will recall last year we had the reclassification gain on MQA as well as on MIC, coming through there and an increase in operating expenses, largely reflective of the head count increase for unfavorable foreign exchange movements and the acquisitions that were made over the course of the year as well as an investment that the group is making in the technology platform supporting their business around the world.

In terms of the key drivers of the business, assets under management, of course, up, a key driver across the group, up 11% over the period. You can see on the left-hand side of the chart MIM up nearly $28 billion, reflective of the ValueInvest acquisition coming through this year, favorable foreign exchange impacts and market movements, offset by some decline in assets in a couple of our strategies, particularly the U.S. fixed income strategy as well as the Quant Hedge Fund strategy in Asia and Asian equities, so that came through during the period.

In terms of the equity under management for MIRA, a record result, nearly $117 billion, $116.9 billion of equity under management as at March of 2019.

Equity raised $19 billion, and, again, a great result around the world in terms of raising funds for our European platform, raising funds for our U.S. platform as well as the location of that capital raising, particularly notable is the contribution of their Asian business to funds being raised around the world for our MIRA businesses.

You saw the benefit of the platform acquisition, the GLL real estate acquisition, coming in during the year as well as the transfer of the Macquarie Capital Real Estate platform to MAM during the course of the 12 months, so overall up 36% at nearly $117 billion.

From a CAF, corporate and asset finance, viewpoint, down 10% on where we were this time last year and a couple of key drivers there. People will recall in 2018, I'm sure we had a release of the collective provision that came through the P&L last year. We didn't have that this year. So the [each] step-up is reflective of that not repeating. From an asset finance viewpoint, again I think people will recall last year we disposed of the U.S. motor vehicles business. That didn't recur this year. We also had some legacy expenses in relation to a lending transaction coming through the asset finance book this year, and that was offset by step-ups in the contribution from our TMET business and also from our energy business around the world.

The Principal Finance in the transportation business broadly in line with where it was this time last year. In terms of the key drivers, the asset portfolio -- the asset finance portfolio, basically flat,. You can see some step-up in contribution from our TMET leasing business in particular and from the energy business in the U.K., offset by a small decline in our MSIS business, which is now sitting in corporate and asset finances, people will be aware.

In terms of the Principal Finance portfolio, it's obviously the old Principal Finance portfolio plus the transportation portfolio. You can see on the left-hand chart there the Principal Finance portfolio down 12% from where it was last year, reflective of the runoff of the line book in Principal Finance, the finance that we've seen over the last few years. In terms of the Aviation portfolio up 5% this year. Again, as Shemara mentioned, we were successful in acquiring the Rotorcraft portfolio, so you can see that coming through there, that $700 million, and that's offset by depreciation coming through that book as well. So overall, Principal Finance portfolio flat on where it was this time last year.

In terms of Banking and Financial Services, up 3% for the period. We saw continued good growth in our mortgages business, up 15% in average volumes; and in our business banking up 12% in average volumes over the last 12 months. And we're also continuing to see a growth in our business banking deposits, which is great to see, offset by lower contribution from the wealth management component. As I think people are aware, we've been refocusing that business on the high net worth segment, and so there is some cost associated with doing that this year that are offset by an increase. So that decline was offset by an increase in the contribution of our assets under administration on our rep platform during the year.

You can see the step-up in technology expenses, which is really a reflection of the continued investment that the group is making in providing the best possible services to its clients around the world. So overall, up 3% for the period.

In terms of the key drivers, all moving in the right direction. Obviously, a slight decline from a vehicles viewpoint, which is reflective of car sales and a lower exposure to dealer in floor plan finance, but other than that all heading in the right direction, which is great to see.

In terms of the first of our markets-facing businesses, the Commodities and Global Markets business, obviously a very strong result on where we were in FY '18, up 65%, driven by the commodities business, up nearly $900 million in terms of contribution. And you can see that coming through in a couple of areas. Strong results across the client hedging activity, the risk management solutions, and really that's reflective of the volatility that we saw coming through gas markets, oil markets and, more generally, across the agricultural, minerals and mining sector during the year. So that provided opportunities for us to provide hedging solutions for our clients.

We also saw a significant step-up in the contribution in terms of inventory management and trading. And as Shemara mentioned, a lot of that came out of our North American Gas and Power business. We were able to see that continuation of the supply/demand imbalances across U.S. regional centers.

We also saw some opportunities in our oil business, our physical and financial oil business, this year, again, reflecting, I think, the volatility that we're all aware of coming through oil markets over the course of the last 12 months.

We're glad to see continued contribution from FX, credit and rates. This is a story that's been building over the last few years. We've been able to provide, particularly, structured FX type solutions to corporate clients and private equity clients in various markets around the world.

We saw an increase in the impairments over the period. As I mentioned before, a small number of commodity-related exposures that sit in CGM. We looked at the performance of those businesses in recent times and had to take an impairment through our P&L; and an increase in operating expenses, reflective of not just the increase in head count , which we've seen supporting the growth of the business, but also the increased the group's making in technology investment, again, to provide that state-of-the-art service to clients around the world.

Now from a client base view, we would put this up for the last few years. It's an important story. Obviously, we're seeing an increase in the clients we're dealing with across all the categories, commodities, financial markets and futures. And obviously from a cash equity's perspective, a reasonably stable story over the last few years. The reason this is important is that the business is a very client-orientated business. It's about more clients, it's about providing more solutions to those clients and it's, of course, about doing more opaque business with those clients. And over the last 12 months, we've seen a step-up in the amount of opaque business that the group is doing with their client base. So it's great to see the underlying driver of the business coming through.

In terms of Macquarie Capital, another very strong result, up 89% on where we were this time last year. You can see a significant step-up in the investment-related income, 112% step-up from where we were last year. I think everyone in this room will be familiar with the Quadrant and the PEXA story. I guess the things standouts for me and looking at this is really the diversity of that story because you're seeing green energy investments being realized in the U.K., being realized in places like Sweden. You're seeing the team in the U.S. actually realize some investments that we made in the green energy space over there as well as in Asia and down here in Australia. with the waste-to-energy facility that we're building in Kwinana in Western Australia. The other thing about this is we're seeing some realizations coming through our private equity co-investment business that we've talked about before and that mainly in the United States. So a great result from an investment viewpoint. The other thing I think is very encouraging is the step-up in fee and commission income. We had a step-up in income across M&A, ECM and DCM around the world. So that's great to see.

Now impairments up a little bit again, a small number of underperforming investments that we have to take through the P&L, but overall up 89% on where we were this time last year.

In terms of the drivers of the business going forward, obviously on one hand, you've got the fee and commission income and I just talked about that, the other piece, of course, is the principal investing activity that Macquarie Capital does. It is a harvest and investing activity and one of the things it's very pleasing, I think, to see is that the capital we've got exposed to Macquarie Capital activities around the world, not only have we been able to realize that during the year and the way I just talked about, but the team has also been successful at deploying capital in new situations that hopefully will mature and realize profitably for us in the years to come. And you can see the big step-up in growing investment over the period of time as well as the step-up in the technology type investments that the team has been making and the infrastructure investments over the course of last 12 months. So it's great to see that continuation.

Turning now to a few other matters. Cost of compliance, this is a feature of our industry as, I think, everyone would be aware, 14% up on where were last year. I guess I'll make 2 other comments. Second half, there has been an acceleration in spend on compliance. The second half project compliance up 22% from where we were in the first half. And the business as usual compliance up 7%. This is a feature, an important part of our organization. We are very focused on those activities covered on this slide.

In terms of the balance sheet highlights, again, a very strong balance sheet as you come to expect. Great result from a deposit viewpoint, up 16% on where we were in March of 2018. And that growth in deposit is really what's funding the growth in our BFS mortgages business and our business banking business. And so that's great to see that continued story of deposits coming through.

Now the funded balance sheet. The term funding, again we've been active this year. We've been very well supported by the bank markets and the bond markets and in particular people will have seen we did 2 hybrid issues this year that were well received, raising a net $1.3 billion of funding over the course of the year. So it's been an active period.

Diversity of issuance is important and tenure. You can say that set out on this page. One of the things that's interesting from a type viewpoint, you look at the wagon wheel there. The equity and hybrid is about the 32% of the funding up from 25% last time we spoke to you. The other thing that's great to think about this page is in terms of the term funding beyond 1 year that's now 5.6 years, that was 4.6 when we set here in September. So we've diversified and we've extended the term of the funding that's supporting the group's growth activities around the world.

Custom deposits, we probably covered off. It's a great sort of long-term story, I think, for me, up 8%, roughly 8% compounded rate over the last 7 years. That's a really interesting and important story for the group.

The loan and lease portfolio up about $8 billion. It's largely reflective of the growth in BFS personal banking and also in the business banking component of BFS. Now the equity portfolio down $800 million from when we sat here in March of 2018. I think the -- most importantly the time I talked about assets we have on the balance sheet that were being recycled into MIRA funds and you can see that in the second round down that we had $800 million of exposure to assets that were going to come off the balance sheet and into MIRA funds. That's actually happened over the last 12 months, and so that's reflective mainly of the reduction between $6.8 billion and $5.9 billion in terms of equity investments at 31 March.

In terms of the regulatory update, there is obviously a lot on this slide. I won't go through each. And there is a lot of work going on APRA and our sales across -- and the industry across a range of different streams of activity. Much of this will be familiar to this audience as we talked about it before. Over the last 6 months, we've seen a discussion paper released on loss-absorbing capital. I'd note that Macquarie Bank extension to be subject to additional LAC requirements, with the final quantum to be determined by APRA's part of the resolution planning prices. And also I note that APRA intends to consult on the framework for a recovering resolution over the course of the rest of the calendar year. Most importantly, based on their current expectations, it is the case that we expect that the surplus capital position that Shemara set out before will accommodate likely additional capital requirement from these initiatives. I will sent out the banking executive accountability regime commences to apply for -- to Macquarie from the 1st of July 2019, and we are getting ourselves in a position to be ready to make that time frame.

Also, from a regulatory viewpoint, we thought it made sense to -- we make mention of the fee for service review and the remediation program we've been undertaking in BFS. That program is now complete, from our perspective, and has been passed to the independent expert and to ASIC to finalize. We expect that we will need to refund about $3 million in fees and interest, and we've commenced that refund process as we speak.

In terms of Brexit, we applied for 4 licenses. Three of those licenses we've achieved. One we're still awaiting, which is the license from CBA in relation to our banking activities in Europe.

Also I thought it would be worthwhile just mentioning in relation to Germany, Macquarie continues to cooperate with German authorities in relation to the historical German lending transaction in 2001. And we note that no current staff members have been interviewed and the (inaudible) demand is not material to Macquarie has been provided for. I also thought it would be worthwhile mentioning that, as we previously stated, Macquarie has resolved 2 dividend trading matters between 2006 and 2009. I think people will be aware that industry-wide investigation related to dividend trading continues and we continue to respond to requests for information of our activities in those markets. The profits from these activities from -- were not material to the group.

In terms of accounting standards the one on this we adopted, in particular the new accounting standard AASB9 in relation to financial instruments. You can see the impact of that coming through our opening shareholders equity and retained earnings for this year. Capital remained strong at 11.4% and 14.3% on a harmonized Basel III basis. Liquidity ratio remained strong as you come to expect. And capital management just to finish the Board a couple of things to note here. In relation to the Macquarie Group employee retained equity plan, the Board has resolved to purchase $590 -- approximately $590 million worth of shares to satisfy the MEREP issue this year. We'll commence that buying on the 13th of May. We've also offered, as people know, a staff-share-style agreement, which enables staff who are getting vested stock released from MEREP to cross their stock into were buying to satisfy the current year MEREP. The dividend reinvestment plan for the second half of '18 and the first half of '19, the DRP shares were acquired on market. The Board has resolved that DRP will be in place for the 0% discount for the second half of 2019 dividend and that those shares will be acquired on market.

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, Alex. So in terms of the outlook, I'll kick off with the short-term outlook and then move on to the medium-term outlook. And as usual, in terms of the short-term outlook, we look at this based on the factors impacting each of our 5 operating groups in the corporate level. So starting with Macquarie Asset Management, we expect both base fees and performance fee and investment-related income to be broadly in line with the result in FY '19, and this is because the base fees benefit obviously from the deployment of capital in the MIRA business and the acquisitions across the MIM and the MIRA business coming through for the full year. And that's offset by the realizations and returns of capital in MIRA and internalization of Altas Arteria. Performance fees, a strong here again in FY '19 and we expect that to be broadly in line for FY '20. With corporate asset and finance, as you saw, the asset finance portfolio end of the year broadly in line, which will drive results in the asset finance business, but in the Principal Finance business, we had reduced loan volumes at year-end and also the timing of realizations is expected to result in that business delivering a number that's going to be down on FY '19.

Banking and Financial Services, again, as you saw, we have -- we end the year with a higher deposit loan portfolio and platform volumes, but we expect the competitive dynamics in that business to drive margin pressures.

Then turning to the market-facing businesses. It's important to note that the franchise across this business continues to grow. And so we have a strong customer base now that we think will drive consistent flows in the commodities business, the fixed income and foreign exchange business and the futures businesses. But in the equities business, we expect the market environment to remain challenging. We also expect reduced impairments, but it's important to note that we do not expect a continuation of the strong market conditions that we saw in FY '19 in the commodities and global markets business.

And with Macquarie Capital, we also expect the market conditions to be broadly consistent with what we experienced in FY '19, which will drive our fee and commission income. But in terms of the investment-related income due to the very high level of realizations that we had in FY '19, we expect that component to be down in FY '20.

At the corporate level, we are expecting the compensation ratio to stay consistent with historical levels and the effective tax rate, based on the present mix of income, we think, will also be broadly in line with FY '19. So when we put that all together, as we've guided, we expect the result for FY '20 to be down slightly on FY '19. And that, of course, is ever remaining subject to the completion rate of transactions, market conditions, impact of foreign exchange, potential regularly changes and tax uncertainties and the geographic composition of income.

But when we turn to the medium term, we continue to be confident that we're well positioned to deliver superior performance over the medium term, and that's driven by the deep expertise we have across a diverse range of products, sectors and markets.

And that will be supported by our strong and conservative balance sheet and with our proven risk management framework and our ongoing program to identify cost-saving initiatives and efficiencies.

And I was just going to finish, as usual, by looking at the return on capital over the medium term of our annuity-style and market-facing businesses in the whole group. And you can see in the annuity-style businesses, we now have $9.2 billion invested in those businesses of capital, 22% return over the last 13 years and 22% again this year. So this consistent performance we expect from that business is continuing to be delivered. The market-facing businesses, $5.9 million invested; we had 16% 13-year average return on equity from those businesses. This year, stepped up to 23% for the reasons we've -- Alex and I have discussed through the presentation.

Now in terms of the net 18% that we returned to shareholders on ordinary equity, we obviously have to take into account the $0.6 billion of capital that we have at the corporate level and the $6.1 billion group surplus that impact that.

So that's the end of our formal presentation. We'll hand over to questions, and I'll hand back to Sam. And I should just note that in addition to having Tim, who is Chairman now of Macquarie Capital, but has been leading the group for a long time, and Andrew, who is now focusing on the cash equities in the Asian part of CGM but has been grouped there for long time, we have them available to speak to us. We have Martin Stanley out here from the U.K. For CAF, we have Garry Farrell and Florian here. We've got Greg Ward, who can cover BFS. And we also have Mary Reemst here for the bank side, and we have Nicole. I think Patrick is here. No. We don't have -- oh, that's right, Patrick is interstate, and Alex and myself available to answer questions for you.

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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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Okay. Thanks very much, Shemara. So as we've done previously, we'll take questions from the room to start with and then we'll go to the lines, and then come back to the room. So give me a moment to -- for some questions. Jon?

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Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [2]

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Jon Mott from UBS. Just a -- kind of quick questions on the balance sheet movements. The first one, I think you said, Alex, there was a comment that there was a small number of impairments, which mainly came due to underperformance in the near term. It sounds like you had a couple of assets which just had a bit of a soft period, and you've taken the opportunity just to write those down. It looks a little bit conservative, so wouldn't mind getting your view on that. And secondly, is that a result of the ability to do that, given the guidance on sale and other parts? And following on from that is the equity investments, which you call out on Page -- or, Slide 48. If you exclude MIRA, it looks like you're down about 10%, 15% on those assets. So is -- was this again an opportunity where the market conditions were fantastic over the last 12 months or so and you've had a chance to realize a lot of gains on sale and clear a few of these assets out, which were probably not pristine?

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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, Jon. In relation to the impairments, I mean, obviously at each balance that we go through or review of our books and make sure that we feel like the underperformance or the performance of those businesses is reflected in the carrying value. And I think over the course of the last 6 months, there were a small number of positions across Macquarie Capital and across CGM that -- where the performance of the business wasn't what we expect it to. And having looked at that balance today, I felt that it was appropriate to write that down. It was obviously no conservative move otherwise. It's just a nature of the way we account for the organization's assets. In relation to the ability to do this, I think I probably answered that. We have guys who review these assets and that each balance day.

In terms of the equity investments, you're right. I think what we did see was a drop off in the equity, I think, is a function. As we've said in the presentation, there were some realizations that we were able to make over the course of the period. And the conditions were good, and we're therefore happy with those. What we did say, though, is -- I said if you look at the capital, particularly in the Macquarie Capital business, that stayed fairly constant. And so whilst there have been some realizations, the team had been able to find opportunities, particularly in green energy, in infrastructure and in technology, to actually invest. As we talked about before, a little bit of that investment is earlier-stage development activities. So whilst the balance sheet commitment might come down, there's some projects that should mature as we get -- take them through development all the way through the financial close.

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

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James? James Ellis?

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James Ellis, BofA Merrill Lynch, Research Division - Director [5]

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It's James Ellis from Bank of America Merrill Lynch. Just a question on the profit share. So during the half and also the year, the compensation expense ratio edged a little bit lower, but the return on equity was high. Now acknowledging profit share is not entirely driven by ROE, I'm just wondering how should we think about that? And then related to that, in a result that seemed to have a number of individually large gains or transactions in there, how do you think about those profit flows and where they get allocated in terms of profit share to the team responsible to the profit share to the broader group and to shareholders thereafter?

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

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Yes. Looking -- setting profit share, we take into account the performance of each of the individual groups and the return on equity, the stability of that profit, but also market factors because we are in a market for talent in many, many regions around the world, in many sectors. So we take both of those into account and set that profit share has reached for the group. And the profit share for the whole group depends on the mix of business that we have each year by geography and by operating group. So those are the main factors that drive how we set profit share.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [7]

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Andrew?

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Andrew Triggs, JP Morgan Chase & Co, Research Division - Research Analyst [8]

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Andrew Triggs from JP Morgan. In a similar line to Jon's question, just in the operating expense lines was noted some legacy-related expenses. Just some flavor on what those relate to? And then second question around the dividend. Obviously, there's a very strong capital position in the period to call out a number of uncertainties on capital. But just was that sort of 66% payout ratio more reflecting that uncertainty or perhaps allowing some acquisitions from here?

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [9]

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So in relation to dividend, I wanted to take that first. Obviously, when we look at the dividend, if you look at the first -- the second half in comparison to the first half, it was obviously up 67%, as Shemara talked about. As we set -- as the Board said, it's dividend policy, we're obviously looking at the utilization of the capital across the group. I think much more -- probably the other thing that's in our mind a little bit is just the mix of net profit between the first half and the second half. And as I think the Board thinks about that going forward obviously it'd depend on the results, but then you have to look at the first half payout ratio of 56% and the second half up into the 70s, yes, that's a little inconsistent with where we're seeing at -- where we're seeing net profit contribution across the two bureau. So we'll think about that going forward. In relation to the legacy expenses, obviously from a corporate viewpoint, as you've seen over the years, we have booked expenses in corporate where they're not aligned with an existing business in an operating segment and those legacy expenses came through this year, which is in relation to some historical lending transactions that we're involved with.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [10]

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Simon? Just in the middle here.

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Simon Fitzgerald, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [11]

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Simon Fitzgerald here from Evans & Partners. I just wanted to explore the equity investments just a little bit further. Obviously, they have been a pretty material feature of results in the last sort of few years now, sort of with that investment income at $2.1 billion. I was wondering if you could give any sort of detail in terms of the average holding period of those investments or sort of a minimum or a typical type of holding period for those investments. I guess I'm just trying to think a little bit more about the vintage that's within those equity investments there.

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [12]

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Well, maybe I'll have a go and then I'll hand to Tim. I mean obviously there are a range of positions in that business. So if you take something like PEXA, for the sake of the example, that was a business that we've built over a long period of time and incrementally increased our exposure to that business as the size of the business built. So that was probably a 7- or 8-year journey. So some of those private equity, where we are actually building technology platforms, tend to be quite longer-term-type investments. The green energy activity tends to be, depending on where it is, tends to be sort of 2 to 3 years in terms of development through to financial close and then to operation. And so it depends on the type of activity, I think, in terms of our whole. Probably, overall, size of the book is 2.5 years in terms of the average duration of the book. Tim, do you want to add anything to that?

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Timothy Cameron Bishop, Macquarie Group Limited - Chairman of Macquarie Capital [13]

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Thanks. I'm not sure I have a lot more to add to that. I think that Alex has articulated it well. I mean there are sort of 2 broad categories of investments. We've got investments that are more private equity-oriented alongside our clients, which may involve technology and, as Alex said, they're probably a longer duration. They are typically sort of 5-year-plus-type investments. And then we've got the green energy investments. And as Alex has said, increasingly, they are at the development end of the spectrum, which means that the quantum of the investment per project is probably smaller. But we're expensing a lot of more of that, so our expenses move -- will trend up. And then we have some typical points at which we can exit when we reach financial close or at some point, through the construction period. And then probably more 2 to 3 years, as Alex said, it's a bit driven on whether it's offshore wind, which is longer. Solar is more of a 12-month, 19-month type of time frame.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [14]

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Brian?

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [15]

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I have 3. Ron Johnson, CLSA. 3 questions, 2 of which are really quick, one which is a little bit longer. Just when we have a look at basically Slide 31, we can see performance fees coming through in MEIF1, MEIF3, GIFII. Can I just confirm that the full gain on Brussels Airport and the sale of DCT Gdansk, was that taken in this period or is there a little bit left out to come in the next quarter?

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

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Those processes have not completed in terms of the sales on both Brussels and Gdansk. So what we've recognized in this period is, as we're required to under the accounting standards, that portion of it that is -- that what there's a highly improbable risk of reversal. So we would be recognizing the amount that we have very, very high confidence in. Assuming those processes go through and complete, we should recognize further performance fees, but obviously at this point we don't see those extra fees as being highly improbable risk of reversal because there are factors required, approvals, et cetera, before those complete.

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [17]

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So there is more to come?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [18]

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Assuming the conditions to completion are met, there should be more performance fees, but we have to wait and see how that plays out.

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [19]

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Okay. The next really quick one, Slide 33...

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [20]

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I'm sorry, Brian. I would note that we have said that we expect in the MAM business, in the performance fees and investment-related income in FY '20 to be broadly in line with FY '19, so we take all that into account.

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [21]

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Slide 33, which is the EUM. We can see there that -- and I'm just a little bit concerned this may well be a typo. You've got equity raised 18.9 and under that you say that includes the GLL acquisition. The next one over is you've got the platforms acquired. Is that one in the wrong spot?

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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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Yes. That is right, Brian. The platform acquired is the 11.7, which is the GLL acquisition coming through plus the acquisition of the infrastructure fund as well in there.

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [23]

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Okay. So in the outlook for the commentary, what have you assumed happens with this great wad of cash we've got sitting in this business? Have you assumed some of it gets deployed or...

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [24]

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The $25 billion. When we say we expect the base fees to be broadly in line we have taken into account deployment of some of that cash, but Martin is sitting in the front row, so I might let him comment on the $25.5 billion and which funds it sits in and expectations for investment.

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Martin Stephen William Stanley, Macquarie Infrastructure and Real Assets (Europe) Limited - Global Head [25]

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Yes. So we're expecting some of the draw past to be deployed as we go through the year on a sort of a normal basis really. So that obviously depends on the level of deal flow that we're seeing around the world and at the moment, that's very strong particularly in the Americas. But we're expecting a sort of a normal level of activity to get to the sort of numbers that we're talking about for next year.

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

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And we -- and Martin did mention at the operations briefing that a lot of that money has been raised quite recently, with our large U.S. funds just closing at USD 5 billion and the large European fund being recently advanced in its raising. And I think he said we normally take 3 to 4 years to invest the capital in each fund, so a portion of it, we'll expect to invest.

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [27]

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Final question. Shemara, I've been following Macquarie a long time, and I always used to like to talk to your predecessor about long-suffering shareholders. And I was looking forward to coming in today and not being able to say that, but your share price is down about $7. It's down a lot. But that being said, it had run very hard going into this result. Two questions flow from that. The first one Alex, for you, is basically when we have a look at it, we've got a big hunk of Macquarie staff expense, the shares that are allocated, what did that run up in the share price basically do to the staff expense line in dollars that was expensed? And the second one, Shemara, is -- and I haven't read everything, but my understanding is the performance share units basically were determined. The vesting had previously been determined by the historic rolling 4-year EPS growth in ROE. Is the change today just saying that they will now vest over the future 4 years, so we're really extending the alignment from 4 years trailing to 4 years backwards, 4 years forward?

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Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [28]

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Yes, thanks, Brian. We obviously don’t break out specific components of the share-based payments expense. It does contribute a little bit to the step-up in share-based payments expense, but it's not that much. It's in the sort of, I guess, the tens of millions rather than anything else.

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [29]

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That sounds very close, to me.

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

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And with the PSUs, basically the Board is determined to push out the vesting of the PSUs to a cliff-faced arrangement compared to what we had previously. So the vesting period has been extended, but the measurement of performance is still the same hurdles that we always had.

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [31]

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So the quantum of it is 4 years backwards EPS growth and basically peer relative ROE of the vesting period is (inaudible).

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [32]

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I'll let Nicole Sorbara, who is here in the front row, give more detail, but what you have is basically right.

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Nicole Sorbara, Macquarie Group Limited - COO & Head of Corporate Operations Group [33]

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Yes. So we had previously 50% of the PSUs were vesting over 3 years and 50% were vesting over 4 years. So the change now is that they're all vesting at year 4 and we have the 2 hurdles. So we have a relative ROE and that is vested at year 4 and if we don’t make the hurdles, then we don't, there's no retesting; and then the other one is EPS growth over that 4 year period.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [34]

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We'll take one more in the room and then we'll go to the line.

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Anthony Hoo, Deutsche Bank AG, Research Division - Research Analyst [35]

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It's Anthony Hoo at Deutsche Bank. If I could ask 2 questions. Firstly, just on the asset management business, on Slide 32 you've shown us the change in AUM, just on the net flows piece, which is negative, are you able to talk, to break that down a bit in terms of what's driving that, any particular areas, and your expectations going forward for that? And then second question, just on air finance. The sale of the 25% air finance. What impact has that had on the numbers here today and on the next few periods?

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

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I'll kick off on the asset management question and then let Martin comment. But basically, in the MIM business, the outflows are principally in a quant hedge fund business that we discontinued. So -- and some are outflows in our Asian equities and then U.S. fixed income. But in terms of the outlook, we have more than 75% of our funds in the MIM business materially beating their benchmarks. So we would expect to have decent flows in those businesses. Martin, anything to add?

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Martin Stephen William Stanley, Macquarie Infrastructure and Real Assets (Europe) Limited - Global Head [37]

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No, I think that's about – that’s about it, really. Nothing really official. There's strong flows in some of the very strong products that we've got in the U.S., so we're feeling pretty good about the situation that we're seeing in those other products areas as well.

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

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And then in terms of the air finance book, wasn't sure which slide you were referring to, but the portfolio, as we mentioned, is up about 5%, including the Rotorcraft portfolio that we acquired. Going forward, we've had an external investor coming to part of the air finance book, so taking -- oh, that was probably what you were referring to, is the 25% third-party investor. So we have an investment there on the balance sheet. At the moment, we've poured some put money into 25% of that. We've done that because we see a lot of opportunity to keep investing in the air finance area and it probably is going to start exceeding the capacity of our balance sheet. So we're moving that more to an asset-managed offering rather than a principal investment offering. And that should, hopefully, keep the income levels growing, from that the returns on equities higher as we move to managing third-party money to invest in that. The skill set we have, which is sourcing the assets, managing them, taking them through to exit, realizing them, will continue to be generating return for the Macquarie shareholders.

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Anthony Hoo, Deutsche Bank AG, Research Division - Research Analyst [39]

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Maybe just (inaudible) had no impact on the current year financial results other than it's recorded as a held for sale asset in the balance sheet?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [40]

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Sorry, if that was your question, it's just a balance sheet impact, not a P&L. We see a deconsolidation. But the earnings impact, we hope will be in future years.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [41]

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Okay. We'll go to the other line first, and I'll come back to it, Andrea. We've one question on the line?

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Operator [42]

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Your first telephone question comes from Brendan Sproules from Citigroup.

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Brendan Sproules, Citigroup Inc, Research Division - VP [43]

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It's Brendan from Citi. Look, I've just got a follow-up question on our performance fee guidance. I was wondering if you could give us a feel of the -- from the MIRA business, some of the unlisted funds that will be attempting to realize asset sales during the FY '20 year and that could probably underpin the guidance that you provided today?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [44]

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Yes. I'll let Martin -- he's here from London -- I'll let him speak to that.

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Martin Stephen William Stanley, Macquarie Infrastructure and Real Assets (Europe) Limited - Global Head [45]

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We're feeling very good about performance fees in this coming year, I have to say. So that MEIF1 and MEIF3 performance fees that we've seen during the course of this year were as a result of the realization of the final assets there, someone referenced Brussels Airport. So we've got to go through the final completion of that process at the moment. It's also subject to not only EU merger control approval, but it also -- requires the Belgian government to approve an operating license, change for the incoming buyer. So that's where the sort of complications are around that. But we're feeling good about that from that perspective, getting that completed. We get down to the sale process that was also referred to. So we're also feeling good about that because that's also got some approval processes to go through as we go through next -- the next month or so. And then as we look forward into the year, we've also got some performance fees expected across the wider portfolio and we've had terrific performance from our U.S. funds platform and we've made a number of realizations, which are in train at the movement. So overall, when we look at the picture for this coming year we're feeling good about where we sit today on performance fees.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [46]

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And I think you've previously guided that the performance fees have typically been about 50 basis points of equity under management, which we've been delivering since you guided that. So it comes from a whole variety of places, but I think for this next...

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Martin Stephen William Stanley, Macquarie Infrastructure and Real Assets (Europe) Limited - Global Head [47]

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That's right, and of course you've got the associated investment income that comes off the back of that, as well, so.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [48]

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Good, there's no more questions on the line. Andrei?

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Andrei Stadnik, Morgan Stanley, Research Division - VP [49]

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Andrei Stadnik here from Morgan Stanley. I wanted to ask questions. And first one, just around commodities revenues. So commodities revenues are about $2 billion this year and 1 point up from $1.1 billion the year before. So you sense from markets may not continue going forward. But in terms of where we're likely see commodities revenues going forward, we'll be closer to the $2 billion or closer to $1.1 billion?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [50]

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As I mentioned, when I went through the short-term outlook, we have seen a growth in our franchise in terms of our customer base across the portfolio, but what we saw in FY '19 was a high level of volatility, which means our customers are needing more services from us in risk management, hedging, et cetera, and it gives us the opportunity to make greater trading income. So we'll have a combination of a lift in the underlying platform offset by an unlikely experience in the level of market conditions that we saw in the previous year, and that includes both the volatility and then we also mentioned in the U.S. Gas and Power that we had due to constraints in transportation infrastructure, conducive environment as well. So I might also let Andrew, who's here, elaborate on that. Andrew, if you want to give any further comment?

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Andrew Downe, [51]

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Sure. I think Shemara, you've largely covered it. What I would say is that there has been an underlying growth in the diversity of the activities that we undertake in the client base that we service. So we do see some underlying growth in the franchise. That means the base level is probably picking up over time. But as Shemara said, during the year we were also fortunate of some constraints in North America. Broadly speaking, quite a lot of volatility in oil price in particular that have helped drive market conditions that have been fairly favorable, and we're just sort of forecasting that, that may not continue.

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [52]

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But I think now you have 160 products across Commodities and Global Markets and we've seen growth not just in the Commodities business that had a material step up, but in fixed income and currency business, the futures business. So all of those in terms of the franchise are stepping up.

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Andrew Downe, [53]

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Correct. So across the -- not just across commodities, but across the whole platform. Broadly speaking, we think that the core earnings, if you like, over the franchise are gradually, as a sort of baseline, picking up.

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Andrei Stadnik, Morgan Stanley, Research Division - VP [54]

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And my second question. It looks like you took the opportunity to invest in the business, and given the stronger revenues and called out that cost will go up about $340 million this year. Can you give a bit more color on where the investments are headed and what kind of benefits do you expect in the longer term?

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

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Yes, so you go ahead.

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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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So we obviously did call out the step-up in other expenses. I mean obviously part of that, Andrei is the acquisition that came through during the period, the GLL, the ValueInvest, the infrastructure fund. Those sort of acquisitions that came through over the period and costs associated with that, professional fees and the like that come through there. In terms of the other investments being made, I talked about technology and really there's investments being made across the Board in technology platforms. So if you take and that's in BFS, it's obviously in CGM, in Macquarie Asset Management, within Macquarie Capital and also obviously the Central Service areas, investing in more advanced technology to enable better servicing of the customers. So we're saying, if you take the MAM business, for instance, a significant investment being made in the platform, the operating platform, the business to enable more seamless integration between the front office, the clients, the middle office and the back office, so you should see offers and benefits coming through there. In terms of Greg's business, a continued investment in not just the interface with clients, but also the underpinning technology that supports the service offering in wealth, for the sake of an example. We should say, see not just client benefits there, but obvious efficiencies coming through there. So I think a lot of that technology investment is about making sure that the business is set up well to deliver to the customers, so we should see a better proposition for customers as well as a more efficient use -- cost infrastructure for us.

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

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Richard?

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Richard E. Wiles, Morgan Stanley - Head of Research - Australia [58]

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Richard Wiles, Morgan Stanley. Shemara, Slide 31 shows the movements in the Macquarie Asset Management earnings. Performance fees were up, gains on sale were down and payments were up. They're all volatile items, but if we look at the 2 more stable items, the base fees and the expenses, base fees were up 170, expenses were up 250. How can you be happy with the performance of a business where expenses are growing at 1.5x the recurring revenues?

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

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Yes. This year, as Alex mentioned, so we had the GLL acquisition, which led to big step up in expenses, but we also had some one-off expenses. So we invested in the Aladdin platform across the MIM business, which drove expenses as well. But I think when you look at our recurring revenue, it is more than just the face fees that you should look at, as Martin showed in a slide recently and we can share it again. Through the cycle we're typically generating 50 basis points in terms of 50 bps on equity under management of performance fees and also 20 basis points of investment-related income. And if you look back over the 5, 6 years, we've typically been generating $500 million to $600 million of performance fees. We have a very good pipeline of investments that we can see, as Martin said, at this point, where we're confident they're generating well above the hurdle for performance fees. So as we look out to realizations in MIRA business, we can see those coming through, both performance fee and investment income, for a few years ahead. And we don't consider those volatile one-off earnings that we included in our annuity-style income because we now after 2.5 decades of being in this business, have a level of confidence of the repeat of that. Martin, do you want to elaborate on that?

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Richard E. Wiles, Morgan Stanley - Head of Research - Australia [60]

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Does that mean, if -- well, there may not be one-off, if they're every year, but they are volatile. You can see the volatility in the last year, as an example. But does it mean, if you don't get growth in the net contribution from performance fees, investment income and impairments, then the earnings go backwards or will expenses grow faster than the base fees?

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

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If you look at the Macquarie Asset Management expenses over the last 10 years, they've broadly held flat. head count and expenses have held reasonably flat in a very low growth rate because we've got the benefit of leveraging the platform that we have when we've grown our revenues materially while the costs and the capital in that business has stayed largely flat. What happened last year was we did 2 big acquisitions, ValueInvest and GLL. So we took on annualized OpEx for both of those businesses and we made a big investment in the Aladdin platform, which we expensed that year. But I might -- I'll let Martin copy, because -- comment, because he's much closer obviously to the group, now running it, than I am.

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Martin Stephen William Stanley, Macquarie Infrastructure and Real Assets (Europe) Limited - Global Head [62]

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There's a few things going on there, which hopefully I can clarify. So the first thing is that, as Shemara said, in order to crystallize performance fees and investment income, we have to actually sell assets. So if you're selling assets that means that you're returning capital as earnings fees. So you have a consequential reduction in same-store base fees, if you like, as you go through time. So you need to look at this sort of over longer periods rather than just in 1 year. So to get performance fees, we're having to sell assets that's dropping base fees, and then we're offsetting that reduction in base fees as a result of raising new capital. Where we're raising new capital, what's actually happening, of course, is that the fees on the new capital is either, is lower than fees on the actual invested capital. So whilst equity under management is going up, it's not until you're actually fully invested on that capital that's really driving your base fee revenue. So that's one point.

The second thing is that, what we've been doing is we've been investing very heavily in the platform capability, particularly in the MIM business, but there's also investment going on in the MIRA platform so that we can get a better end-to-end process from the capture of data through to the provision of information, both to our clients, but also to the financial reporting systems. And what that will do is that will drive operating efficiencies over time, which won't -- haven't come through this year, but we do expect to see them coming through in the future. The third thing that's happening, which is actually the main reason for this big step-up, is the fact that we've acquired these other platforms. So whether it's GLL in Germany, ValueInvest in or in Luxembourg, and also the acquisition of the Foresters platform. And that's bringing people onto -- people and costs onto the platform, which is causing this big step-up in operating expense.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [63]

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Go back to Brian.

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [64]

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Brian Johnson, CLSA. Two quick ones. It's very topical at the moment. I was just wondering if we could get a feeling on what's happening with the arrears right in the homeland book? Also, on the auto book, and I realized the book's going down, so you're going tell us the base if it sees it going up, but I wouldn't mind just hearing about those 2. And then second one, Shemara is, that we can see you've just closed down the Canadian equities business, Re. Equity feels like a pretty tough place to be. It's been struggling now for quite a while. Can you just run us through a scenario, perhaps where you have to deal with it perhaps a little bit more savagely than you have today?

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Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [65]

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Yes. I'll comment on the equities, let Andrew follow-up if he wants to say anything. If not, I will hand over to Greg to talk about the arrears in the mortgage and the vehicle leasing portfolios. But with the Equities business, as you've seen, we've made a call to step out of Canadian equities only. And I think that speaks volumes in that obviously we look at our whole platform and think about that business in long term, what's the opportunity with it, and we've made a very considered call that Canada -- equities in Canada is not a business where we see long-term prospect. It's a very competitive market, it's a very concentrated market. We still have many other business lines in Canada that we stayed in. And the businesses we've exited there, they are just a small part of our footprint in Canada. So we see other ways to compete in Canada. But we remain in the other Canadian businesses and we remain in our equities footprint around the world. Particularly here in Australian and Asia, we have very strong presence and very good earnings out of our equities platform. Anything to add, Andrew?

No? Not particularly? And then I'll let Greg comment on the arrears in our mortgage book. Obviously, in a market that's been recently flat, we've been able to gain share. We've maintained very high credit standards in there. And then also I mentioned new vehicle portfolio the factors of the runoff that arrears particularly, if you want to comment on, Greg.

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Gregory Colin Ward, Macquarie Group Limited - Head of Banking & Financial Services Group and Deputy MD [66]

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Yes. Thanks, Shemara. We've had wonderful growth in mortgages. We have a very low risk appetite. So we target very good borrowers with low LVR. So we've seen some pickup in arrears, but it's much, much lower than the pickup that we're seeing across the market. It's only several basis points. So we're not too bothered on the mortgage side. Obviously, in Western Australia, as the market arrears have gone not much higher than the other states. In motor vehicles, arrears are up quite a bit across the industry, but, again, our portfolio is performing much, much better than the industry. Our risk appetite is lower. The collections team is extraordinary, is an extraordinary collections team. And the mix of business there is different than the market. We have a very large innovation portfolio, and we see very low arrears and very low losses in that part of the book.

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Samuel John Dobson, Macquarie Group Limited - Head of IR [67]

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Okay. All right. There's no more questions. Thank you all for coming along, and we'll catch up with you over the next couple of weeks. Thanks very much.