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Edited Transcript of MQG.AX earnings conference call or presentation 5-Nov-20 11:00pm GMT

·84 min read

Half Year 2021 Macquarie Group Ltd Earnings Presentation Sydney, New South Wales Nov 9, 2020 (Thomson StreetEvents) -- Edited Transcript of Macquarie Group Ltd earnings conference call or presentation Thursday, November 5, 2020 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Alexander Harms Harvey Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia * Gregory Colin Ward Macquarie Group Limited - Head of Banking & Financial Services Group and Deputy MD * Michael John Silverton Macquarie Group Limited - Global Co-Head of Macquarie Capital * Nicholas O'Kane Macquarie Group Limited - Head of Commodities & Global Markets * Samuel John Dobson Macquarie Group Limited - Head of IR * Shemara R. Wikramanayake Macquarie Group Limited - CEO, MD & Executive Voting Director ================================================================================ Conference Call Participants ================================================================================ * Andrei Stadnik Morgan Stanley, Research Division - VP * Andrew Triggs JPMorgan Chase & Co, Research Division - Research Analyst * Brendan Sproules Citigroup Inc., Research Division - Director * Brett Le Mesurier Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance * Brian D. Johnson Jefferies LLC, Research Division - Equity Analyst * Edmund Anthony Biddulph Henning CLSA Limited, Research Division - Research Analyst * Jonathan Mott UBS Investment Bank, Research Division - MD and Banking Analyst * Matthew Wilson Evans & Partners Pty. Ltd., Research Division - Executive Director of Financials ================================================================================ Presentation -------------------------------------------------------------------------------- Samuel John Dobson, Macquarie Group Limited - Head of IR [1] -------------------------------------------------------------------------------- Thank you, and thanks, everyone, for joining us, albeit in a virtual setting. Thanks for joining us for our first half 2021 results announcement. Today, you'll hear from our CEO and Managing Director, Shemara Wikramanayake; and our Chief Financial Officer, Alex Harvey. In addition to Shemara and Alex, we've got a number of group heads with us here today and also on the line. We'll do as the operator said, we'll have the presentation and our Q&A session at the end. And I'll hand over to Shemara. Thank you very much. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [2] -------------------------------------------------------------------------------- Thanks very much, Sam, and welcome, everyone, from me as well, and thank you for joining for our first half '20 results. So as usual, we'll kick off with just noting our 4 operating groups, which each have a business that is being -- that has built a strong position in well positioned structural themes for the medium term, our global asset manager, our Australian Banking and Financial Services business, our global commodities business and our investment banking business that had strong -- client service capability as well as principal investing capability across some specialist niches. And the 4 businesses between them as well give us good diversification through the cycle. So in this half year, we had the annuity-style businesses contribute 70% and the market-facing 30% at the end of last financial year. That ratio was 63%, 37% and the year before, it was 53%, 47%. So responding to the market conditions at the time and now, obviously, reflecting the pandemic-affected environment we're in. And before going through the financial results, I'll just touch on some of the things we're doing more broadly to respond and service our other stakeholders in this COVID-impacted environment. Starting, first of all, with our employees, where when we spoke at the end of last financial year, 98% of them had worked to moving remotely and happily, since then, we've been able to deliver to all of our other stakeholders through the excellent technology we've had and the fact's that we all have become very used anyway to working virtually as we operate across our global teams. Now we have 60% of our staff approved to return to office. But we are responding very much on a localized and a voluntary basis given that this pandemic is still very much with us, and the situation changes from market to market still. Then turning to our clients. We have been stepping up to provide hardship assistance and financing help, et cetera, through this cycle, to them. And at the peak of the cycle, we had 13% of our BFS clients on payment pause.Happily, because we're Australia focused, the clients have proven to be quite resilient, and we're now down to less than 3% of our book on payment pause. Then turning to the portfolio companies, in our asset management and our principal investing business, there as well, primary focus has been on the employee well-being but also trying to make sure we deliver to the communities, the sort of things those businesses seek to deliver. And in some areas like digital, the demands have stepped up. In others like airports where car parts are now being less used, we're repurposing them for testing, et cetera. And lastly, turning to the community stakeholder, we stepped up our foundation giving last year by an extra $20 million to respond to the COVID environment. And over $15 million of that has now been committed initially in health and clinical research and direct relief, and now we're moving more to helping economic recovery. So with that, let me turn to our financial results. And as we foreshadowed the results for the first half of FY '20, it's down 32% on the prior comparable period with the result of $985 million after tax, and that's down from $1.457 billion in the prior comparable first half. That's about a $470 million drop after tax. Before tax, it's about a $600 million decrease, and that was contributed broadly from 2 big areas: one is the credit and other impairment charges have stepped up about $300 million. And then the second one is the contribution from the operating businesses has also contributed a $300 million decrease, principally driven by the challenges in realizing assets in this environment but also the lower activity levels. And looking then at the operating businesses between the annuity and the market facing, the annuity-style businesses had their contribution down 7% on the prior comparable period, and that was made up of the asset manager where performance fees were lower compared to a very strong first half in FY '20. And also in our aircraft leasing business, Macquarie AirFinance, our customers are particularly facing challenges from this pandemic. So we have lower income there, offset by the fact that in the first quarter, we sold the Macquarie European Rail business. In Banking and Financial Services, the result has been most impacted by the credit and other impairment charges that we're taking through this period, both on the existing portfolio. And as we grow the books as well, we have to take provisioning. In addition to that, we've had pressure on margins, both as a result of interest rates coming down in Australia and globally and also the fact that competitive pressure is driving margins, and that's been offset to some extent by the growth in the loan books in personal banking and the deposit book and the funds on the platform. But when we turn to the market-facing businesses, they're down 42% on the prior comparable period. And the big driver there was that in Macquarie Capital, investment-related income was down significantly as a result of the challenges in terms of asset realizations. In addition to that, fee income was down, again due to the lower activity levels despite our very strong franchise in Australia benefiting from the work that we did in the capital markets area. And we also had to provide as we put on loan facilities in that business. And then lastly, the Commodities and Global Markets business result was down somewhat on the first half of '20. That was made up of 2 distinct quarters. So the first quarter was very strong with high volatility in areas like oil and also in metals, particularly precious metals, creating a lot of client activity that the client need for our services. That became much more subdued in the second quarter. And so the results in the second quarter were down quite a bit on the first. Overall, the half, slightly down on a strong prior comparable half. Looking at the overall results, then, as mentioned, the profit after tax was down 32% on the prior comparable period, and the earnings per share were down 36%. And the Board has declared a dividend for the first half of $1.35, which is down 46% on the first half. The assets under management were also down 7% on the prior comparable period. The big driver there was foreign exchange movements and also the fact that we had a reduction in the low fee contracted insurance assets that we look after. And that was partially offset by market movements for the NIM business and investments we made in MIRA. And then I just wanted to make a couple of observations on the diversification globally of our income before turning to looking at each of the operating groups. And you see here that we have 68% of our income coming from outside Australia. And roughly, Australia, Americas and EMEA contribute about 30% each, with about 10% and growing coming from Asia. But this does reinforce that we are exposed to a number of global markets and the conditions prevailing in those. And you can see here over the last 5 halves how each of the regions has performed or contributed. I'd also note that a 10% movement in the Australian dollar is estimated to have about a 7% impact on our profit after tax. So turning then to looking at each of the 4 operating groups and how they performed over the half. Macquarie Asset Management contributed 47% of our result and delivered $1.062 billion, which was down 5% on the prior comparable half. And as I mentioned, that was a strong half with performance fees, and we had the Macquarie AirFinance impact as well. In terms of how the business performed, we were able to actually raise funds and invest and deploy at our typical run rate, so about $9 billion raised and about $8.5 million invested, but you'll see the divestment number is lower because of the environment that we experienced, $0.9 billion divested. But just at the end of the half, we did actually realize the WCA Waste asset in the U.S., and we also progressed well on realizing an asset called Viesgo in Spain in the European funds. Equity under management, down 6% at just under $140 billion. And that was principally driven by foreign exchange. We have $24 billion of dry power now across all our funds in the real asset sectors to invest. We noted the rail asset sale. In Macquarie Investment Management, the assets under management are down 8%, driven by, as I mentioned before, the FX and then the market movements, which market movement has been positive, but also the reduction in the contractual insurance assets. I'd note though that, that business' performance versus 3-year benchmark has stepped up now with 77% of funds outperforming bench market at the end of the half versus 69% at the end of last financial year. Then turning to Banking and Financial Services. It contributed 14% of the result. It was down 18% on the prior comparable period with a result of $317 million. And as I mentioned, the big contributor there is a credit and other impairment charges we're taking now in this COVID-impacted environment and also the pressure on margins. But as I said, that was offset, to some extent, by the growth in the loan portfolio and the deposits and the funds on the platform. If we look at just the personal banking home loan portfolio, all 3 up double-digit percent on the end of last financial year. The business banking book was down slightly 1%, and the vehicle leasing was down given the environment in terms of car sales in Australia. Then Commodities and Global Markets, also like the asset manager, contributing 47% to the $1.082 billion. Again, like the asset manager, down 5% on the prior comparable strong period. We had consistent contribution from the leasing operations in our specialized asset and finance -- specialized and asset finance business and also our lending operations. The commodities business, particularly, as I said, was the one impacted by strong first quarter and then a more subdued second quarter, particularly in areas like oil and precious metals. Financial markets, consistent contribution, particularly from the foreign exchange and interest rates and credit businesses. A strong period in the equity derivatives and trading operations and futures, which is a small contributor down because of the interest rates being much lower. And lastly, Macquarie Capital, as we mentioned, that was significantly down on the prior comparable period at negative $189 million, and that was principally driven, as Alex will explain in further detail, by the much more challenged period in terms of asset realizations. Despite that, as I mentioned, the Australian franchise going very strongly. We were involved in 55% of the equity capital markets raisings in this period in Australia and still a #1 on announced and completed M&A as well as equity capital markets. And globally, the business also in advisory activities, global M&A was down substantially year-to-date, but it's starting to pick up now, and we're seeing that come through to some extent. And as well as that, we were able to actually get invested with about $1.5 billion of investments made in the principal finance area in the advisory and capital solutions business. And in the infrastructure and energy group, investments in green energy of $1.4 billion as at the end of the first half. Our balance sheet and capital position also remains strong with $77 billion -- $77.1 billion of deposits at the end of the first half and $7.2 billion of term funding raised with our term funding still comfortably exceeding our term assets. And capital-wise as well, our surplus capital has increased from $7.1 billion at the end of the last financial year to a $9.4 billion surplus at the end of this half. That was impacted, obviously, by the first half profits neutralized a bit by the issuance for MIRA and the DRP, the net of those 2. And also, we had a small hybrid issuance, but the biggest contributor was the capital released from the businesses, mostly due to foreign exchange, offset by the foreign currency translation reserve. And looking at the businesses there, you can see on the right-hand bar chart to this page, as I said, the biggest contributor to releasing capital was foreign exchange movement, it's $1.4 billion. The 3 of our 4 operating groups also released capital over the period, Macquarie Asset Management from the European Rail sale, Commodities and Global Markets from decreased requirements from reduced derivative exposure and loans and trade debtors, and Macquarie Capital from asset realizations that happened in that period. Banking and Financial Services was the only business to grow capital absorption as the loan books grew. And as well as strong capital and balance sheet position, our regulatory ratios are comfortably across the regulatory minimums. I'd particularly note the 13.5% CET1 ratio at the bank group on the APRA basis. And so let me finish by just noting the interim dividend, as I said, $1.35. That represents a payout ratio of 50%, reflecting the current environment. So that's the dividend the Board has elected to pay, but the policy remains to pay out between 60% and 80%. And with that, I'll hand over to Alex to take you in much more detail through the financial results. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [3] -------------------------------------------------------------------------------- Thanks, Shemara, and good morning, ladies and gentlemen. As Shemara said, I'll now take you through more of the details of the financial statements for the half year ended September 30, 2020. Starting with the key drivers in the income statement, you can see operating income down 13% for the first half relative to the first half of FY '20. The key drivers of that being over $300 million increase in the credit and other impairment charges coming through for the half, a 9% reduction in fee and commission income, a 47% reduction in net operating lease income, largely as a result of the creation of the Macquarie AirFinance joint venture in the first half of FY '20 and a 16% reduction in investment income for the period. In terms of operating expenses, you can see operating expense is down 5% for the period. The key drivers there are the reduction in employment expenses, and that really reflects the reduced profit share in the half, consistent with the operating group performance as well as reduced share-based payments expense, reflective of the fact that in the first half of FY '20, we had some accelerated MIRA amortization associated with the retirement of key management personnel. That was partly offset, that reduction was partly offset by an increase in the annual leave provision coming through in the first half. If you look at the operating expenses, you can see then the other operating expenses, you can see them down as well, and that's largely reflective of the reduced travel that we're seeing across the organization, together with reduced professional services, again, consistent with the transaction activity we're seeing across the group or reduced transaction activity we're seeing across the group. Effective tax rate for the half at 21.9%, up from 20.5% in the first half of FY '20, reflecting the geographic composition and the nature of income coming through in the half. So overall profit, down 32% from where we were in the first half of FY '20. In terms of the operating statement by operating group, you can see the key movements here. Macquarie Asset Management, down 5% from the first half of FY '20. You can see BFS down 18%, primarily driven by the increased credit impairment charges during the half as well as an increase in expenses in that business to support clients. You can see CGM down 5% from where we were in the first half. First half FY '20, of course, is a very strong period, and I'll explain some of the details of CGM in this half in a moment. And you can see the significant reduction in Macquarie Capital of $410 million. Largely, that reduced investment income, together with some reduced fees, and I'll talk about that in a moment. You can see the reduced drag from Corporate, $23 million during the half. That reflects the lower profit share expense, together with lower share-based payments expense, partly offset by some accounting volatility that we're seeing on our economic hedges and also some provisions that we've taken in the Corporate center to reflect the uncertain economic environment that we see in front of us at the moment. We thought it might be helpful, just as we did at the full year results, to just give you a sense of the underpinning assumptions for our equity -- expected credit loss modeling for the first half. And so this is an update to the slide we had in our first half presentation. As everyone knows, of course, informing our expected credit loss provision, we need to take into consideration the forward-looking indicators. And so we have updated our baseline, our downside and our upside cases from where we were at our full year result. We still think that the baseline is probable. We think that the downside is possible. We think the upside is unlikely, not 0, but unlikely to eventuate given the circumstances that we see in front of us. When you look at the detail of this, there's not a material change in our economic outlook other than I draw reference, I guess, to the Australian slide there, where we saw a slightly less precipitous fall in Q2 than we're anticipating at our full year results and a slightly more elongated period of recovery that we see coming through this economy. And there's detail, obviously, in Australia and the U.S. on this slide because they're the largest markets in terms of the composition of our credit portfolio. I'd note that we remain very cautious about the outlook. Obviously, there is a great deal of uncertainty out there, and economies around the world have been very well supported by government stimulus and obviously by liquidity being provided to markets by central banks. We are uncertain as to the implications of the withdrawal of that support over time with the tapering of that support over time and how that might affect the performance of our credit portfolio and economies around the world. And as a result in our expected credit loss provisioning, we have included a management overlay reflecting that level of uncertainty that we feel in terms of the future performance of economies. As at the 30th September, our expected credit loss provision is $1.65 billion. People recall, I'm sure, that's up from $1.54 billion in the full year results that we talked about in May. Now obviously, credit and other impairment charges are a significant feature of the result. And so we've set them out on this page, and I'll spend a few minutes talking through them. You can see expected credit and other impairment charges for the half at $447 million, up from $139 million in the first half of FY '20, which, of course, was a very different economic environment. And you can see that those expected credit losses spread across most of the groups other than the Macquarie Asset Management, which has a relatively small credit and equity portfolio. From a BFS viewpoint, the credit charge is up $36 million. That reflects the growth in the size of the loan book in BFS. It also reflects the support that we're providing to our clients to enable them to make it through COVID-19. From a CGM viewpoint, the expense running through the P&L for the first half was $166 million. That's $134 million more than we expensed through the first half of FY '20, so a very significant step-up. That reflects a small number of positions in the CGM portfolio that have underperformed our expectations, and we've taken specific provisions associated with those positions. It also reflects an overlay to incorporate the regional and industry-specific risks we see across CGM's credit portfolio. Macquarie Capital, an increase of $57 million versus what was expensed in the first half of FY '20. Again, a small number of positions that are underperforming our expectations. Now we've taken specific provisions there. Together with the growth in the loan book that we've seen over the half, the principal finance book has grown by $1.5 billion. And with that growth comes additional expected credit loss provisioning at origination. And in the Corporate center, we've also included an overlay provision, and that really reflects the view that we have that there is a very uncertain macroeconomic outlook. And we think it's prudent to take our provisions in the center to reflect the broad implications of that macroeconomic outlook on our credit books across the group. So turning now to the first of the operating businesses, Macquarie Asset Management, 47% of the group's net profit for the half. And you can see the big movers there, down 5% on the first half of FY '20. You can see the big movements there. Performance fees for the half were down 24%. Investment income was also down. Expenses down a little bit as well associated with some transaction activity and travel and so forth. And then if you look at the Macquarie AirFinance, you can see a significant reduction of contribution from Macquarie AirFinance. That reflects the creation of the joint venture, in which we have a 50% interest, so that was created in the first half of FY '20. So you're seeing the full period effect of that joint venture. It also reflects our share of the losses coming through the Macquarie AirFinance business, reflecting the challenging conditions for our airline clients, together with some impairments associated with some of the assets in that portfolio. And that's partly offset by the increase in management fees we're getting from management of that Macquarie AirFinance joint venture. And then on the right-hand side of the chart, you can see the gain that we realized on Macquarie European Rail assets. We talked about this at the full year results. And of course, that settled during the period. And we realized a significant gain on those assets. That was pleasing to see it come through. In terms of the assets under management down at $555 billion, largely reflective of the foreign exchange movements, as Shemara talked about. In terms of equity under management, just under $140 billion. You can see the unfavorable FX movements coming through there. Really pleasingly, we raised $8.9 billion of new capital across a diverse range of our funds in a range of geographies. So that's really pleasing to see the clients and our investors there stepping up to continue to invest in our infrastructure and real asset product around the world. In terms of the Banking and Financial Services business, you can see for the period, down 18% from where we were in the first half of FY '20. Personal banking, up in terms of its contribution to the result. That's reflective of an average increase in loan volumes of 31% in that mortgage part of that business, offset by pressure on the deposit margin in that business, together with lower vehicle finance and lower margins in the vehicle finance component of our personal bank. From a business banking viewpoint, we talked about this at the full year results. Obviously, significant pressure on deposit margins there. And you can see those deposit margins, again, affecting the first half result. Partly offset by the growth in average loan volumes in the business bank, up 13% on the half and in deposits, up 6%. You can see the credit and impairment charges that I talked about previously. And you can see an increase in the expenses there coming through, and that's a function of us investing in more people to support clients through COVID-19, also investing in people to make sure that the offering to our customer base is as good as it can possibly be. Our response time is obviously a very important part of the growth in that business. We're also continuing to invest in compliance and regulatory change. And of course, making sure our technology investment is up to scratch, particularly in our wealth management business. In terms of the underlying drivers, you can see on the right-hand side, vehicles obviously continue to fall. And that's partly a reflection of the roll-off of a previously acquired book, but also new car sales obviously continue to be very subdued across the country. We're putting aside the vehicles. We're seeing a growth in home loans, we're seeing a growth in our deposits and growth, of course, on our funds on platforms. So it's pleasing to see those underlying drivers of the business continuing to perform. Another slide that we put in at the full year results that we thought would be useful updating for people at the half year is just an overview of the BFS portfolio and credit position. You can see there the loan assets, up 5% from where we were at 31 March 2020. You can also see the step-up in the expected credit loss provision as a proportion of our credit risk-weighted assets. So we have 1.32% coverage at the full year. We're now at 1.43% coverage at the half. In terms of the underlying collateral value, as people will be aware in our business bank side, we're largely secured against residential property, commercial property and diversified cash flow. So we feel good about the security that's underpinning our small and medium enterprise lending business. And then on the home loan side, of course, we have -- as we have seen for some time, a lot of the growth has been that low-LVR product range and you can see that there in terms of 93% of our exposure is below 80% LVR on a dynamic basis. The same as we were at the full year result, 57% on a dynamic basis loan-to-value ratio, so well secured by the value of the underlying property. Pleasingly, on the bottom right, as Shemara mentioned, you can see what's been going with the clients we've had on payment pause over the course of the last 6 months. It peaked at 13% of customers in BFS, now down to less than 3%. So really encouraging to see our customers, obviously, making their way out of payment pause and getting back to regular loan payments. In terms of the market-facing businesses, the -- starting with the Commodities and Global Markets business, 47% of the group's net profit contribution for the half, down 5% on what was a very strong first half of FY '20. I would say that it is reflected in the 2 very distinct quarters. The first quarter for us, so the June quarter for us was characterized by a high level of transaction activity as clients were looking to manage significant risk in their portfolio and transition their portfolios and exposures and also high levels of volatility across a number of our product and commodity categories there. As we move through the half and you saw the liquidity coming through from central banks and the support provided by governments, we saw a lower level of transaction activities and much reduced volatility. So certainly, a tale of 2 quarters. Including -- in terms of the movement across the group, you can see commodities for the period up 10%. Risk management income was down a little bit, although we did see great opportunity to provide solutions to our clients in areas like our resources business, agriculture, global oil, European gas and power and North American gas and power. So a good level of transaction activity, particularly in the first quarter of our half. And in terms of the inventory management and trading, a good period of time there. We did -- I guess, we did anticipate this. We saw a lot of volatility at the back end of our last financial year, and we saw that coming through into the first quarter. So we saw that the team saw good opportunities in the oil business where there was significant volatility. We also saw good opportunities in precious metals, where there's been some dislocation in financial and physical markets. And we also saw some timing of income recognition on our storage and transport contracts coming through in the first half. So good performance from the commodities business within CGM. Financial markets were broadly flat, although I would highlight that the futures business within there was down. That's reflective of reduced interest rates around the world. Good performance from the equities derivatives and trading business during that period and the FIC business, but particularly, I guess, reflective of that volatility we saw in the early part of our half. If you just look at the investment and other income, up $44 million from the first half FY '20. To a large extent, that reflects a reversal of some of the mark-to-market impairments and the fair value through P&L losses we took in the second half of the FY '20 financial year. Credit impairment charge is up nearly 5x from where we were in the first half of FY '20. You can see ongoing investment in operating expenses to support the technology platform within CGM and, of course, to continue to invest in regulation and compliance. In terms of the underlying drivers, client numbers continuing the trend that we've seen over the last few periods, which is very pleasing. Obviously, that's the franchise value that has been created in the CGM business. You can see the specialized and asset finance portfolio coming down a little bit from where we were at 31 March. Partly, that's a reflection of the appreciating Australian dollar between March and where we are today. Partly, that's a reflection of some fund finance being amortized over the period of time as clients look to refinance some of those facilities and partly, the depreciation on operating lease assets coming through the books. In terms of Macquarie Capital, last of our operating businesses, as Shemara said, a significantly lower result than where we were for the first half of FY '20. Not unexpectedly. We did anticipate that investment income would be down significantly from where we saw in the first half of '20, which included a couple of very significant realizations in the green renewable energy space. In this half, investment income down 83% from the first half of '20. Fee and commission income was also down 10%. And we saw equity capital markets activity here in Australia, very buoyant. So it's pleasing to see that, but more than offset by reduced M&A activity around the world in each of the markets in which we operate. It was pleasing to see the operating expenses come down as a reflection of the focus in the equities business on the Asia Pacific region, together with reduced expense on travel coming through the group for the half. In terms of the key drivers of the business, obviously, capital alongside Macquarie Capital as clients is a key part of the business. We saw that come down from $4.3 billion to $3.4 billion at 30 September. Partly, that's the foreign exchange movement. I would draw your attention to the realization chart there, the box there. The dark blue there is the reduced capital we've got against debt positions in Macquarie Capital. And that largely reflects the syndication of underwritten positions that were sitting on our balance sheet at 31st of March and the repayment of some of the revolvers that we saw drawn at March and they're both at -- that underwriting syndication, those revolvers have -- or the syndication of the revolvers' being repaid, I guess, a reflection of the liquidity that we're seeing in markets over the course of the half. Now turning now to just some of the more underpinning aspects of the group away from the operating groups. Cost of compliance continues to go up, up 12% from where we were in the first half of '20. Obviously, a lot of projects going on, not just here but elsewhere around the world that we're investing heavily in and continuing to invest in our business as usual, compliance spend at the same time. A quieter period for term funding raising during the period. Obviously, we saw a big pickup in deposits coming through during the period. So a slightly quieter time from a term funding perspective. We're very happy to get through Tier 2 issuances way out of MBL, just after our full year results. We're also delighted with the support we received on the Macquarie Bank capital notes, too, the hybrid issue we get out of the bank. Again in May, so well supported. And the note there that we drew down, $1.7 billion of the RBA term funding facility during the period. Balance sheet remains well diversified, both in terms of tenor and geography and type. And obviously, quite long in terms of its average duration of 4.7 years. Our growth story coming through on deposits, up about $77 billion, now up 16% for the half. And if you look at that growth rate over time, that's an 11% growth rate for the last -- a compound annual growth rate for the last 7 years. So a really strong deposit story coming through, and that's obviously funding the growth that Greg and the team at BFS are seeing in their loan portfolio. In terms of the loan and lease portfolio, as you can see, the balance down slightly, down $1 billion from where we were at March 2020. We see the growth coming through BFS there, up to $67.7 billion of funded loan assets, partly offset by the reduction in CGM line assets and also Macquarie Capital, that debt capital market exposure I talked about before. And you can see the reduction there in MAM operating lease assets. That's really the disposal of the rail assets coming through in this half. The equity investments, down about 14% -- or funded equity investments, down about 14% from March. Largely, this is a reflection of the FX movements we've seen between our year-end and our half year end. As we've noted, there's been relatively few material realizations during this period. In terms of the regulatory update, lots on the agenda. I'll draw your attention to a couple of things. APRA, in August this year, having announced a delay to the timetable for reform, has announced that public consultation on the policy reforms will recommence in the latter part of 2020, including the reforms associated were unquestionably strong. And obviously, we welcome those discussions continuing. I'd also draw your attention, obviously, the fact that APRA has released some guidance in relation to the dividend payout ratio for ADIs. And as Shemara mentioned, our payout ratio from a group viewpoint was 50% of our profit, which is consistent, obviously, with that guidance. The other thing I'd note is that, as we've said before, we have been in discussion with APRA in relation to resolution planning and intergroup funding. Those discussions are ongoing. But as part of those discussions, we have agreed to transfer our group shared services facility from the entity from the group to the bank. And there's no change to the operations of that entity but does have some changes to capital in the bank, and I'll come to that in a moment. And now update in relation to the German matters. In relation to Brexit, obviously, it continues. The one thing I'd note there is that we have applied for a license in France, and those conversations are ongoing. In terms of the bank capital ratio, you can see a very strong capital ratio at 30th September, 13.5%. I would draw your attention to the pro forma of 12.5%, and I'll explain that adjustment. Firstly, I just talked about the Macquarie Group's services entity transferring from the group to the bank. That's about 50 basis points of that adjustment. And the Macquarie Group Limited, the Macquarie Bank Limited directors also declared a dividend of $500 million, the first dividend we've paid out of the bank to the group since March of 2019. So the adjustment, that happened on the 2nd of November. So that dividend and the transfer of Macquarie Group Services will reduce that 13.5% CET1 ratio down to 12.5%. Still a very strong common equity Tier 1 ratio for the bank. Our strong liquidity position, as you can imagine, partly reflecting the TFF and the deposits coming through. And in terms of capital management, the only thing I'd mention, I think I mentioned everything else on the way through here. The Board, the Macquarie Group Limited Board has obviously declared the interim dividend. We have the dividend reinvestment plan on it at no discount. And with that, I'll hand over to Shemara. Thank you. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [4] -------------------------------------------------------------------------------- Thanks, Alex. So let me then finish with looking at both the medium-term and the short-term outlook. And starting with the short-term outlook, we, of course, always start with looking at the factors impacting our 4 operating groups. And with Macquarie Asset Management, the base fees, we expect to be broadly in line with FY '20, and that's because, as you've seen, we're able to keep raising funds and investing at a consistent rate, bit historical. But in relation to net other operating income, which includes performance fees, investment income and also operating lease income, we expect that to be significantly down on FY '20. And the big driver of that is the timing uncertainty in relation to asset sales as well as in relation to our aircraft leasing business, Macquarie AirFinance, with very challenging environment clients are facing there. Banking and Financial Services. The big driver there, obviously, is the ongoing provisioning that we're having to make in this COVID-impacted environment as we continue to focus on supporting our clients through it. And in addition to that, as Alex and I have mentioned, the competitive dynamics and the interest rate environment, driving pressure on margins. Now that will be partially offset by the higher volumes we have in the loan portfolios, particularly in the mortgage portfolio and also the funds on the platform, although those vary clearly with market movements. With Macquarie Capital, the big factor impacting that business is the external environment with the pandemic is impacting both the number of transactions successfully completing and the time to complete transactions. And that, to some extent, impacts fee-related income, although we benefited in Australia from the strong equity capital markets environment and the increasing global M&A environment globally should help as well. But the asset realization income, we expect to be significantly down, given the material impact of the market conditions in terms of timing of realizations. Commodities and Global Markets, as we said, strong first quarter, more subdued second quarter. We're expecting the environment that we've experienced in the second quarter to continue through the second half. And so we expect the second half to be significantly down on the first half. But we'd note that we expect a consistent contribution from the annuity-style businesses in there, the specialized and asset finance business and the lending operations. And also, we note that our product and client sector diversification across that business gives us a very strong franchise, just like in Macquarie Capital, the diversity of our franchise as well as the good portfolio of investments we have for the medium term. In terms of Corporate, we expect both the compensation ratio and effective tax rate to be within the range of historical levels and recent outcomes. Turning to the overall group result. We think the market conditions are likely to remain challenging, as Alex mentioned, as well, especially given the unprecedented uncertainty being caused by this worldwide pandemic and the uncertain speed of the global recovery from it. So the extent to which these conditions will adversely impact our FY '21 result is uncertain, and that makes short-term forecasting extremely difficult. And as a result, we're unable to give meaningful guidance for FY '21. We've noted a range of factors that will influence the short-term outlook and result and those in relation to pandemic, the duration and the severity of the COVID-19 pandemic, the uncertain speed of the global economic recovery and the global levels of support that we see from governments and central banks. Also, as usual, the completion rate of transactions, period-end reviews, the geographic composition of the income and the foreign exchange impacts from that, the potential regulatory changes and tax uncertainties and market conditions and the impact of geopolitical events also make forecasting challenging. In terms of the medium term, however, we remain comfortable that we are well positioned, given our deep expertise across a range of diversified sectors, markets, products, coupled with our ongoing program to identify cost savings and drive efficiency, our strong and conservative balance sheet and our proven risk management framework and culture. And the medium-term outlook for each of the businesses is not materially changed. So let me just finish by noting that over the medium term, all these businesses have delivered good return on equity. The annuity-style businesses, an average of 22% over the last 14 years and 24% in this half. And the market-facing businesses, 16% average over the last 14 years and 10% in this half, which has been a very challenging environment, as we discussed. For the group overall, that gives us a 9.5% return on equity in this half after taking into account the $9.4 billion of surplus capital. So with that, I'll hand back to Sam to take any questions you have. Thanks. -------------------------------------------------------------------------------- Samuel John Dobson, Macquarie Group Limited - Head of IR [5] -------------------------------------------------------------------------------- Thanks, Shemara. So the Q&A session, which we're going to now will be facilitated by the operator from Chorus Call. So we'll hand over to the operator. Thank you. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Ed Henning from CLSA. -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- I've just got a couple. Today, you've talked a lot about the pressure on asset realizations and transactions coming through. Can you just give us a little bit more of clarity on just how you're seeing the pipeline at the moment, but also how you're seeing it build through the half in looking to '22? I imagine this half would have included a number of deals that were struck, kind of started pre-COVID. And in that, are you seeing people being more comfortable with doing things virtually? Or is that just still a big headwind for transactions going forward? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [3] -------------------------------------------------------------------------------- Yes, sure. Thanks for the question. I'll comment first, and then let Alex elaborate if he has anything to add. But in terms of activity levels, just to give you some statistics, global M&A activity was down year-to-date this year compared to last year by 25%. And in the U.S., that was 42%. And particularly in large transactions, I think transactions over $10 billion were down 69%. So year-to-date, it's been a very challenged environment for getting transactions done. And as you rightly pointed out, where we already had momentum going in, so a lot of the diligence that happened, et cetera, those sort of processes were able to close and then smaller transactions, sub-$100 million, seem to be closing. And if you look at the U.S. bank results, they're all noting that although they had a strong period in ECM and investment-grade DCM, the fees from advisory were down a lot. Having said that, we are seeing in the U.S. and Australia as well the number of transactions that have kicked off starting to increase. So I think people are adapting and being more able to use drones for doing diligence, engage with management teams virtually, et cetera. So the number of transactions in the pipeline is picking up. What we have to wait and see is what the completion rate of that will be. But certainly, in both Macquarie Capital and MAM, we have transactions in the pipeline that we're looking to complete over the second half of the year. The impact of the delay of the first half will definitely have impact on the full year. But we're waiting to see what the completion rate is. As you know, the environment is so uncertain because we've had case numbers surge again in the U.S. and across Europe and in the U.K., and we've gone into second lockdowns in many of the big European markets and in the U.K. So it's unfortunately a time where we're having to wait and see. Things were starting to pick up, but we don't know at the moment whether that will again rein back in with what's happened in the Northern or the Western Hemisphere, as they go into winter as well. Anything, Alex, you want to add? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [4] -------------------------------------------------------------------------------- No. -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [5] -------------------------------------------------------------------------------- That's good. And just a second, a bit more of a mechanical question, potentially for you, Alex. If we look at an equity stake is IPO'ed and some of the stock is escrowed, do you have to -- with that stop at still escrow, do you have to use the IPO price and mark-to-market that on your books? Or can you hold it at historical cost? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [6] -------------------------------------------------------------------------------- Well, if you -- I mean, the way the accounting works here, if you don't change classification, then obviously, you realize your -- if you were to sell down part of that stake into an IPO, you'd realize the profit or loss on that sell-down. And then if you didn't change [the classification you] wouldn't have to do anything with the balance of your interest. If we do change the classification, obviously, you've got to remark the remaining interest to fair market value, and there's some judgment into that fair market value. But that's the way the accounting works. -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [7] -------------------------------------------------------------------------------- So that just means if you move it for available for sale or something, you have to change the classification? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [8] -------------------------------------------------------------------------------- Right, change it really from consolidation to equity accounting or to fair market value are really the 3 characteristics sort of categories that you've got now under IFRS9. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- The next question comes from Jonathan Mott from UBS. -------------------------------------------------------------------------------- Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [10] -------------------------------------------------------------------------------- Questions about the commodities business, and we talked about this even a couple of times over the last 6 months, but a very good result over the half. But you talked about the first quarter being very good and the second quarter, not so good. Even to break it down, it really appears that it was March, April and maybe into the start of the May when you really got this dislocation and transaction activity being extreme and that it really slowed down. So can you give us a bit more of a breakdown on how much of the revenue was delivered in that first 6 to 8 weeks of the crisis? And really for this business, should we think about this and I'll put this in the context about polar vortexes in the past and other spike events, including this period when the oil price went negative for a period of time. Is at a lower base revenue and you really rely on the spike events to really give you that kick in the revenue that comes through when client activity picks up, and is that why you're so cautious about the second half because unless you have another spike event being a weather pattern or another dislocation, it's going to be a lower benchmark going forward. And then I've got a second question. if I could. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [11] -------------------------------------------------------------------------------- Yes. So Jon, it varies for each of our 4 operating businesses in terms of what they experienced through the various months of this first half. Banking and financial services, obviously, consistently growing the book, but having to take provisions consistently on the existing book and as the book grows. Macquarie asset management, consistent base fees, but the performance fees, obviously, it depends on the timing of -- we had the WCA waste asset signed actually on the first of October. But under the accounting standards, we're recognizing fees on that as it becomes highly probable. So that was lumpiness of timing of asset sales. And then the aircraft finance environment has actually become more and more challenging as time has gone on and the pandemic has played out. And then in Macquarie Capital, it's really the investment realizations where we still have not had meaningful realizations come through there. We'll have to see how the second half plays out. But I think your question mostly related to the commodities and global markets business, which did have the game of 2 halves in terms of the first quarter versus the second quarter with the volatility in oil, et cetera. I'm going to hand over to Nick O'Kane, who's sitting here in the room with us, but I'll just make the preliminary comment that basically, what we're seeing in CGM and Alex showed you in the client numbers is the underlying franchise continues to grow across commodities, across clients, across sectors in financial markets. And the volatility impacts that up and down from period-to-period with a strong growing underlying. Nick can comment on what volatility, generally on the business, Nick, and what you see in medium-term and the volatility from half to half. -------------------------------------------------------------------------------- Nicholas O'Kane, Macquarie Group Limited - Head of Commodities & Global Markets [12] -------------------------------------------------------------------------------- Yes. Thanks, Shemara. Jonathan, to your question, 1 of the points, which I don't think we've discussed yet is the impact of working from home that our clients experienced in that second quarter. And that was one of the things that impacted our activity levels across CGM as much as the underlying volatility that we saw in the first 3 months of our financial year. So as our clients adapted to being able to work from home, we saw activity levels reduce, particularly when the summer holidays or summer vacation in the northern Hemisphere started to take shape as well. We started to see some of those customers return and adapt to those those conditions. But that was one of the things that impacted our results over the first half, particularly that differentiation between our results in Q1 versus Q2. Going forward as we look to the second half, we have seen activity continue to be somewhat subdued when compared to the first quarter. Albeit subject to underlying volatility in the marketplace. But at this point, we're seeing similar types of activity levels as we saw in the second quarter. And for the foreseeable future, we expect that to continue. -------------------------------------------------------------------------------- Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [13] -------------------------------------------------------------------------------- And a follow-up question, if I could probably for Alex. You talked on Slide 36 about syndicated debt [and that] being run down. And you said, I just wanted to get a feel for why you're doing this. Is this a change in risk tolerance, a change in risk profile that you've decided to get out a few of these positions and reduce your exposure within that operation because there's quite a substantial change in strategy from first [look]. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [14] -------------------------------------------------------------------------------- Thanks. Jon. No, not so much has changed in strategy. I mean, obviously, around 31st of March, we -- it was a period of extreme volatility, as you know. And so at that period of time, we had some underwritten positions on the balance sheet that were awaiting syndication. And the other thing we saw with our clients then is consistent with others in the market. We saw a drawdown in the revolver, the exposure there. And so the combination that draw down on the revolver and those underwritten positions that were awaiting syndication really drive up the utilization of capital on the debt piece. And what we saw during the first half as liquidity came back into the market. Obviously, we saw the underwriting positions being syndicated. We saw those revolvers being repaid. So not so much a change of the strategy, but just the circumstances that were affecting the balance sheet or the business at 31 March versus where they are today. I mean the one thing that is happening out there is -- and Shemara talked about it before, is that we have seen a much reduced level of M&A activity, particularly from the private equity sponsors and a key customer segment for us, particularly in the U.S. is our private equity sponsor business, both M&A and DCM. So we've seen lower volumes of DCM, consistent with the level of transaction activities in that segment. So I don't think it's a strategic decision, more of the circumstances that we faced at that 31 March versus where we are today. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [15] -------------------------------------------------------------------------------- And I was just going to briefly to that, that the Macquarie Capital business in the U.S. does focus a lot on the sponsor market, as Alex said, and hence, the single B leverage loan market and the sponsor activity is actually down even more than the M&A activity I mentioned. It's more than halved. It started picking up in the second quarter of our financial year, but deals not completed yet. And that's why I think also the debt capital markets book, not only was it big coming in to this because we had a couple of large deals that we were able to syndicate, but also the volume coming in has been lower over this first half financial year. But it's a business we're still in. And as Alex mentioned, as well, Macquarie Capital has been able to invest in the principal finance business in [test] as well, and that's growing the book a bit. If there are questions on the [line,] we've got Florian Herold on the [line] from that business, that we can give you more color on. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- And the next question comes from Matthew Wilson from Evans & Partners. -------------------------------------------------------------------------------- Matthew Wilson, Evans & Partners Pty. Ltd., Research Division - Executive Director of Financials [17] -------------------------------------------------------------------------------- I have 2 questions, if I may. Firstly, I'm looking beyond this current pandemic environment. Could you sort of walk us through or talk us through how Macquarie and its various businesses would perform in the scenario of higher nominal growth rates, but on [on this question of lower real] rates. It seems to be the objective of global central base? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [18] -------------------------------------------------------------------------------- Yes, sure. We -- I guess, we'd look at that business by business. So in our banking and financial services business, growth in nominal rates is good for the earnings of that business because we'd have expansion in NIM in this sort of environment with the nominal rates coming off the large deposit margins are down and also the spread you can charge as a percent of underlying rates are impacted. But ultimately, the way that business is competing is trying to do service and the investment we've made in technology to continue to win share. And that we think medium-term is a big driver of how that business grows. In the asset management business, where we're investing in things like infrastructure, et cetera, whatever the nominal rate, I guess, what we're trying to deliver to investors is real return through using our expertise in identifying assets, managing them well to drive outcomes, et cetera, and delivering real value to the communities in which we invest. So we have shown in a rising real rate environment that those businesses perform better. We could do the work as well on the nominal rate business, but because they're high profit margin businesses, if you have an environment where revenues and costs are growing at the same rate, earnings are growing at a faster rate. So I imagine a strong nominal rate environment would help that business in terms of asset performance, performance fees, et cetera. Nick, should I get you to comment on the nominal versus real on commodities? Anything you particularly want to note? -------------------------------------------------------------------------------- Nicholas O'Kane, Macquarie Group Limited - Head of Commodities & Global Markets [19] -------------------------------------------------------------------------------- I'm not sure that is something that would particularly impact our business any differently from the other kind of factors that we normally look to that determine the growth of our business and the activity levels of the underlying customers. So we would still look to the level of activity being driven by certain amounts of volatility in particularly our commodities business, but also in our equity derivatives business and some of our futures businesses as well. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [20] -------------------------------------------------------------------------------- Yes. And then I know Michael Silverton is on from the investment bank. But I think in the investment bank, it's really exposed to activity levels and transaction volumes in terms of the fee revenue and what our clients are needing. And I can't imagine that's going to be heavily impacted by nominal versus real rate growth. And then the principal investing, again, like in the asset manager, what we're doing is we're investing in things like development projects in renewable energy, where we're putting a small amount of capital in and then looking to make a gain by converting that into an operating asset where there's huge demand for those sorts of assets and making multiples of the investment we've made. So it's more a human capital that we get paid for in both the asset manager on performance fees in the investment bank. Michael, given you're dialed in from the U.S., is there anything you want to add on the investment bank impacts? -------------------------------------------------------------------------------- Michael John Silverton, Macquarie Group Limited - Global Co-Head of Macquarie Capital [21] -------------------------------------------------------------------------------- No, there's nothing I'd add to that. -------------------------------------------------------------------------------- Matthew Wilson, Evans & Partners Pty. Ltd., Research Division - Executive Director of Financials [22] -------------------------------------------------------------------------------- Okay. And then the second question, if I may. It's not huge, but assets under management in Asia fell by 43% half-on-half. Is there any change in strategy in assets in that region? Or it's just a change in divestments or currency? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [23] -------------------------------------------------------------------------------- No. Matt, it's obviously a bit currency, but mostly that Shemara referred to those contractual insurance assets that we -- that left us this half. That was basically a portfolio in Asia. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Your next question comes from Brendan Sproules from Citi. -------------------------------------------------------------------------------- Brendan Sproules, Citigroup Inc., Research Division - Director [25] -------------------------------------------------------------------------------- I have a couple of questions. Just firstly, on the cost base. It looks like in the half, you had a pickup in people that you've allocated to the bank to help customers, but also at the corporate center, working on compliance and technology-related. But just given the very subdued activity, I guess, across all your business units, what's the outlook in terms of the cost in terms of the cost base? Is this a time where you will start to try and manage that down given activity levels are much more subdued? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [26] -------------------------------------------------------------------------------- Do you want me to? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [27] -------------------------------------------------------------------------------- Sure. Well, look, thanks, Brendan. You're right. I think the description is the right description. Obviously, we're adding people in the corporate center to support the ongoing programs of work and compliance and regulation changes and so forth. We've also added people in the banking and financial services business, which we think is really important, both in terms of supporting customers through COVID-19. We see the experience of that, but also if you look at the growth rate in that business, I think it's a reflection of the level of customer service. And so Greg and the team are investing heavily in that part of the business as well. So we're very comfortable with that. In terms of the outlook, I mean, it's obviously a constant exercise. So each of the group heads and within each of those groups. The team leads, they are constantly looking at how do you do things more efficiently. And that might be the use of technology. It might be how do you make sure your customer service proposition is configured the right way for the level of activity. So that's an ongoing process. I don't think that's particularly changed as a result of COVID-19 and certainly not from a center-directed viewpoint. It's much more about at a business unit by business unit level. I mean, I guess, we would say that if you look at the results, customer activity, like the top line, if you like, putting aside the impairments is down about I guess, about 6% or 7%, something like that, which in the environment, we feel is a pretty good result. But and so I wouldn't draw the conclusion that the particular customer activity associated with the heightened COVID-19 in this half is changing our medium-term outlook. I think it's still a case that we think the business is well positioned. But it's also the case that we think that the group heads and people in the businesses are actually out there cost saving. They think about how you do things more efficiently and more effectively. -------------------------------------------------------------------------------- Brendan Sproules, Citigroup Inc., Research Division - Director [28] -------------------------------------------------------------------------------- And just a second question, if I may, on your capital position. Obviously, your group surplus continues to roll upwards. And as you've shown in the business unit capital allocations, they've obviously come down as assets have been realized. I mean to what extent do you need to allocate capital now to ensure once we get through this COVID period that you can resume earnings at the trajectory that you had prior to COVID. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [29] -------------------------------------------------------------------------------- Look. It's true we're sitting with a meaningful surplus capital at the moment, which we think is prudent given the COVID environment, both in terms of the uncertainty of downside given what's happening in other parts of the world, but also the potential upside. So usually, when there's dislocation, it's been the time where we've had a lot of opportunity to put capital to work in inorganic opportunities. All our businesses are basically out looking for that sort of opportunity. And as Alex said, that's not driven from the center. We're empowering all of them to go and look at opportunities for the asset manager or the commodities business and the banking and financial services business, all of the investment through inorganic opportunities. At the moment, we're not seeing meaningful dislocation because of the huge stimulus that's there from the central banks and from government supporting economies to an extent, but financial markets through all this. But I would note that when the financial crisis happened, it wasn't immediately that the opportunities came up. We had to spend quite a lot of time reaching out, looking, finding the right things. So for example, the aircraft portfolio that we acquired was 2 years after the financial crisis happened. Similarly, the Delaware investment happened in 2010 after the 2008 crisis. So I think for now, we're giving our businesses the backing in terms of funding capital and empowerment, and they're all actively looking in places where they think there should be opportunity. Ultimately, if we see that transpire, [we need to back them]. If things turn out that markets are much more benign, the downside risks are less challenging, the opportunities are not there, then we can reconsider the surplus. Anything you want to... -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [30] -------------------------------------------------------------------------------- Brendan, I was going to add -- I agree with all of that. I was just going to add that from a time viewpoint, the outcome varies for the groups. I mean, obviously, if you're in MAM and you deploy capital, you're generally getting a return sort of immediately on deployment. Similarly from a BFS viewpoint, obviously, you put more capital added to your loan portfolio, you're getting paid a return on that capital almost straight away. CGM equally, it's obviously a relatively short-term business, so you get some return on capital pretty quickly. Macquarie Capital, I think, is the 1 where probably there is more of a delay in the timing. And that's consistent with what we've talked about before that if you look at the average duration of that portfolio, it's probably 2, 2.5. It obviously varies, whether it's equity or debt, but you get a bit of a delay from from a Macquarie Capital viewpoint. But I think, yes, that's probably only -- where you're really getting some timing differences. And the other thing, Macquarie Capital is doing through the principal finance businesses, they are finding opportunities to deploy capital into debt. And obviously, you're getting a margin on that debt from the day it's deployed. So hopefully, that gives you a sense of the way we think about it. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Your next question comes from Andrew Stadnik from Morgan Stanley. -------------------------------------------------------------------------------- Andrei Stadnik, Morgan Stanley, Research Division - VP [32] -------------------------------------------------------------------------------- I wanted to ask my first question around [Istanbul] investments, please. From the outset of EMS opportunities, Istanbul investments have increased due to COVID. Is this the right impression? And are you seeing high activity levels? And similarly, are you seeing high unrealized values for the assets for the green assets that Macquarie is trying to develop. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [33] -------------------------------------------------------------------------------- Yes. I mean, I'd say in terms of the latter part of the question, Andrew, whether we're seeing high values, it's probably too early to tell. We have a number of realizations that we're looking to make this year like any year. And at the moment, there seems to be good interest in the assets that we're divesting, but until we get to closing some of those. And some of those have been delayed by the pandemic, it's too early to tell. I think structurally, the themes are that we should see increasing interest and increasing price because there's a huge amount of capital looking to get invested in the world, risk-free rates are coming down, anything that can give you a real return is more attractive and then also the big focus towards ESG now is also driving interest in these assets. So to the extent we can be doing more development and construction and delivering these assets in a derisked form to investors, I think we should see growing interest. And the required return rates coming down and the prices going up. At this stage, I'd say it's too early to tell whether that's playing out. We should know over the next couple of halves. In terms of getting invested, our pipeline is continuing. So we're continuing to find things and the reason Macquarie Capital [niche] released capital is because we had more realizations then investments. But often, the investments we're making in development, we're expensing the debit. So there's not huge capital going into the renewable projects unless we like with East Anglia One, buy in to a later stage construction project. But a lot of what we're doing is development projects where the debit is getting expensed. -------------------------------------------------------------------------------- Andrei Stadnik, Morgan Stanley, Research Division - VP [34] -------------------------------------------------------------------------------- And for my second question, I wanted to ask around the asset management business. The guidance is for base is to be broadly flat year-on-year. But there's a much tougher comp coming up in the second half. So the base fees need to increase in the second half. And yet with the Southern Europe rail business, it seems that in assets under management, it might be a little bit lower. So what are we missing? What's going to help the asset management business deliver broadly in line base fees for the full year? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [35] -------------------------------------------------------------------------------- Do you want to go on? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [36] -------------------------------------------------------------------------------- Yes. I mean, there's a couple of factors in there. Andre, obviously, getting the full period effect of the base fees on Macquarie Asset Management -- sorry, Macquarie AirFinance, which will come through during the period. The other thing you're getting, I guess, the confidence that we have to make that statement is investment through the MIRA stable of funds. So they're continuing to invest, and you saw that come through in the first half. And then finally, from a MIM viewpoint, it's really a function of market movements. And yes, we're obviously making some judgment there together with some FX implications. But when you put it all together, we obviously feel like as we said, we feel like base fees will be broadly in line with where we for FY '20. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Our next question comes from Andrew Triggs from JPMorgan. -------------------------------------------------------------------------------- Andrew Triggs, JPMorgan Chase & Co, Research Division - Research Analyst [38] -------------------------------------------------------------------------------- Shemara, just interested on the Macquarie AirFinance business. How significant have rent deferrals been to date and I noted an impairment of the underlying assets, the prospect of further impairment of this business if conditions don't improve in the airline industry? And then second question on CGM. On the -- specifically on the timing of income recognition, I noted that the inventory management and trading line swung from the loss that we saw last year, to quite a strong outcome this period. Has that fully unwound? Or is it still a half or 2 to come of the timing positively impacting that line item, please? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [39] -------------------------------------------------------------------------------- So I'll start, Andrew, thanks with the Macquarie AirFinance question. And look, the situation is really uncertain for the airline sector. It's possibly the worst affected sector by this pandemic. China domestic flyings picked up to where it was before. In Europe, it was looking like it was picking up, but now we're having this next wave come through and more lockdowns on domestic travel. In the U.S., our private jet business is running at 80% capacity. So it starts and stops in terms of what we're seeing with activity levels. We watch a whole lot of the data coming out, IATA information, et cetera, on expectations, but we have to be realistic that they could turn at any point. And so it's difficult to know when the volumes will come back to where they were and what level they'll actually come back to when they come back in terms of will there be medium-term impacts on business travel. We're obviously running a lot of scenarios. We have a large number of airline customers and roughly a couple of hundred aircraft and at the moment, we're finding the higher credit-worthy of those are continuing to pay as normal. They had some period of deferral, but they're back on paying and they're able to meet their payments. And they make up the majority of our customers, but there are others who have sought deferrals and those deferrals have to continue. And we need to watch and see whether they'll come through. What I'd say is that we're comfortable in terms of the debt facilities in that portfolio for now that things are -- covenants are being met, et cetera. And we and our equity partners in that portfolio like the sector and remain committed to it, but we need to assess period by period how it's all performing. So it's a very live issue as to whether we think further impairments will be needed or whether it will pick up. At the moment, we've taken the impairments that we think reflect the current situation and outlook. But we're going to have to keep assessing. And I don't know, Alex, if you want to add more to that. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [40] -------------------------------------------------------------------------------- Do you want me to do the time [interconditional]? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [41] -------------------------------------------------------------------------------- Sure. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [42] -------------------------------------------------------------------------------- So just, Andrew, if that covers your question on math, just in relation to your second question, as you noted, obviously, the inventory management and trading, we had a more challenging period in the second half of FY '20. And part of that was related to as some dynamics in the oil market at the end of the period. Obviously, we saw the oil price come down. You saw the oil going to contango. And we have a timing difference in terms of marking to market oil and storage versus the period over which the storage value actually unwinds. So we saw that coming through in the second half of last year. As you noted in the first half of this year, obviously, some of that storage value is unwound into the P&L. So that's really the at least part of the performance in inventory management and trading associated with that storage contract value coming through. In relation to the timing of income, again, we did see a pickup in income coming through the P&L associated with storage and transport contracts. More generally, there were some contracts that expired during this period of time. So we saw that income coming through. It's also a function of prices at one end or the other of the pipeline. So there is some variability in that. I just think, I would say, we're always carrying a portfolio of storage and transport contracts. And there's a consistent level of differences between economically, the way we economically account for that storage and transport contracts and the accounting. And that's a feature of the physical and financial nature of the CGM business. So yes, we did see some coming through because of the particular contracts that expired during this half. But there's an ongoing portfolio that sort of [exprise] through CGM. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Your next question comes from Brian Johnson from Jefferies. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [44] -------------------------------------------------------------------------------- Alex, I'd just like to confirm something. So specifically on NUIX, if you were to sell down below 50%, it would move from being basically consolidated to equity accounting, which would trigger the mark of all of it. But if you actually retain above 50%, it's only -- you only booked the gain on the portion that you've realized. Am I interpreting that correctly? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [45] -------------------------------------------------------------------------------- Well, the account -- I mean, maybe just go back to what I was saying before, Brian, so from an accounting viewpoint, the judgment that you need to make is whether there's been a change in accounting classification. So did you did a particular asset you owned go from a consolidated position to an equity accounted position. If that's the case, then if you sell down a piece, you need to not only bring to account the income on the portion you sold down, but you also need to remark the piece you're holding in an equity accounting sense. So that's the accounting sort of the underpinning accounting. Obviously, if you fall below the equity accounting level, where the significant influence level, then you need to record fair value through P&L movement. So you're just basically fair valuing your residual interest on a period by period basis and bringing through income or losses according to the movements in those fair values. In relation to the judgment as to whether something is consolidated or equity accounted, it's not something -- there's obviously a judgment in each case. So as we think about all our investments across the portfolio, we're obviously making a judgment as to whether we feel like we've got sufficient -- significant influence to continue to equity account them or whether we've got control, which would require us to consolidate them or whether we had [need those things and cash with that we] value in P&L so it's just -- there's the judgment there. And obviously, we just follow the accounting standards in relation to the application of those rules to any one of our portfolio interests. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [46] -------------------------------------------------------------------------------- Just the next one, Alex, in the period, what was the delta on the annual leave provision? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [47] -------------------------------------------------------------------------------- You can see in the accounts, it's about $60 million. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [48] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [49] -------------------------------------------------------------------------------- And then on the expense. The expense. That's not quite right. The expense you can see through the accounts Brian, which is probably what you're getting at. Obviously, the provision will reflect the actual taking of annual leave, but the increased expense versus the first half was $60 million. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [50] -------------------------------------------------------------------------------- And are you guys trying to encourage our staff to basically reverse that over this period? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [51] -------------------------------------------------------------------------------- Well, I mean, we get -- maybe I'll say it this way. Obviously, we're vitally interested in the well-being of staff. And so we do think that the well-being of staff is added to by them taking their annual leave. But so that's obviously a long-standing view that we that we've had. I mean, obviously, the circumstances in which people find themselves that COVID-19 has made travel challenging, and it's obviously creating an environment where people are spending a lot of time at work. We obviously hope that economies stabilize and health care prices sort of stabilizes and people get the right balance between taking a break and actually working. But I don't know is there any you want to add? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [52] -------------------------------------------------------------------------------- No, I completely support those comments. And I think ironically to an earlier question that was asked. I think the activity levels have picked up for everyone. Greg's team in the banking and financial services business have been working double hard in terms of helping clients through this. Alex's team with what's going on with the pandemic and having to, in our accounts, look at provisioning and expected credit losses, et cetera. The commodities team is working from home. They actually have not just not had anywhere to go on holiday, but have had to be at their desks a lot more, their home desks. So we are encouraging people to take leave, particularly here in Australia, where we're coming into summer now, and we hope they'll be able to take a bit of a break, as Alex says very much for their well-being. But in other jurisdictions, there are use it or lose it provisions. Pretty much everywhere else in the world, Asia, the Americas, Europe and we're actually giving a little bit of leniency to our staff determined by each regional leadership team to allow them a bit more time to take the leave. But if they're not able to take it, ultimately, that leave will expire in all the other jurisdictions. And in Australia, we're hoping, certainly, we're planning to try and get a couple of weeks off over the summer holidays, if there's go to do that. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [53] -------------------------------------------------------------------------------- Shemara, if I could just push my luck with 1 final question, if I may. When you have a look at this result, it's a lot -- the strong A dollar has been a really big drag because as much as we all love Australia, increasingly, Macquarie isn't really an Australian company. Has there been any consideration given -- I'm not talking about moving the headquarters or anything, but to actually change the reporting and the management to basically make it more of a U.S. dollar stock? Because it might be -- it costs money to run to kind of like report in A dollars when clearly, most of the earnings are probably more U.S. dollar-linked. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [54] -------------------------------------------------------------------------------- Yes. Brian, the thing I'd say is in my 30-odd years here, the Australian dollar has moved up and down all over the place from parity to $0.50 and so to move our business based on what we're having at the moment, which is a strong Australian dollar because Australia is performing well through this pandemic and the commodity complexes have done quite well with demand. That can change, and we see it change a lot. So I think, ultimately, we've said that a 10% movement in the dollar has a 7% impact on the bottom line. But ultimately, we're reporting in Aussie dollars. And then a lot of our shareholder base, our retail shareholder base are living in Australian dollars and half of our institutional base are Australian. So whether we report in another currency or not they're needing income in Aussie dollars. So we haven't thought about in reporting of the currency because it is very volatile. It hasn't been a factor yet, but maybe something to consider as our business globalizes more. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [55] -------------------------------------------------------------------------------- Shemara, can I ask do you manage this business as an Aussie business? Or do you manage it as basically where the businesses sit? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [56] -------------------------------------------------------------------------------- We don't manage this business to currencies. Our teams on the ground look for opportunity in their local jurisdictions and then respond. What we do at the center, and Alex is going to elaborate on this is in terms of our funding and our capital we try to reflect our liability side matching the asset and income side. And I don't know if you want to comment further on that, Alex, [or not on currency...] -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [57] -------------------------------------------------------------------------------- I think it's a very good description. Obviously, when we've got a U.S. dollar asset, we try and fund it in U.S. dollars. So any time we can, we get a natural hedge or pounds or any other currency where the asset sits. Obviously, we do some capital hedging so that we're not exposed to Aussie dollar volatility. We're on our required capital against our foreign investment, net investment in foreign subsidiaries. And I guess to that extent, Brian, we're thinking about how we manage our Australian dollar capital exposure through that hedging program. -------------------------------------------------------------------------------- Operator [58] -------------------------------------------------------------------------------- Our next question comes from Brett Le Mesurier from Velocity Trade. -------------------------------------------------------------------------------- Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [59] -------------------------------------------------------------------------------- Shemara, I don't understand you correctly before, I thought you were implying that your dividend payout ratio of 50% was limited by APRA and the Board would have rather paid a high dividend payout ratio. Was that correct? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [60] -------------------------------------------------------------------------------- Not at all. Our Board makes their judgment as to what they think is the appropriate dividend. And but if you look to pay 50%, they take into account a number of factors, including the guidance and the preferences by the regulator. But ultimately, it's a decision by the Board. So there was APRA guidance in relation to the last half. And we, of course, engaged actively with that [plan,] what the Board thought was prudent and make sure the regulator was happy with what we were doing, but that's a Board decision. The Board have confirmed the expectation for the medium-term is a 60% to 80% payout ratio, but that was a decision by the Board on 50%. -------------------------------------------------------------------------------- Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [61] -------------------------------------------------------------------------------- So the objective is to build up capital to potentially take advantage of future market dislocation, which may occur over the next couple of years. I think that's what you were referring to before. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [62] -------------------------------------------------------------------------------- Yes. That's [a --] sorry, I interrupted. -------------------------------------------------------------------------------- Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [63] -------------------------------------------------------------------------------- And if that's an objective, wouldn't you be more inclined to sell more assets sooner rather than later for fear of that dislocation negatively impacting the future asset side? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [64] -------------------------------------------------------------------------------- Yes. Two things I'd say, first of all, in terms of the capital position, yes, it's a little bit on the aggressive side, if I can call it that to look for opportunities to invest. But it's also on the defensive side, in a way, or maybe offensive as opposed to aggressive. Defensive side as well because we are in an incredibly uncertain environment and we think it is prudent to have stronger capital buffers through this period. In terms of selling assets, basically, we sell assets at the time that it makes the most sense for that asset. So if we're doing a development of floating offshore wind farm, it will be at the time when that asset has reached a maturity level where it is most sensible to exit the asset. If the market conditions are not conducive at that time, we might wait a little longer. But in terms of what we're holding on our balance sheet, they're not assets where we'd rush them out the door at the moment if we think we can add a lot more human capital value to that asset and get much bigger return from completing the program that we're on. So there's not a lot of things on our balance sheet that are trading assets where we just split because we make a call on market cycles. But usually more medium-term assets that we are investing in because we think we have some expertise to bring to that asset and value to add, which drives the enhanced return. We tend not to just financially trade assets. Anything you want to add, Alex? -------------------------------------------------------------------------------- Alexander Harms Harvey, Macquarie Group Limited - CFO, Head of Financial Mgt Group & Executive Chairman of Macquarie Group, Asia [65] -------------------------------------------------------------------------------- No, [said well]. -------------------------------------------------------------------------------- Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [66] -------------------------------------------------------------------------------- And just lastly, could you give me a sense as to the timing of the flexibility or the amount of flexibility, for example, is it a year or 2? We know that you would have to sell an asset, which was ready to be sold in your view? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [67] -------------------------------------------------------------------------------- Well, I mean, the year or 2 is probably an appropriate time in our funds in that they have typically a 10 to 12-year life. During the financial crisis, we had examples where investors agreed to extend the life of the fund and delay the sale of assets to a more conducive period because I think they are aligned in wanting to optimize the return. It really depends how long cycles last because I mentioned that we make sure our term funding exceeds our term assets. So we certainly don't want to have to be forced to sell assets because of a liquidity issue or a funding issue. We give ourselves freedom to realize assets at the point where they generate the best return for the risk for the shareholder for our investors. And we have flexibility to go multiple years if we want. I've not seen us historically have to go out a very long time in terms of how long the cycles have lasted. But we have flexibility to do more than 2 years, if needed. Typically, 2 years would be ample. -------------------------------------------------------------------------------- Operator [68] -------------------------------------------------------------------------------- Our next question is a follow-up from Brian Johnson of Jefferies. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [69] -------------------------------------------------------------------------------- Can I just go back to a question that Matthew Wilson asked. Shemara, if we look at the world we're in, we can see governments injecting massive amounts of liquidity in the system funded with debt. So we can also see that interest rates are not going to go up anytime soon. So it kind of feels is a world where we're going to get higher growth, but the value of money is 0. You guys hold real assets. Aren't you -- aren't you basically a massive, massive beneficiary of these dynamics, of this financial repression? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [70] -------------------------------------------------------------------------------- Look, I mean, we respond to every environment and pay the hand that's dealt us, I guess. If we are heading now into a world where we are going to end up with much higher levels of fiscal debt there are many opportunities that will come out of that for us because we also have mounting amounts of savings in the private markets in the developed world, where we've got aging population saving for retirement and in the developing world, where we've got capital growing fast. And we think we have a lot of service to offer intermediating that capital. But particularly in helping the public sector in terms of what they need to discharge, be it infrastructure, be it various services they need to deliver, so that does create opportunity for us to bring that capital in areas where we have expertise. So infrastructure is one of them, renewable energy is one of them. Technology, certain parts of technology that we invest in, edutech, et cetera, Software-as-a-Service. So we think in that environment, those are the sort of opportunities we'll pursue, yes, that's all conducive to many of the offerings we have, even in the banking business where we intermediate capital from depositors and wholesale funders to investing within mortgages certain subsectors of business banking and into wealth investments. We think there's going to be a mounting need for us to help private capital get invested, particularly in programs that would otherwise have been publicly funded as [this core debt] increases. -------------------------------------------------------------------------------- Operator [71] -------------------------------------------------------------------------------- Your next question is a follow-up from Ed Henning from CLSA. -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [72] -------------------------------------------------------------------------------- Just looking at BFS, given the NIM pressure in the space, do you think the volume growth you're seeing coming through and hopefully, you get going in the future, will be able to offset that headwind of the NIM pressure? -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [73] -------------------------------------------------------------------------------- Yes, we've got Greg Ward here, so I'll let him comment. But yes, we can grow volume. I think Greg and his team also really focus on the cost side and driving more efficiency, but really focus on the customer experience as well in terms of driving volume growth and how they compete specializing in subsector. So Greg, did you want to elaborate in terms of what you and the team are. -------------------------------------------------------------------------------- Gregory Colin Ward, Macquarie Group Limited - Head of Banking & Financial Services Group and Deputy MD [74] -------------------------------------------------------------------------------- sure. Thanks, Ed. Yes, there's been some NIM pressure in this half because of all of the interest rate cuts, but also because we've been carrying extra liquidity to be extra careful. And as we sort of grow into using that excess liquidity from all the deposits raised, I think that will relieve some of the NIM pressure. And then the other thing, of course, in this 6 months is on the asset finance side, there's been payment deferrals. And that has the effect of lower income and -- well, no income on those contracts where there's payments deferred, and that presents in the accounts as NIM pressure as well. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [75] -------------------------------------------------------------------------------- But I think he was asking, Greg about how you grow the business in an environment [what an impression is in there]. -------------------------------------------------------------------------------- Gregory Colin Ward, Macquarie Group Limited - Head of Banking & Financial Services Group and Deputy MD [76] -------------------------------------------------------------------------------- Yes. Well, those are sort of some of the one-off factors in this half. So they'll be relieved, hopefully, going forward. And I think we've got a very good platform to be able to grow deposits. And to grow loans. And we shouldn't see -- we should see the NIM normalized once those factors are taken out, and then it will just be driven by by volume growth unless there are future interest rate cuts, which we're currently not forecasting. -------------------------------------------------------------------------------- Shemara R. Wikramanayake, Macquarie Group Limited - CEO, MD & Executive Voting Director [77] -------------------------------------------------------------------------------- And also you get the benefits of scale, I guess, now as you grow because you've got the platform? -------------------------------------------------------------------------------- Gregory Colin Ward, Macquarie Group Limited - Head of Banking & Financial Services Group and Deputy MD [78] -------------------------------------------------------------------------------- That's right. Yes. So we've made all these big investments in our platforms that make it very efficient, as Alex pointed out, there's been some cost pressure in this half, part of that from dealing with the payment pools. That's been a very expensive activity to deal with for customers, and we thought it was right to prioritize that investment to -- at a time of stress for customers, but that hopefully won't won't be an ongoing factor. We moved some of the operations back from overseas as well and there's been a bit of double up on costs from doing that, and that won't be a recurring factor as well. And we've made big investments in digitization of a number of our processes. In fact, this 6 months there's been about 90 new digitizations delivered. So about 15 a month, so there has been a big investment, and we will benefit from those in the years coming forward. -------------------------------------------------------------------------------- Operator [79] -------------------------------------------------------------------------------- There are no further questions at this time. I'll now hand back to Mr. Dobson for closing remarks. -------------------------------------------------------------------------------- Samuel John Dobson, Macquarie Group Limited - Head of IR [80] -------------------------------------------------------------------------------- Okay. Thank you, everyone, for your interest, for your support. And we look forward to catching up with most of you, hopefully, all of you over the next couple of weeks. So thank you very much.