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Moody's affirms Macquarie's ratings and stable outlook.

Summary: Moody's believes the regulatory and political framework in Australia will continue to be favorable

Moody's Investors Service has today affirmed the

A3 long-term senior unsecured debt rating of Macquarie Group Limited

(MGL). It has also affirmed the A2 long-term senior unsecured debt rating

of Macquarie Bank Limited (MBL) and the A3 long-term issuer rating of

Macquarie Financial Holdings Limited (MFHL). The outlook on ratings

assigned to MGL, MBL and MFHL (collectively Macquarie) remains stable.

A full list of the affected ratings can be found at the end of this press



"The rating affirmation reflects Macquarie's progress in orienting its

operations towards lines of business that have historically been

relatively more stable. However, the firm remains reliant on capital

markets activities for a meaningful portion of firm-wide profits," says

Ilya Serov, a Moody's Senior Credit Officer.

"While the recent performance of Macquarie's capital markets businesses

has improved, they remain subject to a variety of earnings pressures.

Furthermore, the firm's opportunistic approach to business strategy could

result in a reversal of these trends if management identified new

business opportunities in capital markets that it considered to be more

favourable", Serov adds.

In Moody's view, Macquarie's shock-absorbing capacity has been

strengthening, reflecting the rising contribution of earnings sources

that have historically been more stable for Macquarie -- such as

Macquarie Funds Group, asset finance and its traditional banking

businesses -- which offsets the inherent volatility of its capital

market-facing operations. "In addition, Macquarie's risk appetite in

capital markets appears contained: its trading revenues, while weighted

toward the commodities business, have historically been less volatile

than trading revenues at other capital markets firms", says Serov.

Macquarie's ratings also reflect its resilient balance sheet. The firm

has historically maintained a cautious approach to its liquidity policy,

ensuring it is able to meet all of its obligations for a period of 12

months, assuming no access to new funding sources and substantial


Macquarie has also run significant capital buffers. As at March 2014, MBL

reported a Basel III Common Equity Tier 1 of 9.6%, calculated in

accordance with Australian Prudential Regulation Authority's standards,

and 11.4% on a Basel III internationally harmonised basis. For its

non-bank operations, Macquarie holds additional capital calculated on the

basis of an economic capital adequacy model, reviewed by APRA. On an

overall group basis, MGL maintains a surplus to minimum capital

requirements of AUD 1.75 billion, a decline from AUD 2.1 billion recorded

in September 2013, primarily due to the in-specie distribution of its

stake in Sydney Airport.

"We continue to regard Macquarie's balance sheet position as a central

support to its credit profile and a strength relative to its peers", says

Serov. "However, we note that the rapid growth of longer-dated and

funding-intensive products could, if unchecked, stretch the firm's

balance sheet.

"Equally, the trend toward smaller capital and liquidity cushions would

be detrimental to the firm's manoeuvrability. How Macquarie chooses to

deploy its balance sheet as its business model evolves is a key credit

consideration", Serov adds.

In Moody's view while Macquarie's increasingly diverse business profile

and ability to respond swiftly to market opportunities have benefited the

firm in the past, it has come at the expense of growing complexity and

elevated risk management challenges.

Moody's notes Macquarie's well-embedded risk culture, as well as the

discipline displayed by the firm with regard recent acquisition bids

where Macquarie was ultimately an unsuccessful under-bidder. However,

Macquarie also retains vulnerabilities associated with its capital

markets businesses, such as the confidence-sensitivity of its customers,

a high degree of interconnectedness, and opaque and rapidly changing risk


"Although Macquarie's risk challenges are considerable, particularly as

the group grows larger or pursues further opportunities to grow by

acquisition, its track record and its ability to limit earnings

volatility are an important support to its current rating,", says Serov.

Moody's believes the regulatory and political framework in Australia will

continue to be favorable to the interests of bank creditors. Accordingly,

the A2 senior debt rating of MBL incorporates two notches of uplift,

relative to its baseline credit assessment of B1. This reflects the

systemic support the bank is likely to receive, in case of need, as a

consequence of its significant presence in Australia's financial markets

and its deposit base, whose size is on par with Australia's regional

banks. The A3 debt ratings of MGL and MFHL also incorporate uplifts from

this systemic support, in recognition of their close operational

relationship with the bank.

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Publication:EMBIN (Emerging Markets Business Information News)
Geographic Code:8AUST
Date:May 28, 2014
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