(The following statement was released by the rating agency) Fitch Ratings-Sydney-July 18: Fitch Ratings has affirmed the ratings of Macquarie Group Limited (MGL) and its subsidiaries Macquarie Bank Limited (MBL), Macquarie Financial Holdings Pty. Limited (MFHL) and Macquarie International Finance Limited (MIFL). A full list of rating actions can be found at the end of this commentary. KEY RATING DRIVERS ISSUER DEFAULT RATINGS, VIABILITY RATINGs AND SENIOR DEBT MBL is the main operating subsidiary of the group and its Issuer Default Ratings (IDRs), Viability Rating (VR) and senior debt ratings reflect a strong risk-management framework, sound liquidity, solid capitalisation and a diverse business mix, both by type of business and geography. These factors help to offset a level of complexity that results from the diverse business mix, specialised operations outside Australia, a greater risk appetite and earnings volatility relative to Australian retail banks, and a high reliance on wholesale funding. MGL is the non-operating holding company of the group and its IDRs, VR and senior debt ratings are driven by similar factors. However, the ratings are notched down once from MBL's ratings to recognise the regulatory focus on protecting depositors in Australia, limited standalone liquidity, and regulatory restrictions on dividends and liquidity transfers from MBL. MGL has sizeable non-banking operations, through MFHL, that are subject to lower regulatory scrutiny than MBL's operations. These capital markets businesses in the non-banking operations also contribute to a greater level of earnings volatility relative to MBL. The group's risk-management framework and controls are strong, which is important given a higher risk appetite relative to domestic retail bank peers. New products and businesses are tightly controlled by a centralised risk management group and regular and extensive stress testing is undertaken. The higher risk appetite is manifested through the types of activities undertaken by the group, although underwriting within each of these areas is generally in line with the industry. MGL is likely to remain an opportunistic acquirer, although only in areas that build on existing operations - the group does not have an appetite for acquisitions of businesses unrelated to current activity. Fitch expects the funding and capital impact of any large acquisition to be offset through new capital and funding facilities being raised specifically for each transaction - this has been the group's approach historically. The group has a strong reliance on wholesale funding but manages risks associated with this well through relatively conservative liquidity management. MGL's liquidity risk appetite is set so that it is able to meet all of its obligations over a 12-month period with no access to funding markets, and a modest reduction in the group's core businesses. MBL's liquidity risk appetite varies only in that it assumes constrained access to funding markets rather than no access. MBL held AUD24 billion of cash and liquid assets at the end of the financial year to 31 March 2018 (FYE18), while MFHL held AUD2 billion. MFHL also had AUD13 billion on deposit with MBL. These balances more than covered FY19 wholesale debt maturities. In addition, MBL reported that its daily average Basel III liquidity coverage ratio for 4QFY18 was 162%, and its net stable funding ratio was 112% at FYE18. Liquid assets are held by the operating subsidiaries, leaving limited standalone liquidity at the holding company. Fitch expects solid capital buffers to be maintained at both MGL and MBL. These buffers should allow MBL to easily meet higher minimum regulatory capital requirements, including the final Basel III rules in Australia, which are currently planned to be implemented from 2020. The group held a surplus of AUD4.2 billion over regulatory requirements at FYE18 (equivalent to 28% of the minimum requirement), while common equity double leverage was low at 101%. MBL's Fitch Core Capital ratio was 12.3% at FYE18, while its Basel III leverage ratio calculated using the Australian regulator's approach was 6.0%. Fitch expects MGL's earnings to remain more volatile than that of Australian retail banks due to the group's greater exposure to investment banking and other market-oriented businesses. These activities accounted for about 30% of MGL's net profit (excluding central corporate revenues and costs) in FY18. However, this has fallen from about 80% a decade ago as the group has grown its lending, leasing and asset management activities, meaning earnings should be more stable than before the global financial crisis. SUPPORT RATING AND SUPPORT RATING FLOOR MGL's Support Rating and Support Rating Floor reflect Fitch's view that support from Australian authorities cannot be relied upon if needed. The agency believes that if support were provided to the group it would most likely be through the regulated bank, MBL. MBL's Support Rating and Support Rating Floor reflect a moderate probability of support, given its position as Australia's fifth-largest bank by total assets, that it is the only non-major bank that is subject to the Australian government's bank levy, and that it is a key player in the domestic financial markets. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES MBL's subordinated debt is notched once from its VR, which includes zero notches for non-performance risk as this is already captured by the VR, and one notch for loss severity. SUBSIDIARY AND AFFILIATED COMPANY MFHL's IDRs are aligned with those of its parent, MGL, to reflect that it is a key and integral part of the group's business, undertaking the core non-banking activities. In addition, if MFHL were to default it would constitute a huge reputational risk to the parent and very materially damage its franchise. MIFL's IDRs are notched down once from its parent, MBL. MIFL is a relatively small component of MBL, providing finance to Macquarie entities that MBL may otherwise be restricted from financing due to regulatory limits. It has no external funding. RATING SENSITIVITIES ISSUER DEFAULT RATINGS, VIABILITY RATINGS AND SENIOR DEBT A downgrade of MGL's and MBL's IDRs and VRs is likely if the group's risk-management framework and solid approach to liquidity and capital were to weaken, because this would leave both entities susceptible to increased market volatility. Serious reputational issues could also result in negative rating pressure. MGL's ratings may also be pressured if there is a large and sustained increase in common equity double leverage, although Fitch does not expect this to occur. There is limited upside rating potential given the group's specialised franchise outside Australia and the earnings volatility inherent in the market-oriented operations. SUPPORT RATING AND SUPPORT RATING FLOOR MGL's Support Rating and Support Rating Floor are already at the lowest level assigned by Fitch and so cannot be downgraded further. An upgrade appears unlikely as it would require a change in the regulatory focus in Australia from protection of bank depositors to a broader focus on group regulation. The Support Ratings and Support Rating Floors of MBL are sensitive to any change in assumptions around the propensity or ability of Australian authorities to provide timely support. Fitch will reassess the propensity of Australian authorities to support financial institutions once there is greater clarity around the structure of loss-absorbing capital and resolution. A change in the ability of the Australian authorities to provide support, which is likely to be reflected in a downgrade of the Australian sovereign (AAA/Stable), may also result in a downgrade of MBL's Support Ratings and Support Rating Floors. Negative action will not have a direct impact on MBL's IDRs, which are currently driven by its VR. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of MBL's subordinated debt are sensitive to the same factors that influence its VR. SUBSIDIARY AND AFFILIATED COMPANIES Any change in the propensity and/or ability of the respective parents to provide support to MFHL and MIFL is likely to result in changes to each entity's IDRs and Support Rating.
The rating actions are as follows: Macquarie Group Limited (MGL): - Long-Term IDR affirmed at 'A-'; Outlook Stable - Short-Term IDR affirmed at 'F2' - Viability Rating affirmed at 'a-' - Support Rating affirmed at '5' - Support Rating Floor affirmed at 'No Floor' - Senior unsecured long-term rating affirmed at 'A-' - Senior unsecured short-term rating affirmed at 'F2' Macquarie Bank Limited (MBL): - Long-Term IDR affirmed at 'A'; Outlook Stable - Short-Term IDR affirmed at 'F1' - Viability Rating affirmed at 'a' - Support Rating affirmed at '3' - Support Rating Floor affirmed at 'BB+' - Senior unsecured long-term rating affirmed at 'A' - Senior unsecured short-term rating affirmed at 'F1' - Subordinated debt affirmed at 'A-' Macquarie Financial Holdings Pty. Limited (MFHL): - Long-Term IDR affirmed at 'A-'; Outlook Stable - Short-Term IDR affirmed at 'F2' - Support Rating affirmed at '1' Macquarie International Finance Limited (MIFL): - Long-Term IDR affirmed at 'A-'; Outlook Stable - Short-Term IDR affirmed at 'F2' - Support Rating affirmed at '1' Contact: Primary Analyst Tim Roche Senior Director +61 2 8256 0310 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney, NSW 2000 Secondary Analyst Bert Jansen Director +61 2 8256 0345 Committee Chairperson Heakyu Chang Senior Director +822 3278 8363 Media Relations: Leslie Tan, Singapore, Tel: +6567967234, Email: leslie.tan@fitchratings.com. 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