MBL T2 Subordinated Issue
MBL are in the market with a new T2 subordinated issue. A potential fixed and/or floating rate AUD10nc5 instrument is expected to be rated Baa3/BBB/BBB+ (Moody’s, S&P, Fitch). We see fair value for a new floating rate issue landing at 3mBBSW + c.260bp based on:
- MBL’s existing AUD floating rate (assuming c.20bp p.a. for a one-year extension to the MQGAU FRN Jun-31/Jun-26 (+231bp)
- Applying a c.20bp discount to the CBA FRN Apr-32/Apr-27 (+223bp) given the rating differential between MBL (Baa3/BBB/BBB+) (Moody’s, S&P, Fitch) and CBA subordinated issues (Baa1/BBB+/A-) (Moody’s, S&P, Fitch)
- In both cases, applying a c.10bp discount for a new issue premium (NIP)
Based on a credit spread of c.260bp and ADSWAP5 (c.3.35%), this would equate to a yield of 5.95% on a new fixed rate issue.
The structure is a standard AUD10nc5 with coupons mandatory and cumulative. Call risk is low as MBL will lose regulatory treatment at year 5. Furthermore, MBL, like the other major banks, received extraordinary support during the GFC − which lowers the probability of a point of non-viability (PONV), either through a conversion or write-down event occurring.
Table 1. AUD T2 FRN Comps: Macquarie Bank Limited AUD Subordinated Notes
| Ticker | Ratings | Size | Structure | Maturity | Call Date | YB Close (27/5) |
|---|---|---|---|---|---|---|
| MQGAU FRN | Baa3/BBB | $750m | 10NC5 | May-30 | May-25 | +216.30 |
| MQGAU FRN | Baa3/BBB | $750m | 10NC5 | Jun-31 | Jun-26 | +231.00 |
| NAB FRN | Baa1/BBB+/A- | $1.175bn | 12NC7 | Nov-31 | Nov-26 | +215.50 |
| CBA FRN | Baa1/BBB+/A- | $700m | 10NC5 | Apr-32 | Apr-27 | +223.30 |
| CBA FXD | Baa1/BBB+/A- | $400m | 10NC5 | Apr-32 | Apr-27 | +179.00 |
In relative value terms, the 5.95% yield offers value for its credit quality, which was tested during the GFC, but managed to steer through the crisis without reporting net losses. Effective risk management helped to limit trading and investment losses. A strong balance sheet mitigated liquidity problems, but the banking unit had to turn to Australia’s central bank for support. Furthermore, credit risk is lower at the bank level as opposed to the group level.
At the bank level, the CET1 ratio looks comfortable at 11.5%. The bank is APRA regulated and more safeguards are in place, with the APRA guided addition of three independent non-executive directors who are to only join the bank board.
Macquarie has had a remarkable record of profitability since its inception, as it has expanded out of Australia into niche markets overseas. Its specialised funds management business focused on infrastructure and has been conspicuously successful and is a global leader. It has a significant resources and commodities-related business, but it has managed risks and returns effectively, and in FY22 was a significant beneficiary of gas, power, and resources volatility.
Along with large investment disposals from Asset Management and Macquarie Capital, FY22 was a record year which will not be repeated in FY23. Capital is adequate and it holds a significant book of equity investments, but ALM is conservative.
Financial Metrics (FY22)
Table 2. Income Statement
| AUDmn | 2H22 | 1H22 | % Chg | 2H21 | % Chg | FY22 | FY21 | % Chg |
|---|---|---|---|---|---|---|---|---|
| Income Statement | ||||||||
| Net interest and operating lease income | 1,703 | 1559 | 9% | 1,383 | 23% | 3,262 | 2,661 | 23% |
| Fee and commission income | 3,435 | 3,462 | 0% | 2,563 | 34% | 6,887 | 5,176 | 33% |
| Net trading income | 2,337 | 1,659 | 41% | 1,995 | 17% | 3,996 | 3,482 | 15% |
| Investment and other income | 2,326 | 1,122 | 107% | 1,340 | 74% | 3,448 | 1,982 | 74% |
| Operating income | 9,801 | 7,792 | 26% | 7,281 | 35% | 17,593 | 13,301 | 32% |
| Operating expenses | -5,716 | -5,069 | 13% | -4,601 | 24% | -10,785 | -8,867 | 22% |
| Pre-impairment op. profit | 4,085 | 2,723 | 50% | 2,680 | 52% | 6,808 | 4,434 | 54% |
| Net credit impairment charges | -74 | -176 | -58% | -27 | 174% | -250 | -434 | -42% |
| Other impairment charges | -205 | -54 | 280% | -50 | 310% | -259 | -90 | 188% |
| Net profit/(loss) from assoc and JV | -2 | 242 | -101% | 51 | -104% | 240 | -3 | large |
| Pre-tax profit | 3,804 | 2,735 | 39% | 2,654 | 43% | 6,539 | 3,907 | 67% |
| PATMI | 2,663 | 2,043 | 30% | 2,030 | 31% | 4,706 | 3,015 | 56% |
| Balance Sheet | ||||||||
| Gross customer loans | 135,775 | 119,370 | 14% | 106,157 | 28% | 135,775 | 106,157 | 28% |
| Impairment allowance | 1,031 | 1,011 | 2% | 1,131 | -9% | 1,031 | 1,131 | -9% |
| Net customer loans | 134,744 | 118,359 | 14% | 105,026 | 28% | 134,744 | 105,026 | 28% |
| Total assets | 399,176 | 348,567 | 15% | 245,653 | 62% | 399,176 | 245,653 | 62% |
| Customer deposits | 101,667 | 91,736 | 11% | 84,199 | 21% | 101,667 | 84,199 | 21% |
Capital ratios on an APRA basis. Asset quality data taken from Pillar 3 reports but not yet available for H2 2022.
Source: CreditSights
Table 3. Balance Sheet
| 2H22 | 1H22 | 2H21 | 1H21 | 2H20 | 1H20 | FY22 | FY21 | |
|---|---|---|---|---|---|---|---|---|
| Total Assets AUD mn | 399,176 | 348,567 | 245,653 | 230,735 | 255,802 | 219,495 | 399,176 | 245,653 |
| Loans/Deposits | 67% | 68.9% | 72.3% | 69.9% | 71.4% | 73.9% | 67.0% | 72.3% |
| Profitability-Calculated | ||||||||
| ROE | 19.6% | 17.8% | 9.5% | 9.5% | 12.7% | 16.4% | 18.7% | 14.3% |
| Net Interest Margin | 0.9% | 1.0% | 1.1% | 1.1% | 1.2% | 1.2% | 1.0% | 1.1% |
| Non-Interest Margin | 4.2% | 4.2% | 4.9% | 3.5% | 3.9% | 4.8% | 4.4% | 4.0% |
| Total Revenues Margin | 5.1% | 5.3% | 6.1% | 4.5% | 5.1% | 6.0% | 5.4% | 5.1% |
| Cost/Income | 58.3% | 63.1% | 62.8% | 71.5% | 63.6% | 69.4% | 60.5% | 66.7% |
| Capital – Macquarie Bank | ||||||||
| APRA L2 CET1 Ratio | 11.5% | 11.7% | 12.6% | 13.5% | 12.2% | 11.4% | 11.5% | 12.6% |
| Tier 1 Ratio | 13.2% | 13.7% | 14.3% | 15.4% | 13.6% | 13.3% | 13.2% | 14.3% |
| APRA Leverage Ratio | 5.0% | 5.3% | 5.5% | 5.9% | 5.7% | 5.5% | 5.0% | 5.5% |
| Asset Quality | ||||||||
| Loan Impairment Charge/Avg Loans | 0.1% | 0.2% | 0.0% | 0.4% | 0.7% | 0.2% | 0.2% | 0.4% |
| Gross Impaired/Total Loans | N/A | 0.7% | 1.0% | 1.4% | 1.4% | 1.1% | N/A | 1.2% |
| Allowance/Impaired Loans | N/A | 65.7% | 52.4% | 50.1% | 47.1% | 42.9% | N/A | 46.9% |
Capital ratios on an APRA basis. Asset quality data taken from Pillar 3 reports but not yet available for H2 2022.
Source: CreditSights
