MBL

MBL AT1 Perps

The MBL AT1 perps (BB+/Ba1) which are callable in March 2027 are trading at a yield of >7%. We see this as relatively attractive given the bank level risk that investors are taking.

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.

Chart 1. Relative Value

Source: Bloomberg

The MBL AT1 perps also have a high reset of 5y swap +3.7% if not called, which compares favourably to the WBC perps (5y swap +2.9%). The 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 its banking unit had to turn to Australia’s central bank for support.

Macquarie has 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 has been conspicuously successful and is a global leader. It has a significant resources and commodities-related business, but 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.

Chart 2. Comparable Bonds

Source: Bloomberg

Financial Metrics (FY22)

Macquarie produced a particularly strong FY22, with net income increasing 56% yoy to a record AUD4.8bn. All of its main divisions performed well, with a profit underperformance from Macquarie Asset Management due to integration costs related to its acquisition of Waddell & Reed and others.
Net interest income was up 30% yoy to AUD2.9bn and net trading income was up 15% yoy to AUD3.0bn, driven by increased risk management income − particularly in O&G, power, resources, and agriculture. Fee and commission income was up a substantial 33% to AUD6.9bn.
Commodity and Global Markets (CGM) put in a strong performance with operating income and net profit contribution up a substantial 32% and 50% respectively. Volatile markets in O&G, power, and agriculture commodities led to higher client hedging activity.
Macquarie Capital (MC) operating income and net profits contribution were even better than at CGM, up 87% and 269% respectively, thanks to substantially increased revenues through asset realisations, as well as through improved M&A and DCM fee income.
Asset quality has shown a marginal improvement, with the impairment charges declining 3% yoy to AUD0.5bn.
Capital levels are comfortable, in part thanks to the AUD2.8bn equity raise in October 2021. At the bank group level, the Level 2 CET1 ratio is 11.5% (internationally harmonised 14.6%), down roughly 70bp from 12.2% at Q3 2022.

Chart 3. 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
Source: CreditSights

Chart 4. 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%