Fitch Affirms Macquarie Group at 'A-', Macquarie Bank at 'A'
KEY RATING DRIVERS
IDRs, VRs AND SENIOR DEBT
MBL is the main operating subsidiary of the group; and its IDRs, 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 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 once from MBL's ratings to recognise a higher risk profile due to its exposure to unregulated non-banking operations through MFHL, a greater level of earnings volatility - again due to MFHL - and limited standalone liquidity at the holding company.
MGL has a strong risk-management framework in place, which helps to offset the group's higher risk appetite relative to domestic retail bank peers. The balance sheet has expanded strongly since 2012, largely through the group's lending and leasing activities and in part due to acquisitions, particularly in motor vehicle finance and aircraft-operating leases. Fitch expects MGL to remain an opportunistic acquirer, with the funding and capital impact to be offset through management raising new capital and funding facilities specifically for each transaction - this has been the group's approach historically.
The Australian mortgage portfolio has also increased strongly - largely organically - from a low base. This portfolio is less seasoned than those of many peers, meaning that MBL's asset quality may be more susceptible to a downturn in the Australian housing market. This is not Fitch's base case, although macro-economic risks are increasing - house-price growth has outstripped wage growth for a sustained period, which is putting pressure on affordability, while potential oversupply in some segments of the market could hurt house prices over the next 12-18 months.
Liquidity management at the operational entities is strong, which helps offset both a high reliance on wholesale funding and the increased balance-sheet. 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. MGL held AUD30.4bn of cash and liquid assets at 31 March 2016 (FYE16), with AUD28.9bn of this held by MBL - these balances more than covered FY17 wholesale debt maturities. In addition, MBL reported that its average Basel III liquidity coverage ratio for Q1FY17 was 166%. Liquid assets are held by the operating subsidiaries, leaving limited standalone liquidity at the holding company.
Fitch expects both MGL and MBL to maintain solid capital buffers, which helps to counter the group's risk appetite. The group held a substantial surplus over regulatory requirements at FYE16, while common equity double leverage was low at 103%. Internal capital generation has generally been sufficient to meet organic growth. MBL's Fitch Core Capital ratio was 11.5% at FYE16, while its Basel III leverage ratio calculated using the Australian regulator's approach was 5.5%. The regulatory increase in the minimum average risk-weight for Australian mortgages from 1 July 2016 should have only a modest impact on MBL's capital ratios.
Fitch expects MGL's earnings to remain more volatile than Australian retail banks due to the group's business mix. The increase in lending and leasing activities, as well as asset management, has helped improve the stability of the group's earnings. However, investment banking and other market-oriented businesses remain a key part of MGL's franchise - earnings from these businesses are reliant on market conditions.
The impact of Brexit on MGL's businesses remains uncertain, but the operating environment has a lower influence on MGL's and MBL's Viability Ratings relative to other factors.
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 and a key player in the domestic financial markets.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
MBL's subordinated debt is notched once from its VR - zero notches for non-performance risk as this is already captured by the VR, and one notch for loss severity. The Tier 1 capital securities of MBL are notched five times from the bank's VR - two notches for loss severity, and three notches for non-performance risk to reflect fully discretionary coupon payments.
SUBSIDIARY AND AFFILIATED COMPANY
MFHL is a core subsidiary of MGL, undertaking the group's non-banking activities. Its IDRs are aligned with those of MGL. MIFL is a strategically important subsidiary of MBL, providing finance to Macquarie entities. Its IDRs are notched once from those of MBL.
RATING SENSITIVITIES
IDRs, VRs AND SENIOR DEBT
A weakening of the group's robust risk-management framework and solid approach to liquidity and capital would leave both MGL and MBL susceptible to increased market volatility, and would be likely to result in a downgrade of the VRs and IDRs of both entities. Serious reputational issues could also result in negative rating pressure. 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
The Support Ratings and Support Rating Floors of MGL and MBL are sensitive to any change in assumptions around the propensity or ability of Australian authorities to provide timely support. No change to the propensity of the authorities to provide support appears imminent despite global moves, although Australia's membership of the G20 could mean some lessening of support in the medium term.
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 the Support Ratings and Support Rating Floors. Negative action on the Support Ratings and Support Rating Floors of MBL will not have a direct impact on its IDRs, which are currently driven by its VR.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The ratings of MBL's subordinated debt and Tier 1 capital securities 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 debt: affirmed at 'A-'; and
- Short-term debt: 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 debt: affirmed at 'A';
- Market linked securities: affirmed at 'A(emr)';
- Short-term debt: affirmed at 'F1';
- Subordinated debt: affirmed at 'A-'; and
- Macquarie bank exchangeable capital securities (XS0763122909): affirmed at 'BB+'.
Macquarie Financial Holdings Pty Limited (MFHL):
- Long-Term IDR: affirmed at 'A-'; Outlook Stable;
- Short-Term IDR: affirmed at 'F2'; and
- Support Rating: affirmed at '1'.
Macquarie International Finance Limited (MIFL):
- Long-Term IDR: affirmed at 'A-'; Outlook Stable;
- Short-Term IDR: affirmed at 'F2'; and
- Support Rating: affirmed at '1'.
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