Fitch Affirms Macquarie Group at 'A-', Macquarie Bank at 'A'
KEY RATING DRIVERS
IDRs, VRs AND SENIOR DEBT
MBL's IDRs, VR and senior debt ratings reflect sound liquidity, solid capitalisation, robust risk management and a diverse business mix, both by type of business and geography. These factors are offset by a specialised business outside Australia, earnings volatility and a larger risk appetite relative to Australian retail banks. 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 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 generally robust risk management framework which also helps to offset the group's higher risk appetite relative to most Australian retail banks. Recent strong growth, particularly in the bank's Australian mortgage portfolio, could leave MBL susceptible to a downturn in the Australian housing market, although underwriting has generally been in line with industry averages. Concentration risk is low in the loan portfolio, but is higher among interbank exposures. The group also maintains sizeable equity exposures - both trading and non-trading - relative to domestic and international peers and its own capital base.
Growth in more traditional lending and leasing activities has contributed to increased earnings stability, but is more balance sheet intensive than the market related businesses. Continued strong growth in these activities may pressure the group's funding and capital positions, although we expect the group to offset any negative impact through continued sound management of liquidity and capital.
Liquidity management at the operational entities is strong, helping to offset a reliance on wholesale funding. The group requires all long-term assets to be funded with long-term liabilities and to maintain a stress-survival horizon in excess of 12 months with only limited impact on franchise. MGL held AUD25.7bn of cash and liquid assets at 31 March 2015 (FYE15), with AUD23.8bn of this held by MBL - these balances more than covered FY16 wholesale debt maturities. In addition, MBL reported that its Basel III liquidity coverage ratio was in excess of 120% at FYE15. Liquid assets are held by the operating subsidiaries, leaving limited standalone liquidity at the holding company.
Ratings also reflect our expectation that MGL and MBL will continue to maintain solid capital positions to offset the group's risk appetite. The group held a substantial surplus over regulatory requirements at FYE15, while common equity double leverage was low at 98%. MBL's Fitch core capital ratio was 11.0% at FYE15 (FYE14: 10.6%). Basel III capital and leverage requirements have already been met.
The solid liquidity and capital positions help to offset a higher level of earnings volatility relative to other similarly rated retail banks. The volatility emerges from the group's capital market related businesses, and is particularly prevalent in MFHL. Stable earnings streams such as fees and commissions from funds management have increased since FY08; however, the market related businesses are core to the group and mean earnings are likely to remain somewhat volatile.
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 MGL and MBL are notched five times from the respective VRs - two notches for loss severity as there are no non-equity junior instruments, 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 material weakening of the liquidity and/or capital positions would leave MGL and MBL susceptible to increased market volatility and would likely result in a downgrade of both entity's IDRs, VRs and senior debt ratings. Serious reputational issues may also lead to negative rating pressure. Upside rating potential is limited by the earnings volatility inherent in some of the businesses and the group's specialised franchise outside of Australia.
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- to long-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 MGL's and MBL's subordinated debt and Tier 1 capital securities are sensitive to the same factors that influence the VRs of MGL and MBL.
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 PMI LLC:
- Macquarie preferred membership interests (XS0562354422): affirmed at 'BB'.
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';
- Short-term debt: affirmed at 'F1';
- Subordinated debt: affirmed at 'A-'; and
- Macquarie bank exchangeable capital securities (XS0763122909): affirmed at 'BB+'.
Macquarie Financial Holdings 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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