Fitch Affirms Macquarie Group Limited and its Australian subs

Thu Aug 14, 2014 11:03pm EDT

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(The following statement was released by the rating agency) SYDNEY, August 14 (Fitch) Fitch Ratings has affirmed the ratings of Macquarie Group Limited (MGL) and its Australian subsidiaries, Macquarie Bank Limited (MBL), Macquarie Financial Holdings Limited (MFHL), and Macquarie International Finance Limited (MIFL). A full list of rating actions is at the end of this rating action commentary. 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, offset by 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 unregulated operations through MFHL, a greater level of earnings volatility, again due to MFHL, and lower standalone liquidity at the holding company. The Stable Outlooks reflect Fitch's view that MBL's and MGL's balance sheet strength and geographic diversity should allow them to weather a likely modest deterioration in Australia's operating environment over the next 12-18 months with limited business impact. Liquidity management 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. This leaves MBL well positioned to meet Basel III liquidity requirements when they are implemented. MGL held AUD19.1bn of high quality liquid assets at 31 March 2014 (FYE14), with AUD17.3bn of this held by MBL. Liquid assets are held by the operating subsidiaries rather than the holding company. The solid liquidity 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. Ratings reflect Fitch's 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 FYE14, while double leverage was low at 101%. MBL's Fitch core capital ratio was 12.7% at FYE14. Basel III capital and leverage requirements have already been met, well in advance of full implementation. 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 amongst 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. RATING SENSITIVITIES - IDRs, VRs AND SENIOR DEBT A material weakening of the capital and/or liquidity positions would leave MGL and MBL susceptible to increased market volatility and would likely result in a downgrade of both entities 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 of MGL and MBL. KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR MGL's Support Rating (SR) and Support Rating Floor (SRF) 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 SR and SRF reflect a moderate probability of support given its position as the fifth largest bank by total assets in Australia and a key player in the domestic financial markets. The SRs and SRFs 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. KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The ratings of MBL's and MGL's subordinated debt and Tier 1 capital securities are consistent with Fitch's criteria "Assessing and Rating Bank Subordinated and Hybrid Securities", dated 31 January 2014. MBL's subordinated debt is notched once from the banks' VR, while the Tier 1 capital securities of MGL and MBL are notched five times from the respective VRs to reflect fully discretionary coupon payments. The ratings of the instruments are sensitive to the same factors that influence the VRs of MGL and MBL. KEY RATING DRIVERS AND SENSITIVITIES - MFHL and MIFL 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. 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 Capital Funding L.P.: - Macquarie income preferred securities (XS0201559811): 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'. 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 Andrea Jaehne Director +61 2 8256 0343 Committee Chairperson Mark Young Managing Director +65 6796 7229 Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0326, Email: Leni.Vu@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, "Global Financial Institutions Rating Criteria", dated 31 January 2014, "Rating FI Subsidiaries and Holding Companies", dated 10 August 2012, and "Assessing and Rating Bank Subordinated and Hybrid Securities", dated 31 January 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Rating FI Subsidiaries and Holding Companies here Assessing and Rating Bank Subordinated and Hybrid Securities Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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