Evolution of Macquarie’s business model places balance sheet strength in focus
(26 June 2015 – Australia) Moody's Investors Service said that Macquarie Group Limited has made significant progress moving its operations towards more stable lines of business, but that the associated growth of longer-dated, capital and funding-intensive products could, if unchecked, stretch its balance sheet.
While such growth could, over time, erode Macquarie's traditionally strong capitalisation profile and place pressure on its funding profile, Moody's expects that Macquarie will continue to maintain conservative balance sheet settings.
The firm's management has demonstrated commitment to stabilise its capital levels and adopted a pro-active capital management approach during FY 2015.
Moody's also sees Macquarie's reliance on wholesale funding as mitigated by its conservative liquidity policy, growing diversity of funding sources and a sizeable deposit book.
Moody's analysis is contained in its just-released report titled "Macquarie Group: Business Model Evolution Places Balance Sheet Strength in Focus," authored by Ilya Serov, a Moody's vice president and senior credit officer.
"Recent examples of Macquarie's progress in moving its operations towards more stable lines of business include the AWAS aircraft portfolio acquisition and the rising significance of its funds management and traditional banking businesses," said Serov.
"This trend is credit-positive because it enhances the firm's ability to absorb potential earnings shocks arising from financial markets volatility," he added.
"However, the shift in Macquarie's business model has also resulted in greater exposure to longer-dated assets such as asset leases and residential mortgages," added Serov.
Serov pointed out that longer-dated assets are, by their nature, more capital- and funding-intensive.
They also exhibit credit risks which take considerable lengths of time to manifest.
"Macquarie's capital levels and funding structure are commensurate with its high rating level, but its relative advantage compared with its global peers is perhaps narrowing", said Serov.
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