MACQUARIE GROUP LIMITED
Fitch Ratings has affirmed the ratings of
At the same time, Fitch has upgraded the Long-Term Issuer Default Rating (IDR) on
Fitch is withdrawing the Support Ratings and Support Rating Floors across MGL and its subsidiaries because they are no longer relevant to the agency's coverage following the publication of the updated Bank Rating Criteria on
Key Rating Drivers
IDRS, VR and SENIOR DEBT
MBL is the group's main operating subsidiary. The bank's IDRs, Viability Rating (VR) and senior debt ratings are underpinned by robust risk controls and a high-quality management team, which has driven a strong financial profile over a number of years. Partly offsetting this is MBL's significant level of non-traditional banking operations relative to domestic bank peers, and its higher reliance on wholesale funding compared with some international peers.
MGL is the group's non-operating holding company and its IDRs, VR and senior debt rating are driven by the same factors that apply to MBL, although the starting point for the ratings is the group's consolidated risk profile. Fitch aligns MGL's ratings with the consolidated group assessment to reflect moderate common equity double leverage (group operates to a 110% limit) and sound liquidity management. The consolidated group VR is scored at 'a-', below the implied score of 'a', to reflect MGL's business profile and the composition of its operations.
Fitch rates MBL one notch higher than MGL, as we believe the risk profile of the main operating bank is better than the group's overall consolidated risk profile. This is because we believe the creditors of MBL are ringfenced from developments in other parts of the group due to the strong preference of Australian authorities to prioritise bank depositors over investors in other parts of the group.
We expect economic growth to remain solid in
The asset quality of both MBL and MGL has been better than we expected through the Covid-19 pandemic, and the improved economic outlook for the entities' core markets means we expect the core metrics to be maintained around current levels. As a result, we revise MBL's asset quality factor score to 'a+' from 'a', and that of MGL to 'a' from 'a-'. There remains some downside risk as government support measures are unwound, but we believe there are sufficient buffers to maintain a stable outlook on the score. The lower score at the consolidated group level reflects the differing starting points for the implied score due to the lower operating environment score and higher corporate and commercial exposures at the group level.
We believe the earnings and profitability metrics will remain commensurate with the current factor score of 'a' and 'a-' for MBL and MGL, respectively, over the next two years. The group's earnings and profitability were resilient through the pandemic, supported by loan and asset growth, combined with a strong uplift in earnings from market-facing activities, particularly in the commodities and global markets business. We expect earnings to decline modestly in the financial year ending
We expect some moderation in capital ratios over the next two years as additional buffers built up during the course of the pandemic are likely to be managed down. Capital ratios should remain robust, however, and continue to support the 'a' factor score for both MBL and MGL. MBL's common equity Tier 1 (CET1) ratio was 12.2% at
Fitch expects pressure on funding and liquidity to be limited for the group over the next 12 months due to the still-high level of liquidity in markets and the system. The group's strong liquidity management and sound liquidity ratios help to offset some of the risks associated with a greater reliance on wholesale funding than international peers and supports our assigned factor score of 'a' for MBL and 'a-' for MGL, above the implied 'bbb(cat)'. MBL's average liquidity coverage ratio for the quarter ended
GSR
MGL's GSR of 'ns' reflects our view that there is no reasonable assumption of forthcoming support from Australian authorities. We believe that if support were provided to the group it would most likely be through the regulated bank, MBL.
MBL's GSR of 'bbb-' reflects our view that there is a high probability of support for the banking operations. This rating is higher than those for domestic non-major bank peers and is due to MBL's growing domestic systemic significance, with its increased market shares as
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
IDRS, VRS and SENIOR DEBT
MGL
MGL's ratings may be downgraded if the common equity double leverage increases to above 120% for a sustained period, although Fitch does not expect this to occur.
MGL's VR and Long-Term IDR are also broadly sensitive to the same factors as those of MBL as a downgrade in MBL's rating is likely to result in an overall weaker consolidated group rating to which MGL is aligned to.
A downgrade of MGL's Short-Term IDR to 'F2' appears unlikely, as it would require the Long-Term IDR to be downgraded by at least two notches to 'BBB' and the funding and liquidity score also to be lowered by at least two notches to 'bbb'.
MBL
MBL's VR and Long-Term IDR could be downgraded if a combination of the following were to occur:
Four-year average stage 3 loans/gross loans increases above 2.0% for a sustained period (FY18-FY22: 1.3%);
Four-year average operating profit/risk-weighted assets declines below 1.5% for a sustained period (FY18-FY22: 2.1%);
the CET1 ratio falls below 10% without a credible plan to raise it back above this level.
A deterioration or findings of significant deficiencies in MBL's risk-management framework and liquidity management could also pressure ratings as it would likely result in a lower risk profile score, which in turn may negatively affect our assessment of some of the financial profile factors.
The senior debt ratings are sensitive to the same factors as MBL's IDRs.
A downgrade of MBL's Short-Term IDR would require the Long-Term IDR to be downgraded by at least one notch and the funding and liquidity score to be lowered by to at least 'a-'.
GSR
MGL's GSR is already at the lowest level assigned by Fitch.
MBL's GSR could downgraded if there is a negative change in our assumptions around the propensity or ability of Australian authorities to provide timely support. Neither appears probable over the next two years. Negative rating action will not directly affect MBL's IDRs, which are driven by its VR.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
IDRS, VRS and SENIOR DEBT
MGL
The ratings could be revised if there was an upward revision in the business profile or operating environment score, possibly driven by greater weighting of operations towards countries where Fitch has assigned a higher operating environment score or if regulatory changes resulted in more stringent oversight of the consolidated group, in line with MBL.
MGL's ratings are also broadly sensitive to similar factors as MBL as an upgrade MBL's ratings could result in a higher consolidated group rating to which MGL is aligned.
MGL's Short-Term IDR may also be upgraded to 'F1' without an upgrade in the Long-Term IDR if its funding and liquidity score is upgraded by one notch to 'a'.
MBL
An upgrade of the ratings would likely require with an upward revision of the business profile score, possibly driven by further significant improvement in market position, in addition to a combination of the asset quality, earnings and profitability or capitalisation factor scores being revised upward. This would require the four-year average stage 3 loans/gross loans ratio be maintained below 1%, four-year average operating profit/risk weighted asset ratio be maintained above 2.5% or the CET1 ratio maintained above 12% for each of the respective factors (or equivalent under the
MBL's Short-Term IDR may also be upgraded to 'F1+' without an upgrade in the Long-Term IDR if its funding and liquidity score is upgraded by two notches to 'aa-'. This appears unlikely for a foreseeable future as it would require MBL's loan/customer deposit ratio to fall well below 100% (1HFY22: 120%).
GSR
MGL's GSR would only be upgraded if the regulatory focus in
An upgrade of MBL's GSR would require a significant increase in its systemic importance, reflected in the bank's domestic market position. The GSR may also be upgraded if Australian authorities provide additional, explicit statements of support for MBL, or otherwise provide greater certainty that support would be provided if needed.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
MBL's subordinated Tier 2 debt is rated two notches below its anchor rating - the VR - for loss severity, with non-performance risk adequately captured by the VR. The point of non-viability for these instruments is at the discretion of the regulator. None of the reasons for alternative notching from the anchor rating as described in the criteria are present.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The Tier 2 debt ratings would be downgraded if MBL's VR is downgraded.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of MBL's VR would result in an upgrade of the Tier 2 debt ratings.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
MFHL's SSR reflects that it is a key and integral part of the group's business, undertaking core non-banking activities. In addition, if MFHL were to default, it would have a huge impact on the reputation of the parent and damage its franchise. MFHL's IDRs are equalised with that of its direct parent MGL.
Fitch has upgraded MIFL's Long-Term IDR, which is driven by its SSR, to be equalised with that of its direct parent, MBL. MIFL's SSR reflects that it is a key and integral part of the banking group following a restructuring of its operations, which increases the propensity of MBL to extend support. If MIFL were to default, it would have a huge impact on the reputation and franchise of MBL and the wider group.
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The Short- and Long-Term IDRs of MFHL and MIFL would be downgraded following downgrades of their respective parents.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the Long-Term IDRs of MGL and MBL would be also be reflected in the Long-Term IDRs on MFHL and MIFL, respectively, provided there was no change to Fitch's assumption around the parent' ability or propensity to extend support.
VR ADJUSTMENTS
The operating environment score of 'a+' for MGL has been assigned below the 'aa' category implied score because of the following adjustment reason: international operations (negative).
The funding and liquidity scores of 'a-' for MGL and 'a' for MBL have been assigned above the 'bbb' category implied score because of the following adjustment reason: liquidity coverage (positive).
The Viability Rating of 'a-' for MGL has been assigned below the 'a' implied rating because of the following adjustment reason: business profile (negative).
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
The ratings on MFHL are linked to those on MGL while the ratings on MIFL are linked to those on MBL.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of environmental, social and governance (ESG) credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
Entity / Debt
Rating
Prior
LT IDR
A-
Affirmed
A-
ST IDR
F2
Affirmed
F2
Viability
a-
Affirmed
a-
Support
WD
Withdrawn
5
Support Floor
WD
Withdrawn
NF
Government Support
ns
New Rating
senior unsecured
LT
A-
Affirmed
A-
senior unsecured
LT
A-
Affirmed
A-
senior unsecured
ST
F2
Affirmed
F2
LT IDR
A-
Affirmed
A-
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