Analysis Report on Macquarie Group

BUSN 7008 Financial Statements and Reporting – Group assignment

1.0 INTRODUCTION

The purpose of this report is to analyse whether to invest 10 % of the equity of the diversified financial service company - Macquarie Group Limited (Macquarie) on the 13th of May 2011 for an investment horizon of 3 years. Macquarie, which constituted by five operating groups, provides a wide range of financial services to clients, including banking, financial, investments and funds managements (Appendix 1). Through conducting a serious of multiple valuations, the analysis will offer a suggestion on whether the 13th May is the appropriate time for the investors to perform the investment.

2.0 MACROECONOMIC ANALYSIS1

It is essential to assess Australia’s macroeconomic performance during the valuation period. As a services provider, the financial performance of Macquarie group is strongly ties up with Australian business cycle and has a procyclical relationship with Australian economy (Gordy & Howells 2004).

The economic conditions are favourable for the development of Macquarie business since the main economic indicators of Australia (provided in the table above) are expected to increase (Details in Appendix 2), householders have more disposable income (Appendix 3) and investors are increasing their confidence about investment environment (Appendix 4). However, there are certain potential risks of higher interest rate and inflation for the business, which may increase the risk of borrowing and lending.

1 Although there is a significant portion of Macquarie’s business is operated in other countries, this report is more focus on analysing the sectors in Australia.

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3.0 MACROECONOMIC ANALYSIS

The Porter’s Five Forces Model is used to analysis the Macquarie’s competitive position 2 in the industry (Details in Appendix 5) (Macquarie Annual Report 2011).

The current rivals in existing markets are high since many rivals can offer financial services company with competitive price and quality. The threat of new entrants is low due to the highly regulated financial industry in Australia and high capital requirement associated with the establishment. The potential substitute is high due to the existence of the highly competition and similar financial services. The Bargaining power of suppliers is low because the large number of suppliers, especially for the diversified companies. The Bargaining power of buyers is high because there are 55 banks offering financial services in Australia and customers have great number of choices when they purchase financial products (Banks 2011).

4.0 RISK ANALYSIS

The identified business risks associated with Macquarie as well as risk mitigations are provided in the following table (Details in Appendix 6) (Macquarie Group Risk Management report 2011):

RISK MITIGATIONEquity Risk Equity Risk Limit

Transaction Review and Approval ProcessCredit Risk Analysis and Approval of Exposures

Independent AnalysisMacquarie Group ratingsMeasuring and monitoring exposuresLoan impairment reviewCountry Risk Policy

Operational Risk Operational Risk Management FrameworkMacquarie’s operational risk capital framework

Market Risk Trading market riskAggregate measures of market riskTrading revenueCapital adequacy assessmentRisk appetite settingThe Risk Appetite TestRisk-adjusted performance measurement

Liquidity Risk Liquidity managementLiquidity policy and principles

2 It is very hard to define Macquarie’s competitors because it is a diversified financial company. In this report, the major competitors are defined as the big four banks in Australia since they are usually compared with Macquarie by the media and industry profession.

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Scenario analysisLiquid asset holdingsLiquidity contingency planFunding transfer pricing

Legal and Compliance Risk Assesses compliance riskReputation Risk Corporate governance structure and risk management framework

Therefore, although Macquarie is facing several risks, from the risks identified along with the mitigations presented above, it has successfully applied its own unique strategy to mitigate the risks associated with finance companies.

5.0 BUSINESS STRATEGY

The current Macquarie business strategy is “To focus over the medium term on key fundamentals: the provision of services to our clients; the alignment of interests with shareholders, investors and staff; a conservative approach to risk management; incremental growth and evolution; maintaining operations that are diversified by business and geography; and an ability to adapt to change” (Macquarie Annual Report 2011)

By considering the detailed SWOT analysis in Appendix 7, the strategy is suitable to minimize the weakness (strong Australia dollar), overcome the threats (market downturn and strong competitors), maximize the strength (diversity, unique structure and management style) and grasp the opportunities effectively and efficiently (global growth and more corporations)

6.0 TREND ANALYSIS (Macquarie Annual Report 2006-2011)

6.1 Historical data analysis

6.11 Income Statement

2007 %change 2008 %change 2009 %change 2010 %change 2011Interest and similar income 4632 44.60% 6,698 -4.15% 6,420 -28.49% 4,591 15.53% 5,304Interest expense and similar charges -3904 -50.64% -5,881 6.78% -5,482 35.95% -3,511 -14.75% -4,029Net interest income/(expense) 728 12.23% 817 14.81% 938 15.14% 1,080 18.06% 1,275

(in million AUD)for year ended 31 March

With the recovery of global crisis, Macquarie’s operating capability is recovered as well. As is shown in the table, the net interest income of Macquarie had increased from $ 728 million in 2008 to $ 1,275 million in 2011. The main reason for this is because there is a decrease in the interest expense as well as the similar charge (due to the influence of economic crisis).

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2007 %change 2008 %change 2009 %change 2010 %change 2011Fee and commission income 3540 31.21% 4,645 -12.92% 4,045 -8.01% 3,721 4.57% 3,891Net trading income 1047 75.26% 1,835 -36.95% 1,157 12.27% 1,299 5.31% 1,368Share of net (losses)/profits of associates and joint ventures 242 -35.54% 156 -52.56% 74 -410.81% -230 177.83% 179Other operating income and charges 1624 -51.05% 795 -186.54% -688 211.63% 768 21.22% 931Net operating income/(expense) 7,181 14.86% 8,248 -33.00% 5,526 20.12% 6,638 15.16% 7,644


Similar to the interest income trend, the trend of net operating income decreased as well during the three consecutive years from 2008 to 2009, which because the fees based on transaction declined during the period of economic crisis. However, Macquarie has struggled to minimize the loss by recovering the net trade income and other operating income in the following years.

2007 %change 2008 %change 2009 %change 2010 %change 2011Employment expenses -3733 -11.89% -4,177 43.52% -2,359 -31.45% -3,101 -25.44% -3,890Brokerage and commission expenses -421 -66.75% -702 2.42% -685 5.84% -645 -21.71% -785Occupancy expenses -226 -16.81% -264 -48.86% -393 -22.65% -482 -0.21% -483Non–salary technology expenses -163 -31.29% -214 -22.90% -263 -7.60% -283 -11.66% -316Other operating expenses -710 3.38% -686 -22.01% -837 0.48% -833 -7.92% -899Total operating expenses -5,253 -15.04% -6,043 24.92% -4,537 -17.79% -5,344 -19.26% -6,373

Operating profit/(loss) before income tax1,928 14.37% 2,205 -55.15% 989 30.84% 1,294 -1.78% 1,271Income tax (expense)/benefit -377 15.92% -317 95.27% -15 -1240.00% -201 -40.30% -282

Profit/(loss) from ordinary activities after income tax 1,551 21.73% 1,888 -48.41% 974 12.22% 1,093 -9.52% 989


There is a decrease trend in operating expense of Macquarie. In 2007, the figure was dropped from $5253 million to $4537 million in 2009. However, this is a common phenomenon in the financial industry in this year. It is reasonable for the group to suppress operating expense to keep maintaining a satisfactory lever of profit. Noticeably, the fact that the operating profit in these years maintained nearly stable should not be ignored. Therefore it is believed that the MQG has the potential capability to catch up with these four banks.

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6.12 Statement of Financial Position

2007 % 2008 % 2009 % 2010 % 2011Assets Change Change Change ChangeLoan assets held at amortised cost 45,796 14.44% 52,407 -14.61% 44,751 -1.08% 44,267 3.95% 46,016Derivative financial instruments – positive values 11,913 77.42% 21,136 29.77% 27,428 -21.39% 21,561 -1.74% 21,185Investment securities available for sale 6,060 171.52% 16,454 10.14% 18,123 0.54% 18,221 -6.42% 17,051Trading portfolio assets 15,518 1.86% 15,807 -41.42% 9,260 31.08% 12,138 22.74% 14,898Other Assets 57,102 7.61% 61,446 -19.31% 49,582 0.34% 49,753 17.42% 58,418Total Assets 136,389 22.63% 167,250 -10.83% 149,144 -2.15% 145,940 7.97% 157,568

for year ended 31 March(in million AUD)

2007 % 2008 % 2009 % 2010 % 2011Liabilities Change Change Change ChangeDebt issued at amortised cost 51,365 11.19% 57,115 -15.49% 48,270 -11.72% 42,614 -3.37% 41,177Deposits 12,403 27.25% 15,783 38.55% 21,868 2.82% 22,484 57.17% 35,338Derivative financial instruments – negative values 11,069 93.32% 21,399 27.91% 27,371 -20.70% 21,706 -0.62% 21,572Other liabilities 54,033 16.40% 62,892 -33.10% 42,075 12.58% 47,367 0.38% 47,549Total Liabilities 128,870 21.97% 157,189 -11.20% 139,584 -3.88% 134,171 8.55% 145,636


2007 % 2008 % 2009 % 2010 % 2011Equity Change Change Change ChangeContributed equity Ordinary share capital 3,103 46.12% 4,534 8.20% 4,906 42.48% 6,990 2.15% 7,140 Treasury shares -7 -71.43% -12 83.33% -2 -22050.00% -443 -65.01% -731 Exchangeable shares 0 100.00% 133 -12.78% 116 18.10% 137 -24.09% 104Reserves 380 20.00% 456 -96.27% 17 1547.06% 280 10.71% 310Retained earnings 2,795 33.02% 3,718 -2.45% 3,627 17.67% 4,268 7.33% 4,581Minority interests 1,248 -1.28% 1,232 -27.27% 896 -40.07% 537 -1.68% 528Total equity 7,519 33.81% 10,061 -4.98% 9,560 23.11% 11,769 1.38% 11,932


From the three tables presented above, the assets are always higher than the liabilities which give a signal of better performance. In addition it is easy to find that there is no significant reduction in assets and liabilities even in the financial crises year and in 2011. Both assets and liabilities have increased by 7.97 and 8.55 respectively. When turning the eyes to the equity graph, discovers has been found that except the 2009(the global financial crisis) Macquarie’s equity presents an increasing tendency. It jumps from $6662 million in 2007 to $11404 million in 2011, which raises nearly 71.18%. The balance sheet is remains solid and conservative due to the increase in retained earnings as mentioned previously. The strength of our balance sheet, integrated with their pursuit of opportunities for continued growth, resulted in a range of successful initiatives. According to the 2011 annual report, the balance sheet in 2011 is tended to be characterized by high cash balances because of the CMT/CMA

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initiative, which is expected to be continue to deploy in the next following years. All the message presented above, it is not difficult to find that even though there was adverse remuneration in 2009, the balance sheet still maintains a conservative trend, which has demonstrate powerful potential development strength. The increasing trends in total equity throughout the projection years, again, show a favourable sign for investor.

2012 2013 2014 2015 2016Total assets 162,130 167,655 174,172 181,724 190,371Total liabilities 149,578 154,418 160,175 166,883 174,588Total equity 12,552 13,237 13,997 14,841 15,783

Projection as at 31 March(in million AUD)

6.2 Future trends of projection

The projection of income statement, statement of financial position and cash flow from 31 March 2012 to 2016 has performed in the following tables (Assumption is shown in the Appendix).

2012 2013 2014 2015 2016Net interest income/(expense) 1,411 1,560 1,721 1,897 2,088

Net operating income/(expense) 8,314 9,069 9,925 10,897 12,005

Total operating expenses -6,898 -7,486 -8,146 -8,890 -9,733

Operating profit/(loss) before income tax 1,415 1,584 1,779 2,007 2,272

Profit/(loss) from ordinary activities after income tax 1,208 1,352 1,519 1,713 1,940

Profit attributable to minority interests -31 -30 -29 -28 -27

Profit/(loss) attributable to ordinary equity holders of Macquarie Group Limited 1,177 1,322 1,490 1,686 1,913

Dividends and distributions Paid 722 811 914 1,034 1,173

(in million AUD)Projection for year ended 31 March

From the projection of income statement presented above, Macquarie’s profit will keep an increasing profitable rate from 2011 to 2016 (and beyond 2016 in the Appendix, since we only show 2012 to 2016 figure for simplicity). As economic condition improved, a reasonable growth in net interest income and net operating income occurred. Furthermore the total operating expenses increased as well in order to support the growth in business. Along with these increase in profit, the increasing trend in dividends and distributions paid is comes

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as nature. Thus this factor should be treated as a positive signal for investors in Macquarie shares.

7.0 RATIO ANALYSIS (Macquarie Annual Report 2006-2011)

By conducting a detailed ratio analysis could help investors to compare these scandalised ratios across the industry and competitors. A full vision of ratio data calculation and more detailed analysis is conducted in this report (Appendix 9). The following crucial ratios are analysed by accessing their trends and comparing with its major competitors.

7.1 Profitability

Profitability 2007 2008 2009 2010 2011Net Interest Margin 0.69% 0.64% 0.90% 1.05% 1.15%Return On Total Asset 4.27% 4.83% 4.34% 3.29% 3.36%Return On Ordinary Equity 21.96% 20.73% 10.05% 9.35% 8.38%Earnings Per Share (in cent) 592.30 760.26 309.96 320.12 282.40Price-Earnings Ratio 14.51 8.09 8.76 14.85 13.27Earnings Yield 11.67% 12.36% 11.42% 6.72% 7.53%Dividend Yield 3.81% 6.53% 6.84% 3.94% 5.08%Dividend Payout 21.53% 19.13% 21.24% 17.71% 19.46%

Net interest margin is the dominant ratio of measuring the profitability of the Macquarie since interest earning is the main revenue of financial institutions. Similar to the gross margin of non-financial companies, net interest margin measures the company’s real return on its investment relative to its interest earning assets.

Macquarie groups had continuously generating positive net interest margin over the past five years. It indicates that the overall investments made by Macquarie group did success because the interest revenue excesses the expenses which paid for interest generating. In details, the following table shows that how the growth of the expense relative to the growth of the interest income made the real change in the net interest margin ratio. Although by comparing with the big four banks’ figure (e.g. Westpac: 2.15 ANZ: 2.52 in 2010), the ratio is relative low, it is reasonable for the firm due to the development of global platform in the recent years.

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Return On Total Asset have decreasing trend since these returns increase reflected in Net Interest Margin are offset by growth trend of Macquarie’s asset as Macquarie keeps expanding its business. However, the ratio is relative low by comparing with the industry average of 12% (Finanalysis 2011)

Return on Ordinary Equity is reported a stable return on equity of 21.96% and 20.73% in 2007 and 2008 respectively. By comparing with Westpac (average of 21.41%) (Finanalysis), the figure is reasonable within the industry. Because of the financial crisis and the unfavourable market condition, the return on equity dropped significantly. In 2009, while the average ordinary equity declined by 1.87%, the net income after tax dropped 52.40%. As a result, the return on equity was recorded at only 10.05%. In year 2010 and 2011, while the return of equity of the Macquarie’s’ competitors, ANZ and Westpac, increased back to around 15%, Macquarie’s’ data fall to 8.38% (Finanalysis 2011). The main reason of the declined figure is that a large portion of expenses had used for global business construction. Macquarie group has entered into a growth stage, especially in global business. Therefore, it is reasonably that the return on the ordinary equity was recorded lower than other major banks. The figure is expected to grow over the medium-term.

Earnings Per Share is considered to be a appropriate measure of financial performance since they are regarded to be drivers of longer term shareholder returns. These figures decreased from 2008 to 2009 (global economic crisis) mainly due to a decrease profit from $ 1.9 billion to $974 million. The ratio reached a better record since the recovered economic condition in the global market in the following year. Nevertheless, in 2011, the increased dividend payments (from AUD 407 million in 2009 to 607 million in 2011) lead to a drop in the basic EPS (282.5 per share). Moreover, compared with Westpac in terms of current EPS of 191.9 in 2011 (Finanalysis 2011), Macquarie’s current EPS is higher, which indicate a positive signal for investors to invest in Macquarie’s shares.

Price earnings ratio had risen from 2008 to 2010, indicating an increased expectation of investors for the company. However, in 2011, the earning per share dropped to 13.27 times due to the decreased share price of $36.6. Moreover, compared with the industry P/E of 14.03 in 2011 for finance sector (Finanalysis 2011), Macquarie have better P/E with lower value

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since investors pay lower amount of money for the same earnings in the industry. In addition, the high price earnings ratio demonstrates a fact that Macquarie is a financially strong blue chip company with a promising future prospect.

Dividend payout ratio has performed in a constant manner during the past five years with an average of 20%. It enhances the firm’s credit standing and it is preferred by the shareholders due to the indication of stability in Macquarie’s market prices of shares (Articles 2011).

since investors pay lower amount of money for the same earnings in the industry. In addition, the high price earnings ratio demonstrates a fact that Macquarie is a financially strong blue chip company with a promising future prospect.

Dividend payout ratio has performed in a constant manner during the past five years with an average of 20%. It enhances the firm’s credit standing and it is preferred by the shareholders due to the indication of stability in Macquarie’s market prices of shares (Articles 2011).

Liquidity 2007 2008 2009 2010 2011Current Ratio 1.23 1.20 1.09 1.16 1.13

Macquarie had maintained a consistent level of current asset relative to the current liabilities from 2001-2011. In details, these ratios declined to 1.09 during 2008 to 2009 due to global crisis that frozen most financial firms liquidity, but improved in the next year as economic conditions improved.

7.2 Financial stability

Financial Stability 2007 2008 2009 2010 2011Debt Ratio 94.48% 93.98% 93.49% 91.93% 92.43%Equity Ratio 5.51% 6.01% 6.41% 8.06% 7.57%Capitalisation Ratio 18.14 16.62 15.60 12.40 13.22Times Interest Earned 1.88 1.37 1.18 1.36 1.31Asset Turnover Ratio 0.08 0.08 0.07 0.07 0.07

The total debt ratio is used to measure the safety of creditors’ equity in liquidation circumstance. Generally speaking, the lower the ratio, the better off the company will be. But as we mentioned above in debt-to equity ratio, the assessment is up to the industry. Individually, total debt ratio declined from 0.94 at 2007 to 0.92 at 2011, but by contrast, this ratio of Commonwealth was maintained around 0.94 in this period (Finanalysis 2011). Hence, it implies that the Macquarie’s performance is not abnormal in this industry.

In order to less the misleading might be caused by tax and interest expenses when deciding the financial health of a business in short term, the interest coverage ratio(Appendix 9) has been considered by investors as one of the most important ratios. It offers a clear picture of a

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company’s capacity to pay interests charges on its debt. The calculation shows that the interest coverage of Macquarie reduced from 1.51 to 1.32, which definitely is not good news. Because normally investors are not suggested to hold the company’s stock whose interest coverage ratio is below 1.5. As long as the ratio went down to 1, this company will be regarded as having difficulties to generating cash to pay its interest. As a result, for Macquarie, similar problems may exist.

7.3 Cash sufficiency

Cash Sufficiency 2007 2008 2009 2010 2011Cash Flow Adequacy 1.06 20.84 4.82 -8.12 -7.12Repayment of Long Term Borrowings 1.43 0.01 0.05 -0.07 -0.39Dividend Payment -0.48 0.04 0.16 -0.06 0.25Reinvestment -1.77 0.39 1.41 -1.03 3.57Debt Coverage -43.2 2.76 8.69 -7.6 19.91

Cash Flow Adequacy Ratio increased significantly from 1.06 in 2007 to 20.84 in 2008. In 2009, due to financial crisis effect of the tightened cash flow in the global market, the ratio declining sharply to 4.82 and even lower with -8.12 in 2010 and -7.12 in 2011. This ratio is expected to growth in the following year since the company is expanding its business in the global market (more investment opportunities in accessing global financial market).

Cash Flow Efficiency 2007 2008 2009 2010 2011Cash Flow to Revenues -8.80% 131.72% 46.56% -58.72% -20.38%Operations Index -0.63 9.86 5.26 -5.45 2.41Cash Flow Return On Asset 2.87% 16.31% 6.92% -1.35% 4.38%

The Cash Flow to Revenues increased sharply from -8.80% in 2007 to 131.72% in 2008 as reflected in the increase of cash flow adequacy as mentioned before. The the same correlation existed in the following years since the cash flow from operating fluctuations are the main driver of these movement. Operations Index had the same trend correlation with cash flow to revenues mainly due to same reason.

7.4 Net loan losses

2007 2008 2009 2010 2011

Net loan losses as % of loan assets 0.10% 0.30% 1.90% 0.80% 0.40%

RatioAs At 31 March

Net loan losses is an important ratio to be analysed since a slight increase in net loan losses will have a significant adverse effect in financial companies’ profit. Since Macquarie’s business is operated globally, this ratio increased from 0.30% in 2008 to 1.90% in 2009 due to the global business

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breakdown. With the recovery of the global economic condition, Macquarie started to recover as well from this situation by decreasing the ratio to 0.80% in 2010 and further to 0.40% in 2011.

8.0 INDEPENDENT VALUATION

In order to determine whether investors should invest in Macquarie, it is significant to forecast the future economic value of Macquarie by applying different valuation models. Therefore, dividends discount model, discount future cash flow approach and industry multiple model are used in this valuation.

8.1 Cost of capital

Weighted average cost of capital (WACC) is applied in the valuation to defined the weighted average of the expected after-tax rates of return of the firm’s various sources of capital, including equity and debt (Cost of preference shares is ignored in this report) . The formula is

applied by WACC=DV

rd (1−τ c )+ EV

re . The financial data from the financial statement of

Macquarie 2011 is applied to conduct the calculation. The tax rate is assumed to be 30%.

Cost of debt

Cost of debt is derived from interest paid and total debits. Therefore, by dividing total debits issued from the interest paid, the cost of debt of 8.36% is obtained.

Cost of equity from Capital Asset Pricing Model (CAPM)

The CAPM is applied to conduct the firm’s cost of equity

Formula: ke=krf+e(krm-krf).

- 15 years Australian Treasury bill is defined as the risk-free rate (Bloomberg 2011).

- The year to date years’ average return of 7.11% of S&P/ASX 200 is applied for market return (Standard&Poor 2011).

- According to FinAnlysis 2011, of the diversified industry is 0.89.

Therefore, the cost of equity of 6.96% is obtained.

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WACC

Therefore,

WACC=DV

rd (1−τ c )+ EV

re=92.43 %× 8.36 %× ¿

8.2 Discount Future Cash Flows Model (DCF) 3

DCF is a valuation model by taking all estimated future cash flow into consideration and discounted back to present value. The Formula is

In order to determine the price of the stock, it is important to forecast future net cash flows. According to the past financial performance, different assumptions are made according to the nature of each account. For example, by adjusting the impact of financial crisis, interest received is assumed to growth by 3.1 %(Details in Appendix 14). In addition, the total future weighted average number of ordinary shares and potential ordinary shares are expected to be increased in future by using the past average growth rate.

3 Since the company is a diversified financial service, it will be too complicated to forecast its cash flow through the balance sheet. Therefore, the cash flow forecast is directly from prediction of Macquarie’ cash flow statement.

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2011 2012 2013 2014 … 2084Cash Flow 550 704 871 1,052 … 61,973Number of Share 359,248,731 391,502,031 426,651,029 464,955,698 … 191,040,730,703Cash Flow per Share 1.53 1.80 2.04 2.26 … 0.32Required Rate Of Return 5.93% 5.93% 5.93% 5.93% …Present Value 1.53 1.70 1.82 1.90 … 0.00Share Price 45.33

Once the assumptions are made, the cash flow is obtained. The present value in 2011 is simply the cash flow per share in 2011 and net present value is calculated from the sum of all present value from 2011 to 2084 (as the Present Value in 2084 is close to zero, it is assumed that the remaining present value beyond 2084 is irrelevant). By discounting the future cash flow back by applying the WACC and summing it up, the total net present value will be achieved. The calculation process will result in current theoretical share price of $45.33.

8.3 Dividend Discount Model (DDM)

DDM is a valuation method by using forecast dividends and discounting them back to present value. Therefore, it is crucial to project the firm’s dividend payment by dividing the projected number of shares from the forecasted profit (Details in Appendix 12 and 13) Therefore, the theoretical share price is calculated by dividing the number of shares from the sum of the net present value of all future dividends.

2011 2012 2013 2014 … 2065Dividends and Distribution Paid 643 722 811 914 … 55,318Number of Share 359,248,731 391,502,031 426,651,029 464,955,698 … 37,298,314,429Dividends Per Share 1.79 1.84 1.90 1.97 … 1.48Required Rate Of Return 5.93% 5.93% 5.93% 5.93% …Present Value 1.79 1.74 1.69 1.65 … 0.07Share Price 69.41

The Present Value in 2011 is the dividends per share in 2011and Net Present Value is calculated from the sum of all Present Value from 2011 up to 2065 (same as the previous DCF assumption). Therefore, by applying the WACC and the forecast number of shares, the theoretical share price of $69.41 is obtained.

8.4 Industry Multiple Approach

P/E multiple is another way of valuation the stock of Macquarie by focusing on analysing Macquarie’s shares relative to its annual profit generated by the firm. The current industry P/E multiple of 14.03 is applied is the valuation (Finanalysis2011).Therefore, the share price of $39.64 is conducted by the P/E multiple multiplied by Macquarie Earnings/Share in 2011.

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2011Industry P/E 14.03Macquarie Earnings/Share (in cents) 282.50Share Price (in AUD) 39.64

To conclude, the expected share price of Macquarie of $45.33, $65.41 and $39.64 is obtained from different three valuation model. By comparing with the Macquarie’s closing share price of $ 34.72 on the 13th May 2011 (ASX 2011), the three different approaches illustrate a market signal for investors to take the long position because the market price of Macquarie is currently underpriced.

9.0 RECOMMEDNDATION

According to the previous comprehensive analysis of the external environment, there is enough evidence to illustrate that the Macquarie group has stepped into a firm growth stage. First, the recent favourable macroeconomic environment conditions for Macquarie, equipped with Macquarie sophisticated risk management, have provided a safe backup and opportunities for the firm to recovery from the financial crisis and are ready for future expansion. Second, Solid business strategy, especially the recent advantage of global growth has strengthened the diversity of the company’s operation. Third, the improved historical financial performance is recorded. Although some of the Macquarie’s past financial ratios did not outperform its major competitors, it is believed that the company has the potential to have a promising performance in the future.

Last but not least, all the favourable conditions have shown that the asking price (10% of the firm’s equity) for investors is currently undervalued because the current market value of Macquarie is $34.72 per share whereas the valuation models presents the value of share is $45.33, $65.41 and $39.64 respectively.

Therefore, it is the right time for the investors to go long positions in Macquarie Group on the 13th of May. In addition, it is vital for the investors to regularly analysis and keeps attention on firm’s new announcements and external market information (such as interest rate, inflation and dividend policy) during the investment period to make further investment decisions.

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APPENDIX

Appendix 1 Internal structure of Macquarie Group Limited

Source: Macquarie Annual Report

Appendix 2 Analyses of economic conditions in Australia

While uncertainties remain from the financial crisis, the Australian is well placed in economic recovery (RBA 2011). With strong resource boom and demand from the emerging Asia region, Real GDP is expected to rise by 3.5% in 2010 with stronger rates of growth over the medium(RBA 2011). Because of the healthy political and economic position, Australia now has become more attractive investment destination for both domestic and international investors. S&P ASX200 has performed strongly since the S&P ASX200 accumulate index keep climbing up and reached 35,395 in January in 2011. Consequently, NAB business Survey (2011) in Appendix 2 illustrates that the general movement of business confidence has gone up. Although there is a fluctuation occurs currently, which is mainly contributed by the Queensland floods, the two indictors are expected to increase over the medium run.

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\

Appendix 3 Household Wealth and Liabilities

Appendix 4 NAB Business Survey –Business conditions and confidence level

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Appendix 5 Macquarie’s competitive position in the industry

There is an increasing tendency in the growing development of banking industry in Australia in last decade. Currently, four major banks dominate Australian’s banking sectors (control around 87 percent of Australia's $1.1 trillion (695.6 billion pounds) home loan market) (Banks 2011). Macquarie Group Ltd, as a number of financial institutions, is facing a fierce and dynamic competing environment as well. To illustrate, Porter’s five forces will be introduced in the following table.

THE FIVE FORCES ANALYSISThe threat of the entry of new competitors

The threat is considered low, mainly driven by :(i) The existence of barriers to entry is high due to highly regulated nature of financial industry (ii) Capital requirements is high due to highly required capital to establish financial firms

The threat of substitute products or services

The threat is considered high, mainly driven by :(i) Relative price performance of substitute financial services is highly competitive in financial sector(ii) Number of substitute products available in the

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market is high since there are many other similar financial services in financial industry

The bargaining power of customers (buyers)

This threat is considered high, mainly because large amount of financial services company in Australia.

The bargaining power of suppliers This threat is considered low, mainly because supplier volume is high, since there are many investors of financial services in one single financial firm, thus the bargaining power of suppliers is low

The intensity of competitive rivalry The threat is considered high, mainly due to many rivals can offer financial services with competitive price and quality in financial industry

Appendix 6 Risk analysis

RISK MITIGATIONEquity RiskRisk of loss arising from banking book equity-type exposures

Equity Risk LimitAll of the risk exposures is subject to aggregate Equity Risk Limit (the limit is reviewed on a semi-annual basis)Transaction Review and Approval ProcessThe business unit executing the transaction is responsible for due diligence and risk analysis of each equity investment

Credit RiskRisk of financial loss as a result of failure by a client or counterparty to meet its contractual obligations

Analysis and Approval of ExposuresMacquarie enforces a strict ‘no limit, no dealing’ rule; all proposed transactions are analysed and approved by designated individuals before they can proceed.Independent AnalysisThe RMG credit team provides independent analysis of credit risk exposuresMacquarie Group ratingsMacquarie has established a proprietary internal credit rating framework to assess counterparty credit risk.Measuring and monitoring exposuresAll credit exposures are monitored regularly against limits.Loan impairment reviewAll loan assets are subject to recurring review and assessment for possible impairment.Country Risk PolicyCountries are grouped into categories based on the country’s risk profile.

Operational RiskMacquarie defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems

Operational Risk Management FrameworkMacquarie’s Operational Risk Management Framework (ORMF) is designed to identify, assess and manage operational risks within the

18


or from external events. organisation.Macquarie’s operational risk capital frameworkMacquarie’s framework for operational risk capital has two main elements:(i) An annual scenario approach for modelling operational risk losses and to determine operational risk capital(ii) A quarterly scorecard analysis which is used to update operational risk capital between scenario analyses and as a basis for updating the allocation of capital to businesses.

Market RiskMarket risk is the exposure to adverse changes in the value of Macquarie’s trading portfolios as a result of changes in market prices or volatility.

Trading market riskRMG monitors positions within Macquarie according to a limit structure which sets limits for all exposures in all markets.Aggregate measures of market riskAggregate market risk is constrained by two riskMeasures :(i) The VaR model, which predicts the maximum likely loss in Macquarie’s trading portfolio due to adverse movements in global markets over holding periods of one and ten days.(ii) The MEL scenario, which utilises the contingent loss approach to capture simultaneous, worst case movements across all major markets.Trading revenueThe effectiveness of Macquarie’s risk management methodology can be measured by Macquarie’s daily trading results.Capital adequacy assessmentMacquarie assesses capital adequacy for both Macquarie Group and Macquarie Bank.Risk appetite settingRisk appetite is the nature and amount of risk that the Group is willing to accept.The Risk Appetite TestThis is a Macquarie-wide stress test in which a severe economic downturn scenario is considered.Risk-adjusted performance measurementRisk-adjusted performance metrics for each business unit are prepared on a regular basis and distributed to Operations Review Committee and the Board as well as to business units.

Liquidity Risk Liquidity managementMacquarie’s liquidity risk management framework ensures that both Macquarie Group Limited (MGL) and Macquarie Bank Limited (MBL) are able to meet their funding requirements as they fall due under a range of market conditions.Liquidity policy and principles

19


The liquidity management principles apply to both MGL and MBL and include the following:(i) Liquidity and funding management(ii) Liquidity limitsScenario analysisThe objective is to ensure MGL and MBL’s ability to meet all repayment obligations under each scenario and determine the capacity for asset growth.Liquid asset holdingsGroup Treasury maintains a portfolio of highly liquid unencumbered assets in both MGL and MBL to ensure adequate liquidity is available in all funding environments, including worst case conditions.Liquidity contingency planThe liquidity contingency plan applies to the entire Macquarie Group and defines roles and responsibilities and actions to be taken in a liquidity event.Funding transfer pricingAn internal funding transfer pricing system is in place which aims to align businesses with the overall funding strategy of Macquarie.

Legal and Compliance RiskLegal and compliance risks include the risk of breaches of applicable laws and regulatory requirements, actual or perceived breaches of obligations to clients and counterparties, unenforceability of counterparty obligations and the inappropriate documentation of contractual relationships.

RMG assesses compliance risk from a Macquarie-wide perspective and works closely with legal, compliance and prudential teams throughout Macquarie to ensure compliance risks are identified and appropriate standards are applied consistently to manage these compliance risks.

Reputation Risk Macquarie seeks to manage and minimise reputation risk through its corporate governance structure and risk management framework.

Source: Macquarie Group risk management report

Appendix 7 SWOT Analysis

By applying the SWOT model, Macquarie business strategy analysis is tabulated below :

IDENTIFICATION ANALYSIS (source : Macquarie Group 2010 Annual Report)

StrengthsCharacteristics of the business that give it an advantage over others in the industry

Macquarie have several strengths such as :(i) Diversity of operation(ii) Unique structure and management style which enables businesses to exercise significant operating freedom balanced by limits on risk and the adherence to

20


professional standards(iii) Strong financial position

WeaknessesCharacteristics that place the firm at a disadvantage relative to others

Macquarie have several weaknesses such as :(i) Lower values, write-downs and disposals of offshore assets that largely due to strengthening of Australian dollar against major global currencies(ii) At 31 March 2010, over half of Macquarie’s income and approximately half of Macquarie’s staff were offshore which is also affected by strengthening of Australian dollar against major global currencies

OpportunitiesExternal chances to make greater sales or profits in the environment

Macquarie have several opportunities such as :(i) Advantage of global growth and transaction opportunities arising from generally improved market conditions.(ii) Range of credit opportunities(iii) Opportunities arising as a result of market disruptions like acquisitions of businesses, teams and individuals(iv) The dislocation of global credit markets, together with the scale back of lending activities by financial institutions, provided opportunities for corporate and asset financing businesses(v) Working with governments and strong local partners to deliver infrastructure opportunities.

ThreatsExternal elements in the environment that could cause trouble for the business

Several threats to Macquarie are :(i) Market downturn, that affect volume of financial services to customers(ii)Strong competitor that might enter the market

The business strategy of Macquarie is unique, very entrepreneurial (Pollenmarking 2010). They “intend to concentrate only on the offering that they had a leadership position in or that they can develop one in”. They concentrated on sectors they have the deepest knowledge only, such as resources and energy, infrastructure, real estate and financial institutions. Hence in all their six operating businesses the same core of business strategy: operating and managing the businesses provides the client with highly specialized insights (Macquarie 2011).

Although analysts point out that the revenues of Macquarie are very low compared to other competitors who have larger size of operation and reputation, the fact turns out to be it seems like such a good player in their definite area and markets. The strengths of diverse operation, unique management and strong financial position et cetera will make Macquarie well adapt to various environments they operate in. The head of Macquarie’s investment banking group

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pointed out that rather than flight a battle in the areas where competitors are big and strong, Macquarie focus on the areas where others are not strong (Pollenmarking 2010).

Minimizing the weakness. A conservative approach to risk management is suitable strategy to minimize :(i) Lower values, write-downs and disposals of offshore assets that largely due to strengthening of Australian dollar against major global currencies(ii) At 31 March 2010, over half of Macquarie’s income and approximately half of Macquarie’s staff were offshore which is also affected by strengthening of Australian dollar against major global currencies

Overcome the threats. Incremental growth and evolution and an ability to adapt to change are suitable strategies to overcome :(i) Market downturn, that affect volume of financial services to customers(ii)Strong competitor that might enter the market

Maximize the strengths. Maintaining operations that are diversified by business is suitable strategy to maximize :(i) Diversity of operation(ii) Unique structure and management style which enables businesses to exercise significant operating freedom balanced by limits on risk and the adherence to professional standards(iii) Strong financial position

Grasp the opportunities effectively and efficiently. The provision of services to our clients and the alignment of interests with shareholders, investors and staff are suitable strategies to effectively and efficiently grasp :(i) Advantage of global growth and transaction opportunities arising from generally improved market conditions.(ii) Range of credit opportunities(iii) Opportunities arising as a result of market disruptions like acquisitions of businesses, teams and individuals(iv) The dislocation of global credit markets, together with the scale back of lending activities by financial institutions, provided opportunities for corporate and asset financing businesses(v) Working with governments and strong local partners to deliver infrastructure opportunities.

Appendix 8 Macquarie financial performance

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Source: Macquarie annual report 2011

Appendix 9 Ratio calculations

CalculationRatios Formula 2007 2008 2009

Profitability ratioNet interest margin

Net interest incomeInterest earning asset

7281062256

=0 .69 %

817127322

=0.64 %938103675

=0 . 90 %

Return on total asset

Profit before income tax +finance costsAverage total assets

5832136389

=4 . 27%8086167250

=4 .83%6471149144

=4 .34 %

Return on ordinary

Profit - preference dividendsAverage ordinary equity

14636662

=21. 96 %18038829

=20 .73 %8718664

=10 .05 %

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equityEarnings per share

Profit (after income tax ) - preference dividendsWeighted average number of ordinary shares issued

1463247

=592.30 %1803269

=760 .26 %871281

=309 .96 %

Price-earnings ratio

Market price per ordinary shareEarnings per ordinary share

48 .81569 .8

=14 .51 %52 .83653

=8 . 09%27 . 04308 .6

=8 .76 %

Earnings yield Earnings per ordinary shareMarket price per ordinary share

569 .848 .81

=1167.3%65352 .83

=1236%308 . 627 .04

=1141. 2%

Dividend yield

1. 8648 . 81

=3. 81%3 .45

52 .83=6 . 53%

1.8527 .04

=6 .84 %

Dividend payout Total dividends to ordinary shareholders

Profit-preference dividends

3151463

=21.53 % 3451803

=19. 13 %185871

=21.24 %

Liquidity ratiosCurrent ratio Annual dividend per ordinary share

Market price per ordinary shareCurrent assetsCurrent liabilities

10625686704

=122. 55%127322105851

=120.28%10367595070

=109 .05 %

Quick ratio Cash assets + receivablesCurrent liabilities

Since Macquarie Group is a financial service company, there is not possible to calculate these four ratios due to the lack of inventory and sales items

Receivables turnover

Net sales revenueAverage receivables balance

Average collection period

Average receivables balance *365Net sales revenue

Inventory turnover

Cost of sales Average inventory balance

Financial stability ratiosDebt ratio Total liabilities

Total asset128870136389

=94 .48%157189167250

=93 . 98 %139584149144

=93 . 49%

Equity ratio Total equity Total asset

7519136389

=5.51 %10061167250

=6 . 01%9560149144

=6 .41%

Capitalisation ratio

Total asset Total equity

1363897519

=18 .14 %16725010061

=16 .62 %1491449560

=15 .60 %

Times interest earned

Profit before income tax + finance costs expensed Finance costs (expensed and capitalised )

58323094

=1 .8880865881

=1 .3764715482

=1.18

Asset turnover ratio

Revenues Average total assets

11085136389

=8 .13 %14129167250

=8 .45 %11008149144

=7 .38 %

Cash sufficiency ratiosCash flow adequacy

Cash flows from operating activities Repayment of long-term borrowings +Assets acquired+dividends paid

−975−922

=1.0618611893

=20.8451251064

=4.82

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Repayment of long-term borrowings

Repayment of long-term borrowings Cash flows from operating activities

−1394−975

=142.97 %225

18611=1.12 %

2355125

=4.59 %

Dividend payment

Dividends paid Cash flows from operating activities

472−975

=−48.41 %668

18611=3.59%

8295125

=16.18 %

Reinvestment Purchase of property, plant and equipment Cash flows from operating activities

1724−975

=−176.82 %719518611

=38.66 %72495125

=141.44 %

Debt coverage

Non-current liabilities Cash flows from operating activities

42116−975

=−43.205133818611

=2.76445145125

=8.69

Cash flow efficiency ratiosCash flow to revenues

Cash flows from operating activitiesRevenues

−97511085

=−8.80 %1861114129

=131.72 %512511008

=46.56 %

Operations index

Cash flows from operating activitiesProfit

−9751551

=−0.63186111888

=9.865125974

=5.26

Cash flow return on assets

Cash flows from operating activities + income tax paid +interest paid (finance costs )Average total assets

3479121300

=2.87 %24764151819

=16.31 %10948

158197=6.92 %

Source: Macquarie annual report 2006-2011

Appendix 10 Additional Ratio analysis

Net interest margin

Net interest margin is the dominant ratio of measuring the profitability of the Macquarie group since interest earning is the main revenue of financial institutions. Similar to the gross margin of non-financial companies, net interest margin measures the company’s real return on its investment relative to its interest earning assets. A positive value indicates that a firm makes successful investment decisions because the return excess the amount of interest is paid

Net interest margin 2006-2011

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2006 2007 2008 2009 2010 2011

0.77% 0.69% 0.64%

0.90%1.05% 1.15%

Net interest margin 2006-2011

Interest income and interest expenses

2006 2007 2008 2009 2010 2011

Interest and similar income 3,136.00 4,632.00 6,698.00 6,420.00 4,591.00 5,304.00

Interest income growth rate 47.70% 44.60% -4.15% -28.49% 15.53%

Interest expense 2,544.00 3,904.00 5,881.00 5,482.00 3,511.00 4,029.00

Interest expense growth rate 53.46% 50.64% -6.78% -35.95% 14.75%

expense/income -81.12% -84.28% -87.80% -85.39% -76.48% -75.96%

Net interest income/(expense) 592.00 728.00 817.00 938.00 1,080.00 1,275.00

Macquarie groups had continuously generating positive net interest margin over the past five years. It indicates that the overall investments made by Macquarie group did success because the interest revenue excesses the expenses which paid for interest generating. In details, how the growth of the expense relative to the growth of the interest income made the real change in the net interest margin ratio. Except year 2011, the growth rates of interest rate for last five years are all excess the growth rate of interest income. For instance, while the interest income grew 44.60% to $A 6698milliomn in 2008, the interest expense grew 50.64%. A approximately 6% higher in expense growth made the major contribution of the relative lower net interest margin of 0.69% in 2008, by comparing with 0.77 in 2007. In 2011, the net interest margin reached 1.15% with a lower expense growth of 14.75, comparing with 15.53% increase in interest income.

Return on equity

Return on equity measure the ability of a firm to generate return with the shareholders’ investments. A high return on equity shows a firm is effectively using shareholders’ investment in profit generating.

Return on ordinary equity 2006-2011

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2006 2007 2008 2009 2010 2011

21.05% 22.43% 20.73%

10.05% 9.35% 8.38%

Return on ordinary equity 2006-2011

Net income after tax 945 1,494 1,830 871 1,050 956

Growth rate 58.10% 22.49% -52.40% 20.55% -8.95%

Average ordinary equity 4,489 6,662 8,829 8,664 11,232 11,404

Growth rate 48.41% 32.53% -1.87% 29.64% 1.53%

In 2006-2008, before the financial crisis, Macquarie group reported a stable return on equity of 21.05%, 22.42% and 20.73% respectively. By comparing with Westpac (average of 21.41%), the figure is reasonable within the industry. Because of the financial crisis and the unfavourable market condition, the return on equity dropped significantly. In 2009, while the average ordinary equity declined by 1.87%, the net income after tax dropped 52.40%. As a result, the return on equity was recorded at only 10.05%. In year 2010 and 2011, while the return of equity of the Macquarie’s’ competitors, ANZ and Westpac, increased back to around 15%, Macquarie’s’ data fall to 8.38%. The main reason of the declined figure is that a large portion of expenses had used for global business construction. Macquarie group has entered into a growth stage, especially in global business. Therefore, it is reasonably that the return on the ordinary equity was recorded lower than other major banks. The figure is expected to grow over the medium-term.

Debt- to- equity ratio

Debt –to-equity ratio of MQG from 2006 to 2011

27


2006 2007 2008 2009 2010 20110.00

5.00

10.00

15.00

20.00

Debt-to-equity ratio(MQG)

Debt-to-equity ratio

As we could see in the Graph, although the debt-to equity ratios decreased during years’ period, they are also quite high from FY06 to 11, far from the normally acceptable level of 40%. It may implies that there is too much debt has been put into the business at risk and may lead to difficulty in meeting interest and principal repayments. But the indications of this ratio also depend on the type of business and industry circumstances. Compared with its competitors like other major banks, i.e. Commonwealth Bank, the debt-to-equity ratio of Macquarie can be considered as a low one, especially in recent years.

Total debt ratio

Ratios of cost-to-income, total debt ratio and interact coverage of MQG from 2006 to 2011

2006 2007 2008 2009 2010 2011

0.00%20.00%40.00%60.00%80.00%

100.00%120.00%140.00%160.00%

Cost-to-income

Interest coverage

Cost-to-incomeTotal debt ratioInterest coverage

This ratio is used to measure the safety of creditors’ equity in liquidation circumstance. Generally speaking, the lower the ratio, the better off the company will be. But as we mentioned above in debt-to equity ratio, the assessment is up to the industry. Individually, total debt ratio declined from 0.95 at FY06 to 0.92 at FY11, as we can see in the graph , but by contrast, this ratio of Commonwealth was maintained around 0.94 in this period. Hence, it implies that the Macquarie’s performance is not abnormal in this industry.

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Interest coverage

In order to less the misleading might be caused by tax and interest expenses when deciding the financial health of a business in short term, the interest coverage ratio has been considered by investors as one of the most important ratios. It offers a clear picture of a company’s capacity to pay interests charges on its debt. The calculation shows that the interest coverage of Macquarie reduced from 1.51 to 1.32, which definitely is not good news. Because normally investors are not suggested to hold the company’s stock whose interest coverage ratio is below 1.5. As long as the ratio went down to 1, this company will be regarded as having difficulties to generating cash to pay its interest. As a result, for Macquarie, similar problems may exist.

Cost-to-income

Cost/Income ratio is used to measure a company’s efficiency in minimizing costs while increasing interest, usually in financial sectors. The lower the ratio is, indicating that the company may generate higher profit with more efficient. Unfortunately, as it shows in the above graph, the cost-to-income ratios of Macquarie are higher than those of Commonwealth Bank, and from newest annual report, we could figure out that the ratio increased by approximately 4%. That implies that Macquarie should make move to improve their ability of making profit and cutting cost at the same time.

Appendix 11 Additional Trend analysis

Cash flow trend analysis

Net Operating Cash Net investment Cash Net Financing Cash

03/2007 -975 -1705 1873

03/2008 18611 -6380 258

03/2009 5125 -740 -705

03/2110 -5959 -7103 340

03/2011 2379 -1891 62

-7500

-2500

2500

7500

12500

17500

29


TABLE:10

03/2007 03/2008 03/2009 03/2110 03/2011

Net Increase Cash

-807 12489 3680 -12722 550

Percentage NaN 16.4758 -0.7053 -4.457 -1.0432-12500

-7500

-2500

2500

7500

12500

NET INCREASE CASH

As the bar graph shows, the proportion of the cash flow differs greatly among operating activity, financing activity and investment activity. Generally speaking, the company obtains most of its cash from operating activities from 2007 to 2010, which gives a signal of a healthy and stable operation of MQG. What is noticeable in this graph is that there is an abnormal cash flow in 2010-- both the net operating cash flow and the net investment cash flow presented a negative figure. More specifically, the operating cash flow in 2009 is 216.27% lower than 2010 and the investment cash flow had a fall of 859.84% as well. Inevitably this resulted in a decline of 445.7% in net cash flow, which is dropped from $A3680millions in 1999 to -$A12722million in 2000.

According to the 2010’s financial report, there are two reasons for this change: first, after the economic crisis, the relevant market in 2010 is not regarded as active enough, which lead to a valuation techniques being applied to the fair value and thus discounted the cash flow. Second, the company spent more on money on investing activities that year for the preparation of recovering from the economic crisis, the investing capital consumed from $A740mil in 2009 to $A7103mil in 2010. However, nearly all the banks in Australia had taken the similar strategy, and as we have seen in the second graph, the company achieves great success as well. The increasing amount cash flow in operating activity in 2011 demonstrates a healthy financial situation.

After tax profit attributable to ordinary equity

Graph 1: Profit from ordinary activities after income tax attributable to ordinary equity 2006-2011

30


2006 2007 2008 2009 2010 20110

200400600800

1,0001,2001,4001,6001,8002,000

Profit from ordinary activities after income taxattributable to ordinary equity ($Am) 2006-2011

The after-tax profit of Macquarie Group bank over past five years experienced some fluctuation, which is mainly contributed to the highly disrupted market conditions.

- The operating group performed strongly in year 2007 and 2008 with the growth rate of 59.72% and 23.24% respectively and achieved $A1803million at of the end of the financial year 2008. Although unfavourable conditions like the closure of global mortgage securitisation markets and weakness in the global listed real estate investment trust market, the successful transition to an global corporation has provide a strong potential market for the Macquarie group.

- The unprecedented market downturn in 2009 resulted in a decline in the overall operation. The after-tax profit was decrease 51.69 % to $A871million. By comparing with the major competitors, NAB and ANZ were in the similar situation of 42.9% and 11% decrease in their after-tax profit (Finanalysis 2011). In 2010, the improved market condition has brought the profit back to $A1050million.

- In 2011, although the net operating income was increased by 15 percent, the increased operating expenses which related to global platform expansion, ongoing uncertainty and the strong Australia dollars had negatively affected the final profit. The after-tax profit was declined to $A956million, decreased by 8.95% from previous year.

Interest income

Sometimes companies keep their cash in short term deposit investment or deposit which will mature in twelve months. Interest earrings from these are recorded as interest income.

The table above shows the change of interest income from 2006 to 2010 and its growth trend. There was a shape decline in 2008; in 2009 the growth rate was 28.49% negative. However in 2010, the growth rate raised to 15.53%, which is still fewer than the figures before 2008.

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FY(annual report isuued at)

2007 2008 2009 2010 2011

Interest Income 4632 6698 6420 4591 5304

Growth 47.70% 44.60% -4.15% -28.49% 15.53%


The fluctuation of interest income not only is effected by the interest rate of Federal Reserve, but also results from the interest method the company took.

Macquarie declared in their annual reports that, the interest income is brought to account using the effective interest method which has considered fees, transaction cost and financial lease and so forth. And as we stated at the first part, the economy both in global and local will become better, especially in the financial area. As a result, we believe that the interest income will be increase in the next few years, and the growth rate will rise as well.

Operating expense trend analysis

03/2007 03/2008 03/2009 03/2110 03/2011

Net Operating Expense

5252 6034 4537 5344 6373

Percentage NaN 0.148895658796649

-0.2498 0.1779 0.1926

-500

1500

3500

5500

OPERATING EXPENSE

As the graph shows, the total operating expense of MQG in these five years generally kept a growing tendency. In 2007, the figure was $A5253mil and with a 15% increasing, it reached to $A6034mil in 2008. Then after a reverse situation occurred next year (the data drop nearly 25%). the operating expense jumped to $A5344mil in 2010 again and kept a 19.26% growth rate in the next year.

When compared this data with Australia’s four major banks, we find the amount of operating expense of these four banks are a little higher than MQG. To illustrate, we choose a year randomly (2010) to compare MQG’s operating expense with these four banks’. According to their annual report, the operating expense of Australia and New Zealand Banking Group (ANZ) is $A6971mil, the Commonwealth Bank of AustraliaI ($A7765mil), National Australia Bank ($A8541mil ) and Westpac Banking Corporation is ($A7416mil ). The relatively higher operating expense, to some extent, reflect a better business circumstances, these numbers mentioned above provides a general idea of the company’s operating situation.

Although there is still a little disparity with the four major banks, the fact that the operating expense of MQG keeps a growing tendency in the last few years should not be ignored. Therefore it is reasonable to believe that the MQG has the potential capability to catch up with these four banks.

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Dividend trend analysis

03/2007 03/2008 03/2009 03/2110 03/2011

Total Divi-dents

315 345 185 186 186

Per-cent-age

NaN 0.0952380952380

953

-0.4637681159420

29

0.0054054054054

054

0

-25

25

75

125

175

225

275

325

TOTAL DIVIDENTS

As the graph shows, the dividend in 2007 and 2008 is obviously higher than in the following three years. From 2009 to 2010, the dividend is basically remained balance approximately at $A 165mil. According to the annual report in 2009, the reason why the dividend decreased by 46.48% is that under the influence of global financial crisis, Macquarie group’ shareholders have to subject to suffer as well. However The Board believes that although the economic climate has result in the overall performance declining, Macquarie’s remuneration approach has conduced to essential relative outperformance. In2010，Macquarie establish a new equity plan, which will benefit for the shareholders in the long term.

Assets/ liability/equity trend analysis

33


03/2007 03/2008 03/2009 03/2110 03/2011

To-tal As-sets

136389 167250 149144 145940 157568

Per-cen-tage

NaN 0.2262 -0.1083 -0.0215 0.0797

To-tal Lia-bil-ity

128870 157189 139584 134171 145636

Per-cen-tage

NaN 0.2197 0.112 -0.0388 0.0855000000000001

-25000

25000

75000

125000

175000

TOTAL ASSETS AND LIABILITIES

1 2 3 4 5

Equity 6662 8829 8664 11232 11404

Percentage NaN 0.325300000000001

-0.0187 0.296400000000001

0.0153

-100010003000500070009000

11000

TOTAL EQUITY

According to these two graphs, the assets are always higher than the liabilities which give a signal of better performance. In addition we can find that there is no significant reduction in assets and liabilities even in the financial crises year and in 2011 both assets and liabilities has increased by 7.97 and 8.55 respectively. When turning the eyes to the equity graph, we can find that except the 2009(the global financial crisis) Macquarie’s equity presents an increasing tendency. It jumps from $6662 mil in 2007 to $11404 mil in 2011, which raises nearly 71.18%. The balance sheet is remains solid and conservative. The strength of our balance sheet, integrated with their pursuit of opportunities for continued growth, resulted in a range of successful initiatives. According to the 2011 annual report, the balance sheet in 2011 is tended to be characterized by high cash balances because of the CMT/CMA initiative, which is expected to be continue to deploy in the next following years. All the message mentioned above, it is not difficult to find that even though there was adverse

34


remuneration in 2009, the balance sheet still maintains a conservative trend, which has demonstrate powerful potential development strength.

Appendix 12 Projection of Income statement

Macquarie’s Income Statement from 2007 to 2011 is shown below:

35


2007 2008 2009 2010 2011Interest and similar income 4,632 6,698 6,420 4,591 5,304Interest expense and similar charges -3,904 -5,881 -5,482 -3,511 -4,029Net interest income/(expense) 728 817 938 1,080 1,275

Fee and commission income 3,540 4,645 4,045 3,721 3,891Net trading income 1,047 1,835 1,157 1,299 1,368Share of net (losses)/profits of associates and joint ventures accounted for using the equity method 242 156 74 -230 179Other operating income and charges 1,624 795 -688 768 931Net operating income/(expense) 7,181 8,248 5,526 6,638 7,644

Employment expenses -3,733 -4,177 -2,359 -3,101 -3,890Brokerage and commission expenses -421 -702 -685 -645 -785Occupancy expenses -226 -264 -393 -482 -483Non–salary technology expenses -163 -214 -263 -283 -316Other operating expenses -710 -686 -837 -833 -899Total operating expenses -5,253 -6,043 -4,537 -5,344 -6,373

Profit/(loss) from ordinary activities before income tax 1,928 2,205 989 1,294 1,271Income tax (expense)/benefit -377 -317 -15 -201 -282

Profit/(loss) from ordinary activities after income tax 1,551 1,888 974 1,093 989

Distributions paid or provided on Macquarie Income Preferred Securities -54 -50 -45 -8 -4 Macquarie Income Securities -31 -34 -33 -21 -26 Other minority interests -3 -1 -25 -14 -3Profit attributable to minority interests -88 -85 -103 -43 -33

Profit/(loss) attributable to ordinary equity holders of Macquarie Group Limited 1,463 1,803 871 1,050 956

Dividends and distributions Paid 602 880 962 409 643


In projecting Macquarie’s Income Statement, we are using assumption as follows :

36


Average Assumption2008 2009 2010 2011 Growth Used

Interest and similar income 44.60% -4.15% -28.49% 15.53% 6.87% 6.87%Interest expense and similar charges -50.64% 6.78% 35.95% -14.75% -5.66% -5.66%

Fee and commission income 31.21% -12.92% -8.01% 4.57% 3.71% 3.71%Net trading income 75.26% -36.95% 12.27% 5.31% 13.97% 13.97%Share of net (losses)/profits of associates and joint ventures accounted for using the equity method -35.54% -52.56% -410.81% 177.83% -80.27% 0.00%Other operating income and charges -51.05% -186.54% 211.63% 21.22% -1.18% 21.22%

Employment expenses -11.89% 43.52% -31.45% -25.44% -6.32% -6.32%Brokerage and commission expenses -66.75% 2.42% 5.84% -21.71% -20.05% -21.71%Occupancy expenses -16.81% -48.86% -22.65% -0.21% -22.13% -0.21%Non–salary technology expenses -31.29% -22.90% -7.60% -11.66% -18.36% -11.66%Other operating expenses 3.38% -22.01% 0.48% -7.92% -6.52% -7.92%

AverageIncome tax (expense)/benefit 14% 2% 16% 22% 14.63% 14.63%

Distributions paid or provided on Macquarie Income Preferred Securities 7.41% 10.00% 82.22% 50.00% 37.41% 7.41% Macquarie Income Securities -9.68% 2.94% 36.36% -23.81% 1.45% 1.45% Other minority interests 66.67% -2400.00% 44.00% 78.57% -552.69% 44.00%

AverageDividends and distributions Paid 48.81% 110.45% 38.95% 67.26% 61.32% 61.32%

% Tax

Dividend Payout Ratio in %

Growth

For interest and similar income, interest expense and similar charges, fee and commission income, net trading income, employment expenses and distributions paid on income securities; we are using average growth from 2007 to 2008 since we expect these variables will move in these reasonable growth as the business is expanding. However, share of net (losses)/profits of associates and joint ventures is assumed constant since there are extreme fluctuations throughout the years. Other operating income and charges is assumed at 2011 growth since it is the only reasonable value among others. Whereas brokerage commission expenses, occupancy expenses, non-salary technology expenses and other operating expenses assumed at 2011 growth as it is still reasonable growth we predict in future. Distributions paid on Income Preferred Securities and other minority interests is assumed at the least extreme growth available at 7.41% and 44.00% respectively. Also, future Tax rate and Dividends and distributions paid is assumed at the average rate throughout 2007 to 2011.

The above assumption will result in figures from 2012 to 2016 is shown below:

37


2012 2013 2014 2015 2016Interest and similar income 5,669 6,058 6,475 6,920 7,395Interest expense and similar charges -4,257 -4,498 -4,753 -5,022 -5,307Net interest income/(expense) 1,411 1,560 1,721 1,897 2,088

Fee and commission income 4,036 4,185 4,341 4,502 4,669Net trading income 1,559 1,777 2,025 2,308 2,631Share of net (losses)/profits of associates and joint ventures accounted for using the equity method 179 179 179 179 179Other operating income and charges 1,129 1,368 1,658 2,010 2,437Net operating income/(expense) 8,314 9,069 9,925 10,897 12,005

Employment expenses -4,136 -4,397 -4,675 -4,970 -5,284Brokerage and commission expenses -955 -1,163 -1,415 -1,722 -2,096Occupancy expenses -484 -485 -486 -487 -488Non–salary technology expenses -353 -394 -440 -491 -549Other operating expenses -970 -1,047 -1,130 -1,220 -1,316Total operating expenses -6,898 -7,486 -8,146 -8,890 -9,733

Profit/(loss) from ordinary activities before income tax 1,415 1,584 1,779 2,007 2,272Income tax (expense)/benefit -207 -232 -260 -294 -332

Profit/(loss) from ordinary activities after income tax 1,208 1,352 1,519 1,713 1,940

Distributions paid or provided on Macquarie Income Preferred Securities -4 -3 -3 -3 -3 Macquarie Income Securities -26 -25 -25 -25 -24 Other minority interests -2 -1 -1 0 0Profit attributable to minority interests -31 -30 -29 -28 -27

Profit/(loss) attributable to ordinary equity holders of Macquarie Group Limited 1,177 1,322 1,490 1,686 1,913

Dividends and distributions Paid 722 811 914 1,034 1,173

(in million AUD)Projection for year ended 31 March

38


Appendix 13 Projection of Statement of Financial Position

Macquarie’s Statement of Financial Position from 2007 to 2011 is shown below:

2007 2008 2009 2010 2011AssetsCash and balances with central banks 3 7 141 0 0Due from banks 6,120 10,110 12,271 8,251 9,817Cash collateral on securities borrowed and reverse repurchase agreements 25,909 22,906 5,096 7,149 8,790Trading portfolio assets 15,518 15,807 9,260 12,138 14,898Loan assets held at amortised cost 45,796 52,407 44,751 44,267 46,016Other financial assets at fair value through profit or loss 2,779 4,131 7,910 9,172 11,668Derivative financial instruments – positive values 11,913 21,136 27,428 21,561 21,185Other assets 10,444 10,539 10,640 13,096 12,646Investment securities available for sale 6,060 16,454 18,123 18,221 17,051Intangible assets 100 494 759 1,456 1,317Life investment contracts and other unitholder investment assets 5,847 5,699 4,314 4,846 5,059Interests in associates and joint ventures accounted for using the equity method 4,071 5,500 6,123 3,927 2,790Property, plant and equipment 378 375 605 605 5,007Deferred income tax assets 457 718 1,186 1,124 1,245Non–current assets and assets of disposal groups classified as held for sale 994 967 537 127 79Total assets 136,389 167,250 149,144 145,940 157,568

LiabilitiesDue to banks 4,127 10,041 11,858 9,927 7,810Cash collateral on securities lent and repurchase agreements 7,489 13,781 3,953 7,490 6,617Trading portfolio liabilities 15,922 11,825 2,161 5,432 5,808Derivative financial instruments – negative values 11,069 21,399 27,371 21,706 21,572Deposits 12,403 15,783 21,868 22,484 35,338Debt issued at amortised cost 51,365 57,115 48,270 42,614 41,177Other financial liabilities at fair value through profit or loss 5,552 6,288 6,203 4,413 4,339Other liabilities 11,958 12,210 10,342 12,679 14,327Current tax liabilities 132 193 187 119 197Life investment contracts and other unitholder liabilities 5,781 5,689 4,312 4,864 5,055Provisions 153 179 189 191 215Deferred income tax liabilities 78 121 4 235 287Liabilities of disposal groups classified as held for sale 170 215 328 9 0Total liabilities excluding loan capital 126,199 154,839 137,046 132,163 142,742

Loan capital

Macquarie Convertible Preference Securities 0 0 591 593 595Subordinated debt at amortised cost 1,783 1,704 1,496 916 1,832Subordinated debt at fair value through profit or loss 888 646 451 499 467Total loan capital 2,671 2,350 2,538 2,008 2,894

Total liabilities 128,870 157,189 139,584 134,171 145,636

Historical(in million AUD)

39


Net assets 7,519 10,061 9,560 11,769 11,932

EquityContributed equity Ordinary share capital 3,103 4,534 4,906 6,990 7,140 Treasury shares -7 -12 -2 -443 -731 Exchangeable shares 0 133 116 137 104Reserves 380 456 17 280 310Retained earnings 2,795 3,718 3,627 4,268 4,581Total capital and reserves attributable to ordinary equity holders of Macquarie Group Limited 6,271 8,829 8,664 11,232 11,404

Minority interestsMacquarie Income Preferred Securities 841 752 398 67 63Macquarie Income Securities 391 391 391 391 391Other minority interests 16 89 107 79 74Total equity 7,519 10,061 9,560 11,769 11,932

40


In projecting Macquarie’s Statement of Financial Position, the following assumptions are made.


AssetsCash and balances with central banks 133.33% 1914.29% -100.00% 0.00% 486.90% 0.00%Due from banks 65.20% 21.37% -32.76% 18.98% 18.20% 18.20%Cash collateral on securities borrowed and reverse repurchase agreements -11.59% -77.75% 40.29% 22.95% -6.53% -6.53%Trading portfolio assets 1.86% -41.42% 31.08% 22.74% 3.57% 1.86%Loan assets held at amortised cost n/a n/a n/a n/a n/a n/aOther financial assets at fair value through profit or loss 48.65% 91.48% 15.95% 27.21% 45.82% 15.95%Derivative financial instruments – positive values 77.42% 29.77% -21.39% -1.74% 21.01% -1.74%Other assets 0.91% 0.96% 23.08% -3.44% 5.38% 0.91%Investment securities available for sale 171.52% 10.14% 0.54% -6.42% 43.95% 0.54%Intangible assets 394.00% 53.64% 91.83% -9.55% 132.48% -9.55%Life investment contracts and other unitholder investment assets -2.53% -24.30% 12.33% 4.40% -2.53% -2.53%Interests in associates and joint ventures accounted for using the equity method 35.10% 11.33% -35.86% -28.95% -4.60% -4.60%Property, plant and equipment -0.79% 61.33% 0.00% 727.60% 197.04% 0.00%Deferred income tax assets 57.11% 65.18% -5.23% 10.77% 31.96% -5.23%Non–current assets and assets of disposal groups classified as held for sale -2.72% -44.47% -76.35% -37.80% -40.33% -2.72%

LiabilitiesDue to banks 143.30% 18.10% -16.28% -21.33% 30.95% -16.28%Cash collateral on securities lent and repurchase agreements 84.02% -71.32% 89.48% -11.66% 22.63% -11.66%Trading portfolio liabilities -25.73% -81.73% 151.37% 6.92% 12.71% 6.92%Derivative financial instruments – negative values 93.32% 27.91% -20.70% -0.62% 24.98% -0.62%Deposits 27.25% 38.55% 2.82% 57.17% 31.45% 2.82%Debt issued at amortised cost 11.19% -15.49% -11.72% -3.37% -4.85% 11.19%Other financial liabilities at fair value through profit or loss 13.26% -1.35% -28.86% -1.68% -4.66% -1.35%Other liabilities 2.11% -15.30% 22.60% 13.00% 5.60% 2.11%Current tax liabilities 46.21% -3.11% -36.36% 65.55% 18.07% -3.11%Life investment contracts and other unitholder liabilities -1.59% -24.20% 12.80% 3.93% -2.27% -1.59%Provisions 16.99% 5.59% 1.06% 12.57% 9.05% 1.06%Deferred income tax liabilities 55.13% -96.69% 5775.00% 22.13% 1438.89% 22.13%Liabilities of disposal groups classified as held for sale 26.47% 52.56% -97.26% -100.00% -29.56% 26.47%

Macquarie Convertible Preference Securities 0.00% 100.00% 0.34% 0.34% 25.17% 0.00%Subordinated debt at amortised cost -4.43% -12.21% -38.77% 100.00% 11.15% -4.43%Subordinated debt at fair value through profit or loss -27.25% -30.19% 10.64% -6.41% -13.30% -6.41%

Growth

41


EquityContributed equity Ordinary share capital 46.12% 8.20% 42.48% 2.15% 24.74% 2.15% Treasury shares -71.43% 83.33% -22050.00% -65.01% -5525.78% 0.00% Exchangeable shares 100.00% -12.78% 18.10% -24.09% 20.31% -12.78%Reserves 20.00% -96.27% 1547.06% 10.71% 370.38% 10.71%Retained earnings n/a n/a n/a n/a n/a n/aMacquarie Income Preferred Securities -10.58% -47.07% -83.17% -5.97% -36.70% -5.97%Macquarie Income Securities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other minority interests 456.25% 20.22% -26.17% -6.33% 110.99% -6.33%

For the all of the statements of financial position accounts as shown above except Loan assets held at amortised cost and retained earnings, we assume the future growth as the least extreme values among the years and the average growth (as we will predict that the values. Whereas for retained earnings, the future projection will be the previous retained earnings plus current profit less dividends and distributions paid, and for the Loan assets held at amortised cost is the difference that will balance the statement of financial position.

The above assumption will result in figures from 2012 to 2016 as shown below :

2012 2013 2014 2015 2016AssetsCash and balances with central banks 0 0 0 0 0Due from banks 11,603 13,715 16,211 19,161 22,648Cash collateral on securities borrowed and reverse repurchase agreements 8,216 7,680 7,179 6,711 6,273Trading portfolio assets 15,175 15,458 15,746 16,039 16,338Loan assets held at amortised cost 47,838 49,925 52,204 54,598 57,023Other financial assets at fair value through profit or loss 13,530 15,688 18,191 21,093 24,459Derivative financial instruments – positive values 20,816 20,453 20,096 19,745 19,401Other assets 12,761 12,877 12,994 13,112 13,232Investment securities available for sale 17,143 17,236 17,329 17,423 17,517Intangible assets 1,191 1,078 975 882 797Life investment contracts and other unitholder investment assets 4,931 4,807 4,685 4,567 4,451Interests in associates and joint ventures accounted for using the equity method 2,662 2,539 2,423 2,311 2,205Property, plant and equipment 5,007 5,007 5,007 5,007 5,007Deferred income tax assets 1,180 1,118 1,060 1,004 952Non–current assets and assets of disposal groups classified as held for sale 77 75 73 71 69Total assets 162,130 167,655 174,172 181,724 190,371

Projection as at 31 March(in million AUD)

(Note: that the Loan assets held at amortised cost will increase over time in the projection as this is the case where economic conditions improved in future)

42


LiabilitiesDue to banks 6,538 5,473 4,582 3,836 3,211Cash collateral on securities lent and repurchase agreements 5,846 5,164 4,562 4,031 3,561Trading portfolio liabilities 6,210 6,640 7,099 7,591 8,116Derivative financial instruments – negative values 21,439 21,306 21,175 21,044 20,914Deposits 36,333 37,357 38,409 39,491 40,604Debt issued at amortised cost 45,787 50,912 56,611 62,949 69,995Other financial liabilities at fair value through profit or loss 4,280 4,222 4,165 4,109 4,054Other liabilities 14,629 14,937 15,252 15,573 15,902Current tax liabilities 191 185 179 174 168Life investment contracts and other unitholder liabilities 4,975 4,895 4,817 4,741 4,665Provisions 217 220 222 224 227Deferred income tax liabilities 351 428 523 638 780Liabilities of disposal groups classified as held for sale 0 0 0 0 0Total liabilities excluding loan capital 146,795 151,741 157,598 164,401 172,197

Loan capital

Macquarie Convertible Preference Securities 595 595 595 595 595Subordinated debt at amortised cost 1,751 1,673 1,599 1,528 1,461Subordinated debt at fair value through profit or loss 437 409 383 358 335Total loan capital 2,783 2,677 2,577 2,482 2,391

Total liabilities 149,578 154,418 160,175 166,883 174,588

Net assets 12,552 13,237 13,997 14,841 15,783

EquityContributed equity Ordinary share capital 7,293 7,450 7,610 7,773 7,940 Treasury shares -731 -731 -731 -731 -731 Exchangeable shares 91 79 69 60 52Reserves 343 380 421 466 516Retained earnings 5,036 5,548 6,124 6,776 7,516Total capital and reserves attributable to ordinary equity holders of Macquarie Group Limited 12,032 12,726 13,493 14,344 15,293

Minority interestsMacquarie Income Preferred Securities 59 56 52 49 46Macquarie Income Securities 391 391 391 391 391Other minority interests 69 65 61 57 53Total equity 12,552 13,237 13,997 14,841 15,783

43


Appendix 14 Projection of Statement of Cash Flows

Macquarie’s Statement of Cash Flows from 2007 to 2011 is shown below :

2007 2008 2009 2010 2011Cash flows from operating activitiesInterest received 4,461 5,894 6,077 4,275 5,097Interest and other costs of finance paid -3,828 -5,788 -5,490 -3,672 -4,060Dividends and distributions received 460 407 568 572 366Fees and other non-interest income received/(paid) 3,572 4,858 4,704 4,470 4,855Fees and commissions paid -380 -704 -742 -624 -771Net receipts from trading portfolio assets and other financial assets/liabilities -8,281 8,289 4,503 2,626 -3,857Payments to suppliers -797 -1,877 -2,089 -1,300 -1,489Employment expenses paid -2,377 -3,531 -4,120 -2,862 -3,724Income tax paid -626 -365 -333 -288 -204Life investment contract (expense)/income 415 497 265 -137 126Life investment contract premiums received and other unitholder contributions 2,594 3,225 3,745 2,295 2,575Life investment contract payments -2,469 -2,773 -4,201 -3,226 -2,411Non-current assets and disposal groups classified as held for sale – net receipts from operations 173 164 265 0 0Net loan assets repaid -11,621 -6,675 3,553 336 -1,550Recovery of loans previously written off 3 6 10 19 12Net (decrease)/increase in amounts due to other financial institutions, deposits and other borrowings 17,726 16,984 -1,555 -8,443 7,414Net cash flows (used in)/from operating activities -975 18,611 5,160 -5,959 2,379

(in million AUD)Historical

44


Cash flows from investing activitiesNet payments for financial assets available for sale and at fair value through profit or loss -889 -3,254 -3,826 -8,141 -721 -721Payments for interests in associates -1,525 -2,954 -1,411 -887 -522 -474Proceeds from the disposal of associates 1,080 1,008 444 622 246 230

Payments for the acquisition of assets and disposal groups classified as held for sale, net of cash acquired -1,750 -812 -103 0 -22 -22Proceeds from the disposal of non-current assets and disposal groups classified as held for sale, net of cash disposed 2,159 1,562 745 12 0 0Net (payments for)/cash inflow from the acquisition of subsidiaries, excluding disposal groups, net of cash acquired -25 -931 65 -309 1378 1,378Proceeds from the disposal of subsidiaries and businesses excluding disposal groups, net of cash deconsolidated 0 107 3,354 437 92 92Payments for life investment contracts and other unitholder investment assets -6,083 -7,031 -6,950 -5,717 -6,371 -6,298Proceeds from the disposal of life investment contracts and other unitholder investment assets 5,520 6,037 7,208 6,850 6,145 6,352Payments for property, plant and equipment, and intangible assets -199 -164 -299 -398 -2130 -2,130Proceeds from the disposal of property, plant and equipment 7 52 33 0 0 0Proceeds from disposal of management rights 0 0 0 428 14 14Net cash flows used in investing activities -1,705 -6,380 -740 -7,103 -1,891 -1,578

Cash flows from financing activitiesProceeds from the issue of ordinary shares 946 1,089 81 1,312 1 1Payments to minority interests 5 62 -348 -238 -4 -4Repayment of subordinated debt 0 -225 -235 -406 932 891

Issue of Macquarie Convertible Preference Securities 1,394 0 600 0 0 0Payment of issue costs on Macquarie Convertible Preference Securities 0 0 -9 0 0 0Dividends and distributions paid -472 -668 -829 -328 -598 -598Financing of treasury shares 0 0 0 0 -269 -269Net cash flows from/(used in) financing activities 1,873 258 -740 340 62 21

Net (decrease)/increase in cash and cash equivalents -807 12,489 3,680 -12,722 550 704Cash and cash equivalents at the beginning of the financial year 9,133 8,326 20,815 24,495 11,773 12,323Cash and cash equivalents at the end of the financial year 8,326 20,815 24,495 11,773 12,323 13,027

45


In projecting Macquarie’s Statement of Cash Flows, the following assumptions are made:


Cash flows from operating activitiesInterest received 32.12% 3.10% -29.65% 19.23% 6.20% 3.10%Interest and other costs of finance paid -51.20% 5.15% 33.11% -10.57% -5.88% 5.15%Dividends and distributions received -11.52% 39.56% 0.70% -36.01% -1.82% 0.70%Fees and other non-interest income received/(paid) 36.00% -3.17% -4.97% 8.61% 9.12% -3.17%Fees and commissions paid -85.26% -5.40% 15.90% -23.56% -24.58% -5.40%Net receipts from trading portfolio assets and other financial assets/liabilities 200.10% -45.67% -41.68% -246.88% -33.53% 0.00%Payments to suppliers -135.51% -11.29% 37.77% -14.54% -30.89% 0.00%Employment expenses paid -48.55% -16.68% 30.53% -30.12% -16.20% 0.00%Income tax paid 41.69% 8.77% 13.51% 29.17% 23.29% 8.77%Life investment contract (expense)/income 19.76% -46.68% -151.70% 191.97% 3.34% 3.34%Life investment contract premiums received and other unitholder contributions 24.33% 16.12% -38.72% 12.20% 3.48% 3.48%Life investment contract payments -12.31% -51.50% 23.21% 25.26% -3.83% -3.83%Non-current assets and disposal groups classified as held for sale – net receipts from operations -5.20% 61.59% -100.00% 0.00% -10.90% 0.00%Net loan assets repaid 42.56% 153.23% -90.54% -561.31% -114.02% 0.00%Recovery of loans previously written off 100.00% 66.67% 90.00% -36.84% 54.96% 0.00%Net (decrease)/increase in amounts due to other financial institutions, deposits and other borrowings -4.19% -109.16% -442.96% 187.81% -92.12% -4.19%

Cash flows from investing activitiesNet payments for financial assets available for sale and at fair value through profit or loss -266.03% -17.58% -112.78% 91.14% -76.31% 0.00%Payments for interests in associates -93.70% 52.23% 37.14% 41.15% 9.20% 9.20%Proceeds from the disposal of associates -6.67% -55.95% 40.09% -60.45% -20.74% -6.67%

Payments for the acquisition of assets and disposal groups classified as held for sale, net of cash acquired 53.60% 87.32% 100.00% -100.00% 35.23% 0.00%Proceeds from the disposal of non-current assets and disposal groups classified as held for sale, net of cash disposed -27.65% -52.30% -98.39% -100.00% -69.59% 0.00%Net (payments for)/cash inflow from the acquisition of subsidiaries, excluding disposal groups, net of cash acquired -3624.00% 106.98% -575.38% 545.95% -886.61% 0.00%Proceeds from the disposal of subsidiaries and businesses excluding disposal groups, net of cash deconsolidated 100.00% 3034.58% -86.97% -78.95% 742.17% 0.00%Payments for life investment contracts and other unitholder investment assets -15.58% 1.15% 17.74% -11.44% -2.03% 1.15%Proceeds from the disposal of life investment contracts and other unitholder investment assets 9.37% 19.40% -4.97% -10.29% 3.38% 3.38%Payments for property, plant and equipment, and intangible assets 17.59% -82.32% -33.11% -435.18% -133.25% 0.00%Proceeds from the disposal of property, plant and equipment 642.86% -36.54% -100.00% 0.00% 126.58% 0.00%Proceeds from disposal of management rights 0.00% 0.00% 100.00% -96.73% 0.82% 0.00%

Growth

46


Cash flows from financing activitiesProceeds from the issue of ordinary shares 15.12% -92.56% 1519.75% -99.92% 335.60% 0.00%Payments to minority interests 1140.00% -661.29% 31.61% 98.32% 152.16% 0.00%Repayment of subordinated debt -100.00% -4.44% -72.77% 329.56% 38.09% -4.44%

Issue of Macquarie Convertible Preference Securities -100.00% 100.00% -100.00% 0.00% -25.00% 0.00%Payment of issue costs on Macquarie Convertible Preference Securities 0.00% -100.00% 100.00% 0.00% 0.00% 0.00%Dividends and distributions paid -41.53% -24.10% 60.43% -82.32% -21.88% 0.00%Financing of treasury shares 0.00% 0.00% 0.00% -100.00% -25.00% 0.00%

For the all of the Statements of Cash Flows accounts as shown above except net receipts from trading portfolio assets and other financial assets/liabilities, payments to suppliers, employment expenses paid, net loan assets repaid, Recovery of loans previously written off, net payments for financial assets available for sale and at fair value through profit or loss, payments for the acquisition of assets and disposal groups classified as held for sale, proceeds from the disposal of non-current assets and disposal groups classified as held for sale, net (payments for)/cash inflow from the acquisition of subsidiaries, proceeds from the disposal of subsidiaries and businesses excluding disposal groups, payments for property, plant and equipment, and intangible assets, proceeds from the issue of ordinary shares, payments to minority interests, Dividends and distributions paid; we assume the future growth as the least extreme values among the years and the average growth (as we will predict that the values. Whereas for the accounts mentioned above, we use zero growth since among the available values throughout growths from 2008 to 2011 and average growth, there are many extreme fluctuations hence it is very hard to predict in future.

The above assumption will result in figures from 2012 to 2016 as shown below :

47


2012 2013 2014 2015 2016Cash flows from operating activitiesInterest received 5,255 5,418 5,587 5,760 5,939Interest and other costs of finance paid -3,851 -3,653 -3,465 -3,286 -3,117Dividends and distributions received 369 371 374 376 379Fees and other non-interest income received/(paid) 4,701 4,552 4,408 4,268 4,133Fees and commissions paid -813 -856 -903 -951 -1,003Net receipts from trading portfolio assets and other financial assets/liabilities -3,857 -3,857 -3,857 -3,857 -3,857Payments to suppliers -1,489 -1,489 -1,489 -1,489 -1,489Employment expenses paid -3,724 -3,724 -3,724 -3,724 -3,724Income tax paid -186 -170 -155 -141 -129Life investment contract (expense)/income 130 135 139 144 148Life investment contract premiums received and other unitholder contributions 2,665 2,757 2,854 2,953 3,056Life investment contract payments -2,503 -2,599 -2,699 -2,803 -2,910Non-current assets and disposal groups classified as held for sale – net receipts from operations 0 0 0 0 0Net loan assets repaid -1,550 -1,550 -1,550 -1,550 -1,550Recovery of loans previously written off 12 12 12 12 12Net (decrease)/increase in amounts due to other financial institutions, deposits and other borrowings 7,104 6,806 6,521 6,248 5,987Net cash flows (used in)/from operating activities 2,262 2,154 2,053 1,960 1,875

Cash flows from investing activitiesNet payments for financial assets available for sale and at fair value through profit or loss -721 -721 -721 -721 -721Payments for interests in associates -474 -430 -391 -355 -322Proceeds from the disposal of associates 230 214 200 187 174

Payments for the acquisition of assets and disposal groups classified as held for sale, net of cash acquired -22 -22 -22 -22 -22Proceeds from the disposal of non-current assets and disposal groups classified as held for sale, net of cash disposed 0 0 0 0 0Net (payments for)/cash inflow from the acquisition of subsidiaries, excluding disposal groups, net of cash acquired 1,378 1,378 1,378 1,378 1,378Proceeds from the disposal of subsidiaries and businesses excluding disposal groups, net of cash deconsolidated 92 92 92 92 92Payments for life investment contracts and other unitholder investment assets -6,298 -6,225 -6,153 -6,082 -6,012Proceeds from the disposal of life investment contracts and other unitholder investment assets 6,352 6,567 6,789 7,018 7,255Payments for property, plant and equipment, and intangible assets -2,130 -2,130 -2,130 -2,130 -2,130Proceeds from the disposal of property, plant and equipment 0 0 0 0 0Proceeds from disposal of management rights 14 14 14 14 14Net cash flows used in investing activities -1,578 -1,263 -944 -622 -295

(in million AUD)Projection

48


Cash flows from financing activitiesProceeds from the issue of ordinary shares 1 1 1 1 1Payments to minority interests -4 -4 -4 -4 -4Repayment of subordinated debt 891 851 813 777 742

Issue of Macquarie Convertible Preference Securities 0 0 0 0 0Payment of issue costs on Macquarie Convertible Preference Securities 0 0 0 0 0Dividends and distributions paid -598 -598 -598 -598 -598Financing of treasury shares -269 -269 -269 -269 -269Net cash flows from/(used in) financing activities 21 -19 -57 -93 -128

Net (decrease)/increase in cash and cash equivalents 704 871 1,052 1,245 1,453Cash and cash equivalents at the beginning of the financial year 12,323 13,027 13,899 14,950 16,196Cash and cash equivalents at the end of the financial year 13,027 13,899 14,950 16,196 17,649

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Documents

Analysis Report on Macquarie Group