Macquarie Bank Limited...Detailed credit considerations Capital levels remain strong; future positioning is a key credit consideration MGL's capital requirements are a combination

FINANCIAL INSTITUTIONS

CREDIT OPINION3 April 2019

Update

RATINGS

Macquarie Bank LimitedDomicile New South Wales,

Australia

Long Term CRR A1

Type LT Counterparty RiskRating - Fgn Curr

Outlook Not Assigned

Long Term Debt A2

Type Senior Unsecured - FgnCurr

Outlook Stable

Long Term Deposit A2

Type LT Bank Deposits - FgnCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Francesco Mirenzi +61.2.9270.8176VP-Sr Credit [email protected]

Patrick Winsbury +61.2.9270.8183Associate Managing [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Macquarie Bank LimitedUpdate to credit analysis

SummaryThe A2 long-term rating and baa1 baseline credit assessment of Macquarie Bank Limited(MBL) reflect its strong overall credit profile. The A2 rating also includes two notches of upliftto reflect our view that depositors and senior bondholders would benefit from systemicsupport, if needed.

MBL is the principal banking operating entity of Macquarie Group Limited (MGL, ratedA3 stable). Please refer to MGL's Credit Opinion for details of the credit profile of theconsolidated Macquarie group. The majority of the rating factors for MBL and MGL are thesame and this credit opinion provides an abbreviated outline of rating factors pertinentexclusively to MBL.

Our rating view of MGL's and MBL's standalone credit profiles balances the risks of thegroup's continual evolution, and the evolution of its earnings profile – which places greateremphasis on annuity-like businesses with a lower reliance on the potentially more volatiletrading and capital markets businesses -- against the credit positives of the group's strongcapitalization and liquidity metrics and very strong risk management framework.

Exhibit 1

Rating Scorecard - Key Financial Ratios

1.4% 12.9%0.9%

48.2% 35.2%

0%

10%

20%

30%

40%

50%

60%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Asset Risk:Problem Loans/

Gross Loans

Capital:Tangible Common

Equity/Risk-WeightedAssets

Profitability:Net Income/

Tangible Assets

Funding Structure:Market Funds/

Tangible BankingAssets

Liquid Resources:Liquid BankingAssets/TangibleBanking Assets

Solvency Factors (LHS) Liquidity Factors (RHS)

Macquarie Bank Limited (BCA: baa1) Median Baa1-rated banks

So

lve

ncy F

acto

rs

Liq

uid

ity F

acto

rs

Source: Moody's Financial Metrics

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1165432

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit strengths

» Strong liquidity profile

» Strong capital levels

» Improving asset quality

Credit challenges

» Exposure to capital markets business, albeit declining

» High levels of wholesale market funding

» Diverse nature of MBL's operations, which raises the level of operational complexities and risk management challenges

Rating outlookThe rating outlook is stable.

Factors that could lead to an upgradeDespite the recent trend towards a more diversified business profile, MBL (and the broader MGL group) retains exposure to financialmarket conditions. As a result, even if operating conditions improve markedly, the prospect of an upgrade is unlikely. Moody's viewswholesale / investment banking businesses to be appropriately rated in the Baa range. MBL's standalone credit assessment of baa1already positions it at the higher end of this range.

Factors that could lead to a downgradeThe ratings would come under negative pressure should the trend towards a more diversified business profile reverse itself and resultin a higher exposure to volatile financial markets businesses. Any signs of a loss of discipline in its risk management or a materialreduction in its capital and liquidity buffers would also be detrimental to its ratings.

As the ratings of MBL incorporate the potential for systemic support, any signal from the regulator or government that suggests a lesscreditor-friendly stance on bank resolution could create downward pressure on the supported ratings.

Further deterioration in the operating environment faced by MBL and MGL could lead to a change in their macro profile and place theirratings under downward pressure.

We view the Macquarie legal entities as closely intertwined, with a high degree of operational and financial linkages. However, shouldin the medium-to-long run there be a sharpening of the boundaries between the group's bank and non-bank entities, it could lead togreater divergence of their credit profiles and rating outcomes.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 3 April 2019 Macquarie Bank Limited: Update to credit analysis


Key indicators

Exhibit 2

Macquarie Bank Limited (Consolidated Financials) [1]9-182 3-182 3-172 3-162 3-152 CAGR/Avg.3

Total Assets (AUD million) 169,847 162,435 155,693 167,002 156,278 2.44

Total Assets (USD million) 122,893 124,595 118,771 128,466 119,388 0.84

Tangible Common Equity (AUD million) 12,431 12,479 11,998 12,043 10,912 3.84

Tangible Common Equity (USD million) 8,994 9,572 9,153 9,264 8,336 2.24

Problem Loans / Gross Loans (%) 0.8 1.1 1.9 1.9 2.9 1.75

Tangible Common Equity / Risk Weighted Assets (%) 12.9 13.6 13.3 12.8 12.6 13.16

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 4.5 7.1 11.2 12.1 17.8 10.55

Net Interest Margin (%) 1.5 1.4 1.5 1.4 1.6 1.55

PPI / Average RWA (%) 2.3 2.2 2.2 2.5 2.8 2.46

Net Income / Tangible Assets (%) 0.9 1.0 0.8 1.2 0.7 0.95

Cost / Income Ratio (%) 69.1 68.7 67.0 63.2 60.7 65.85

Market Funds / Tangible Banking Assets (%) 46.5 48.2 47.6 56.0 55.1 50.75

Liquid Banking Assets / Tangible Banking Assets (%) 35.3 35.2 37.1 38.0 40.2 37.15

Gross Loans / Due to Customers (%) 144.3 135.6 132.3 152.5 152.3 143.45

[1] All figures and ratios are adjusted using Moody's standard adjustments. [2] Basel III - fully-loaded or transitional phase-in; IFRS. [3] May include rounding differences due to scaleof reported amounts. [4] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime. [5] Simple average of periods presented for the latestaccounting regime. [6] Simple average of Basel III periods presented.Source: Moody's Financial Metrics

ProfileMacquarie Bank Limited (MBL) is a Sydney-based authorised deposit-taking institution that provides banking services to institutional,corporate and retail clients and counterparties around the world. As of 30 September 2018, MBL held a market share of 2.4% inAustralia in terms of total resident assets. On a consolidated basis, MBL held total assets of AUD 184.9 billion as of 30 September2018.

MBL is a wholly owned subsidiary of Macquarie Group Limited (MGL). The other main operating subsidiary held by MGL is MacquarieFinancial Holdings Pty. Limited (MFHPL), a provider of non-banking services.

Detailed credit considerationsCapital levels remain strong; future positioning is a key credit considerationMGL's capital requirements are a combination of Basel III capital requirements for its banking operations contained within MBL andadditional capital requirements in respect of its non-banking operations calculated on the basis of an economic capital adequacy model(reviewed by the Australian Prudential Regulation Authority). Please refer to MGL's credit opinion for details of the overall group'scapital positioning.

As at September 2018, MBL reported a Common Equity Tier 1 (CET 1) ratio of 10.4%, calculated with APRA's capital methodology(Exhibit 3) and a self-reported “Harmonized” Basel III ratio of 13.0%. On an overall group basis, as at September 2018, Macquariehad AUD 3.4 billion of capital buffers relative to APRA's requirements, assuming a minimum Tier 1 ratio of 8.5% of the group's risk-weighted assets.

Furthermore, the group will transfer Corporate and Asset Finance portfolios from the banking group into the non-bank group. As aresult of this, it is expected that the bank's CET 1 ratio would rise to approximately 11.1%.



Exhibit 3

Common Equity Tier 1 Ratio

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

Sep-16 Mar-17 Sep-17 Mar-18 Sep-18

Source: Company disclosures, Moody's Investors Service

MGL's capital deployment has been focused on the group's three divisions with relatively more stable cash flows (its `annuities-style'businesses – Macquarie Asset Management, Banking and Financial Services, and Corporate and Asset Finance). As at September 2018,the overall capital requirements of these businesses were AUD 9.0 billion or around 55% of total capital requirements for the group.

Strong liquidity profileOn a consolidated level, MGL's liquidity metrics remain strong. As at September 2018, the group's liquid asset portfolio stood at AUD23.5 billion, of which AUD 21.4 billion was held by MBL. MBL's liquidity coverage metrics are very strong, reflected in the bank's highregulatory Liquidity Coverage Ratio, which had a quarterly daily average of 159% for the quarter ending Septemberh 2018. MGL'sstandard liquidity policy is to ensure that at least twelve months' maturities can be met from internal sources. This is reflected in MBL'svery high `a1' Liquid Resources score.

The group's external wholesale funding is chiefly raised by MBL. MBL has also successfully grown its deposit base on the back of itsprivate client business. Factors we would view to support the stickiness of such deposits are the fact that they are transaction accountswith relatively small average balances, such that there would be a high degree of coverage by Australia's Financial Claims Scheme (aform of deposit insurance).

MBL’s funding structure remains exposed to high levels of wholesale funding, which was at 46.5% for 1H 2019, based on Moody'smeasure of market funds relative to tangible banking assets, this was down from 48.2% for FY 2018. MBL's reliance on externalwholesale funding has reduced by AUD 10.7 billion in the 12-months to September 2018, and has been replaced by intercompanyfunding, which has increased by AUD 10.1 billion over the same period. Whilst the amount of market funding at the bank has reduced,the group's consolidated exposure to credit and capital markets has not as the intercompany funding likely represents a transfer ofmarket funding from within the group.

On balance, we view MBL's Funding Structure to be commensurate with a `ba2' level, an upward adjustment -- reflecting a reasonablylong and evenly distributed maturity structure -- from the unadjusted `b1' score.

Rating is supported by Australia's strong operating environmentAustralia's Strong+ Macro Profile reflects a very high degree of economic resilience, institutional and government financial strengthand low susceptibility to event risk. Australia is in its 27th year of uninterrupted economic growth, although the economy is facingreduced investment in the resources sector and, although rising, nominal income growth remains low. Our baseline scenario assumesGDP growth of up to 2.5% in 2019 and 2.5% in 2020. Australia’s economy has undergone a transition from growth led by investmentsin the resources sector to other sources of growth. This adjustment has led to below-trend nominal GDP and wage growth and,consequently, a more difficult operating environment for banks.

While there may still be pockets of weakness from lower private-sector investment and fiscal spending, low interest rates supportoverall private-sector demand. Rising house prices in Sydney and Melbourne over 2013-17 were accompanied by an elevated



proportion of lending to residential property investors, raising concerns regarding financial stability. Australia also has very high levelsof household debt, with household debt-to-annualized disposable income ratio reaching 188.6% in September 2018. To address therising risks in the housing market, Australian Prudential Regulation Authority has undertaken a number of initiatives to preserve prudentlending standards and strengthen the resilience of the banking system.

These actions have led to a slowdown in higher-risk lending activity and a reduction in overall credit growth compared with thenational income. House prices in Sydney and Melbourne are softening in an orderly manner. However, the resilience of householdbalance sheets and, consequently, bank portfolios to a serious economic or funding shock has not been tested at these levels of privatesector debt.

Our view of the operating environment also reflects banks' strong pricing power as a result of the high concentration in the bankingsector. Australia's structural reliance on external financing remains the sector's primary vulnerability. On a net basis, the country'sforeign debt funding has traditionally been sourced primarily through the banking system, exposing Australian banks to the risk ofsudden shifts in foreign investor sentiment.

Support and structural considerationsStrong potential for government supportWe judge the probability of systemic support for MBL in the event of stress to be high. This is based on MBL's significant position inthe Australian financial market. Additionally, the regulator's own Probability And Impact Rating System - which measures the systemicimpact of the failure of an individual institution - uses asset size as a major input. As one of Australia's larger banks, MBL scores well bythis metric. It also plays a significant role in Australia's financial markets. Although the bank does not have a big presence in the retaildeposit market, it has been growing consistently and its overall deposits are comparable in size to Australia's regional banks.

MBL's relationship to the ratings of its operating subsidiariesMBL's A2 rating is positioned one notch above the A3 rating of MGL. MBL dominates the group both in terms of assets and earnings.MGL's rating is positioned in line with Moody's usual notching practice for holding companies, which recognizes the structuralsubordination of MGL's creditors to those of its principal operating subsidiary.

Other than MBL, we assign the ratings to Macquarie Financial Holdings Pty Limited (MFHPL), the intermediate holding company fornon-bank's entities. Given the closely interlinked operations, two of the group's five business lines cross over the boundaries betweenMBL and MFHPL, MFHPL's issuer rating incorporates uplift for systemic support as a result of its close integration with the bank.

We continue to view the Macquarie businesses as closely intertwined, with a high degree of operational and financial linkages.However, should in the medium-to-long run the transfer serve to sharpen the boundaries between the group's bank and non-bankentities, it could lead to greater divergence of their credit profiles and rating outcomes.

No rating uplift from parental supportMBL's ratings do not include any uplift from the potential for support from its parent, MGL because (i) MGL is rated lower as a result ofbeing structurally subordinated to its operating subsidiaries, (ii) MGL's and MBL's performance are highly correlated as a result of theirclose operational integration and (iii) the group holds its liquidity resources at the operating company level.

In practice there is some potential for MGL to provide additional capital support to MBL -- but also for capital to flow the other way.MGL is the listed entity that would raise additional capital for the group if required. The regulator has also publicly indicated that solong as regulated entities -- such as both MBL and MGL -- individually meet minimum regulatory capital requirements, it is ambivalentwhere surplus capital is held within a group structure. Therefore, given that MBL operates at a relatively high level of capital, and inview of the close operational integration of MBL and the rest of the group, there is also a possibility that capital and dividends couldflow from MBL up to MGL at certain times.

Loss Give Failure analysisThere is no statutory bail-in in Australia. As a result, we do not consider Australia to have an operational resolution regime (as definedin our Banks rating methodology). We apply a basic Loss Given Failure approach in rating Australian banks' junior securities.



In determining whether Australia has an operational resolution regime, we take into account both the current resolution frameworkand Australian policymakers' public stance. Although Australia is a member of the Financial Stability Board, and the board hashighlighted the lack of statutory bail-in as a gap relative to international standards, the Australian authorities have so far adopted amore nuanced public stance on this issue.

In November 2018, APRA released a consultation on a proposed framework for total loss absorbing capacity (TLAC). The proposal,if implemented, will require Australia's four largest banks to strengthen their loss-absorbing capacity, in the event of a resolution, byincreasing their total capital ratios by four to five percentage points. The proposals allow banks to meet this requirement with existingcapital instruments, which include Common Equity Tier 1 (CET1), Additional Tier 1 and Tier 2 capital instruments.

In contrast to loss absorbing capacity requirements introduced in many other jurisdictions, APRA in its consultation paper, did notpropose a new form of loss-absorbing instrument or a statutory bail-in framework. Furthermore, there are no proposed legislativechanges in Australia to impose explicit burden-sharing on bank creditors. Consequently, APRA's proposal does not alter our view thatgovernment support would likely be available for Australia's largest banks in case of stress. The proposal to increase TLAC will reducethe potential for government support to be required, however, we do not expect this to change the willingness of authorities to providesupport for senior creditors, in case of need.

Counterparty risk ratingMoody’s Counterparty Risk Ratings are opinions of the ability of entities to honour the uncollateralized portion of non-debtcounterparty financial liabilities (CRR liabilities) and also reflect the expected financial losses in the event such liabilities are nothonoured. CRR liabilities typically relate to transactions with unrelated parties. Examples of CRR liabilities include the uncollateralizedportion of payables arising from derivatives transactions and the uncollateralized portion of liabilities under sale and repurchaseagreements. CRRs are not applicable to funding commitments or other obligations associated with covered bonds, letters of credit,guarantees, servicer and trustee obligations, and other similar obligations that arise from a bank performing its essential operatingfunctions.

MBL’s CRR is positioned at A1/P-1

We consider Australia to be a non-operational resolution (non-ORR) regime. For non-ORR countries, the starting point for the CRR isone notch above the bank's Adjusted BCA, to which we then typically add the same notches of government support uplift as applied todeposit and senior unsecured debt ratings.

Counterparty risk assessmentCounterparty Risk Assessments (CR Assessments) are opinions of how counterparty obligations are likely to be treated if a bank failsand are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than both the likelihood of defaultand the expected financial loss suffered in the event of default and (2) apply to counterparty obligations and contractual commitmentsrather than debt or deposit instruments. The CR assessment is an opinion of the counterparty risk related to a bank's covered bonds,contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

MBL's long-term CR Assessment is positioned at A1(cr). The CR Assessment, prior to government support, is positioned one notchabove the Adjusted BCA and therefore above the Preliminary Rating Assessment of senior unsecured debt obligations -- reflectingMoody's view that the probability of default of obligations represented by the CR Assessment is lower than that of senior unsecureddebt. Moody's believes that senior obligations represented by the CR Assessment will be more likely preserved in order to limitcontagion, minimize losses and avoid disruption of critical functions.

For MBL, the CR Assessment also benefits from government support in line with Moody's `High' support assumptions on long-termissuer ratings and senior unsecured debt. This reflects Moody's view that any support provided by governmental authorities to the bankwhich benefits senior unsecured debt is very likely to benefit operating activities and obligations reflected by the CR Assessment aswell, consistent with Moody's belief that governments are likely to maintain such operations as a going concern in order to reducecontagion and preserve the bank's critical functions.



About Moody's bank scorecardOur Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read inconjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.



Rating methodology and scorecard factors

Exhibit 4

Macquarie Bank LimitedMacro FactorsWeighted Macro Profile Strong + 100%

Factor HistoricRatio

InitialScore

ExpectedTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 1.4% aa3 ↓ baa1 Non lending

credit riskMarket risk

CapitalTCE / RWA 12.9% a3 ← → a3 Risk-weighted

capitalisationAccess to capital

ProfitabilityNet Income / Tangible Assets 0.9% baa1 ← → baa1 Return on assets

Combined Solvency Score a2 baa1LiquidityFunding StructureMarket Funds / Tangible Banking Assets 48.2% b1 ← → ba2 Term structure Market funding quality

Liquid ResourcesLiquid Banking Assets / Tangible Banking Assets 35.2% a1 ← → a1 Quality of

liquid assetsAccess to

committed facilitiesCombined Liquidity Score baa3 baa2Financial Profile baa1

Business Diversification 1Opacity and Complexity -1Corporate Behavior 0

Total Qualitative Adjustments 0Sovereign or Affiliate constraint: AaaScorecard Calculated BCA range a3-baa2Assigned BCA baa1Affiliate Support notching 0Adjusted BCA baa1

Instrument class Loss GivenFailure notching

AdditionalNotching

Preliminary RatingAssessment

GovernmentSupport notching

Local CurrencyRating

ForeignCurrency

RatingCounterparty Risk Rating 1 0 a3 2 A1 A1Counterparty Risk Assessment 1 0 a3 (cr) 2 A1 (cr) --Deposits 0 0 baa1 2 A2 A2Senior unsecured bank debt 0 0 baa1 2 A2 A2Dated subordinated bank debt -1 -1 baa3 (hyb) 0 -- Baa3 (hyb)[1] Where dashes are shown for a particular factor (or sub-factor), the score is based on non-public information.Source: Moody's Financial Metrics



Ratings

Exhibit 5Category Moody's RatingMACQUARIE BANK LIMITED

Outlook StableCounterparty Risk Rating A1/P-1Bank Deposits A2/P-1Baseline Credit Assessment baa1Adjusted Baseline Credit Assessment baa1Counterparty Risk Assessment A1(cr)/P-1(cr)Issuer Rating A2Senior Unsecured A2Subordinate Baa3 (hyb)Commercial Paper P-1Other Short Term (P)P-1

ULT PARENT: MACQUARIE GROUP LIMITED

Outlook StableIssuer Rating A3Senior Unsecured A3ST Issuer Rating P-2Other Short Term (P)P-2

MACQUARIE BANK LIMITED, LONDON BRANCH

Outlook StableCounterparty Risk Rating A1/P-1Counterparty Risk Assessment A1(cr)/P-1(cr)Senior Unsecured A2Pref. Stock Non-cumulative Ba1 (hyb)

MACQUARIE BANK LIMITED, SINGAPORE BRANCH

Counterparty Risk Rating A1/P-1Counterparty Risk Assessment A1(cr)/P-1(cr)Senior Unsecured MTN (P)A2

MACQUARIE FINANCE LIMITED

BACKED Pref. Stock Non-cumulative -DomCurr

Ba1 (hyb)

Source: Moody's Investors Service



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EMEA 44-20-7772-5454


Documents

Macquarie Bank Limited...Detailed credit considerations Capital levels remain strong; future positioning is a key credit consideration MGL's capital requirements are a combination