Macquarie Group Limited

FINANCIAL INSTITUTIONS

CREDIT OPINION11 August 2021

Update

RATINGS

Macquarie Group LimitedDomicile Sydney, New South

Wales, Australia

Long Term CRR Not Assigned

Long Term Debt A3

Type Senior Unsecured - FgnCurr

Outlook Stable

Long Term Deposit Not Assigned

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]

Si Chen +61.2.9270.1416Associate [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 Group LimitedUpdate to credit analysis

SummaryThe long-term rating of Macquarie Group Limited (MGL, A3 stable) reflects its strong overallcredit profile, that balances the risks of the group's continual evolution against the strengthof its earnings profile and the group's strong capitalization and liquidity metrics. The ratingalso includes two notches of uplift to reflect our view that depositors and senior bondholderswould benefit from systemic support, if needed.

Moody's also maintains ratings for the group's banking subsidiary, Macquarie Bank Limited(MBL, A2/A2 stable, baa1), and an intermediate holding company housing its non-bankoperations, Macquarie Financial Holdings Pty Limited (A3 stable). For the rating factor gridapplicable to MBL, please refer to MBL's Credit Opinion.

In particular we note:

» MGL maintains a solid balance sheet position, with high levels of capital and very strongliquidity metrics. As at March 2021, its banking subsidiary reported an APRA Basel IIICommon Equity Tier 1 (CET 1) ratio of 12.6%. The banking subsidiary had a quarterlydaily average Liquidity Coverage Ratio of 174% for the quarter ending March 2021.Management's focus on maintaining a resilient balance sheet is key to maintaining thefirm's strong credit profile.

» MGL's risk management is very strong with tight risk controls, cognizant of market,regulatory and reputational pressures both on an individual unit and on a portfolio basis.The well-embedded risk culture reflected in the firm's earnings performance are positive.Maintaining its disciplined risk culture remains a challenge as the group grows larger, orpursues further growth opportunities through acquisitions.

» A high probability that MGL would receive systemic support in case of need, as aconsequence of its significant presence in Australia's financial markets. We continue toview the regulatory and political framework in Australia to be favorable to the interests ofsenior bank creditors, in contrast to many developed markets. As a result, we incorporatetwo notches of systemic support uplift into the ratings of Macquarie Bank Limited (MBL),and, by extension, MGL.

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https://www.moodys.com/credit-ratings/Macquarie-Bank-Limited-credit-rating-435700

https://www.moodys.com/credit-ratings/Macquarie-Financial-Holdings-Pty-Limited-credit-rating-820661158

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Credit strengths

» A diversified business profile, constrained by exposure to non-lending risks.

» Conservative risk management is key to MGL's credit profile.

» Capital levels remain supportive; future positioning is a key credit consideration.

» Strong liquidity profile.

Credit challenges

» Exposure to volatile capital markets businesses, albeit declining.

» Complex and diverse nature of MGL's operations, requiring disciplined and proactive risk management.

Rating outlookThe outlook is stable for all the ratings of MGL and its subsidiaries.

Factors that could lead to an upgradeDespite its more diversified ratings profile, MGL retains exposure to financial market conditions. As a result even if operating conditionsimprove markedly, the prospect of an upgrade is unlikely. The baseline credit assessment of Macquarie's banking subsidiary, MBL,positions the firm at the higher end of the range applicable to wholesale banks.

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, including as a result of cumulative effects of M&A activity, would also be detrimental to itsratings.

As the ratings of MGL, MBL and MFHPL incorporate the potential for systemic support, any signal from the regulator or governmentthat suggests a less creditor-friendly stance on bank resolution could create downward pressure on the supported ratings. In particularany signs of a reduction in the degree of a support available to, or expectation of greater loss absorbency by, holding companies couldlead to downward pressure on the ratings of Macquarie's holding company, MGL.

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 11 August 2021 Macquarie Group Limited: Update to credit analysis


Key indicators

Exhibit 1

Macquarie Group Limited (Consolidated Financials) [1]

03-212 03-202 03-192 03-182 03-172 CAGR/Avg.3

Total Assets (AUD Million) 227,270.0 211,982.0 185,595.0 180,291.0 171,095.0 7.44

Total Assets (USD Million) 173,100.1 129,743.9 131,837.1 138,291.8 130,520.2 7.34

Tangible Common Equity (AUD Million) 18,684.8 17,122.7 14,846.3 14,519.0 13,406.0 8.74

Tangible Common Equity (USD Million) 14,231.3 10,480.0 10,546.0 11,136.8 10,226.8 8.64

Problem Loans / Gross Loans (%) 1.9 2.1 2.5 1.1 2.1 1.95

Tangible Common Equity / Risk Weighted Assets (%) 21.8 19.3 20.5 16.4 -- 19.56

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 10.2 11.0 12.6 5.3 11.4 10.15

Net Interest Margin (%) 1.2 1.2 1.2 1.4 1.4 1.35

PPI / Average RWA (%) 3.8 3.4 3.0 2.9 -- 3.36

Net Income / Tangible Assets (%) 1.3 1.3 1.6 1.4 1.3 1.45

Cost / Income Ratio (%) 72.1 76.4 78.2 74.6 73.4 75.05

Market Funds / Tangible Banking Assets (%) 36.0 40.5 39.9 44.4 45.7 41.35

Liquid Banking Assets / Tangible Banking Assets (%) 37.2 31.1 33.5 32.9 36.2 34.25

Gross Loans / Due to Customers (%) 126.1 141.1 139.4 152.9 134.4 138.85

[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 because of thescale of reported amounts. [4] Compound annual growth rate (%) based on the periods for the latest accounting regime. [5] Simple average of periods for the latest accounting regime. [6]Simple average of Basel III periods.Sources: Moody's Investors Service and company filings

ProfileMacquarie Group Limited (MGL) is the non-operating holding company of the Macquarie Group. The group offers asset management;finance, banking, advisory services and risk and capital solutions gloablly. As at 31 March 2021, the group reported consolidated assetsof AUD 230.7 billion.

MGL was formed in 2007 when Macquarie Bank Limited (MBL, established as Hill Samuel Australia Limited in 1969, renamed MBLin 1985, and listed in 1996) was reorganizsed under a holding company structure. Since 2007, MGL’s shares have been listed on theAustralian Securities Exchange (Ticker: MQG).

Detailed credit considerationsA diversified business profile, constrained by exposure to non-lending risksMGL's earnings are highly diversified by product and geography. MGL's activities are carried out through four primary business lines:Macquarie Asset Management, Banking and Financial Services, Commodities and Global Markets as well as Macquarie Capital.

MGL benefits from a highly diverse business profile, with a history of strong earnings contribution from its more stable lines of business,including asset management, asset finance and banking. This provides the group with a strong and stable earnings base, enabling it tobetter absorb earnings shocks that may arise from market volatility that would affect its markets facing businesses (Exhibits 2 and 3).The group's (and MBL's) diversification account for a positive adjustment we apply to the financial profile of MBL in its scorecard.



Exhibit 2

Net profit contribution by divisionFor the year ending 31 March 2021

Exhibit 3

Strong earnings built on a base of stable businessesHalf-yearly profits excluding Corporate Centre costs

0

500

1,000

1,500

2,000

2,500

3,000

Macquarie AssetManagement

Banking andFinancial Services

Commodities andGlobal Markets

Macquarie Capital

AU

D m

illio

ns

Source: Company disclosures

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21

AU

D m

illio

ns

Annuities-style Capital markets


Despite this, MGL continues to have a material presence in capital markets, which are subject to greater earnings volatility. In our view,this constrains the firm's overall risk profile. Accordingly, we have adjusted the Asset Risk section of the MBL scorecard to place thisfactor in the `baa' rating range that we believe to better reflect the balance of risks faced by MBL.

Underlying earnings trends are:

» Strong contribution to earnings from Macquarie Asset Management (“MAM”) and Commodities and Global Markets (“CGM”) infiscal year 2021 (Exhibit 4), respectively contributing 34% and 42% of net income for the year period.

» CGM's net profit contribution of AUD 2.6 billion was up 50% compared to the prior fiscal year, due to strong client activity,inventory management and trading results across multiple sectors.

» Net profit contributions from MAM was down 5% to AUD 2.1 billion compared to the prior fiscal year. Assets under managementdecreased 6% to AUD 562.2 billion as at March 2021. Base fees were down 2% to AUD 2.0 billion, and performance fees weresignificantly down 20% to AUD 653 million from AUD 821 million for fiscal year 2020 (Exhibit 5). We expect performance fees tocontinue to be a large contributor, but note that on a through the cycle basis, we view the base fee stream generated by MAM to bethe key contributor to the group's profitability.

» Macquarie Capital reported a net profit contribution of AUD 651 million, down 15% from AUD 763 million at fiscal year 2020. Thiswas driven by lower fee and commission income which was down 13%, whilst investment-related income was down 7% due tofewer asset realisations compared to the prior year.

» BFSs' net profit contribution was flat at AUD 771 million as stronger personal banking income offset lower business banking income.Employment expenses remained elevated, with higher headcount to support customer through the coronavirus pandemic as well asincreased costs associated with investment in technology. The home loan portfolio was up 29% from fiscal year 2020, representingapproximately 3.4% of the Australian market. We expect intense competition for Australian mortgages, combined with the verylow interest rate environment will result in margin pressure in 2022.



Exhibit 4

Profit growth waterfallFY21 compared to FY20

2,731

-103

1

863

-112-194

-171

3,015

0

500

1000

1500

2000

2500

3000

3500

4000

FY20 MAM BFS CGM MacCap Corporatecentre

Taxexpense

FY21

AU

D m

illio

ns


Exhibit 5

Macquarie Asset Management base and performance fees

0

100

200

300

400

500

600

700

800

900

1,000

1,100

Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21

AU

D m

illio

ns

Base Fee Income Performance Fee Income

Source: Company disclosures, Moody's Investors Service

Conservative risk management is key to MGL's credit profileThe benefits of MGL's global scope and diversification also raises the level of operational complexities and risk management challenges.In addition it exposes the firm to and risks associated with the evolution of the group's business model. As a result, we adjusted MBL'sfinancial profile negatively by one notch.

We consider MGL's ability to maintain a conservative risk culture as being one of the firm's most difficult tasks. The diversity of MGL'sbusiness requires tight risk controls, cognizant of market, regulatory and reputational pressures both on an individual unit and ona portfolio basis. To date, management has been focused on containing its markets exposure through a combination of tight riskmanagement oversight and an emphasis on less volatile streams of trading revenue.

MGL has a well-embedded risk culture and the firm's track record and ability to limit earnings volatility are positive. Maintaining itsdisciplined risk culture remains a challenge as the group grows larger, or pursues further growth opportunities through acquisitions.

Asset quality rebounds, but outlook still uncertainNonperforming loans, classified as Stage 3 under the accounting standards, have returned to March 2020 levels, reflecting the strengthof the recovery. This has led to a drop in the bank's nonperforming loans ratio to 1.3% as at March 2021 (fiscal year 2021), from 1.9%at September 2020. However, we believe nonperforming loans are a lagging indicator as some borrowers' COVID-related deferralpackages may still become delinquent in the future, potentially raising the level of nonperforming loans. Furthermore the recentlyinstated lock-downs in Sydney and Melbourne, Australia's two most populous cities, raise the level of uncertainty around future assetquality trends.



That said, we expect the ultimate level of problem loans and eventual credit losses would be manageable for MBL. The bank reportedStage 3 loan assets of AUD1.9 billion for fiscal year 2021 increased by 41% from fiscal year 2020, but Stage 2 assets experienceda decrease of 19% in credit risk to AUD11.2 billion for fiscal year 2021. As a result, MBL's total expected credit loss allowance hasdecreased to AUD776 million as at March 2021, compared to AUD980 million at September 2020 and AUD852 million at March 2020.

In determining expected credit losses MBL and the broader Macquarie group, has incorporated forward-looking information todetermine baseline, upside and downside economic projections, which are then probability weighted. Macquarie's baseline projections,representing the most likely outcome, include the following scenarios;

» Australia – unemployment to fall from a peak of ~7.1% in mid-2020, house prices increase by ~8% in 2021.

» US – unemployment to fall from a peak of ~13% during H1 2020, GDP contracted ~10% during H1 2020 but is expected to returnto pre-pandemic levels in Q2 2021

Capital levels remain supportive; future positioning is a key credit considerationThe firm'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).

As at March 2021, MBL, MGL's banking subsidiary, reported a Common Equity Tier 1 (CET 1) ratio of 12.6%, calculated with APRA'scapital methodology (Exhibit 6) and a self-reported “Harmonized” Basel III ratio of 16.2%. On an overall group basis, as at March 2021,Macquarie had AUD 8.8 billion of capital buffers relative to APRA's requirements, assuming a minimum Tier 1 ratio of 8.5% of thegroup's risk-weighted assets.

Exhibit 6

Common equity Tier 1 ratio of Macquarie Bank Limited

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21

Source: Company disclosures, Moody's Investors Service

Strong liquidity profileOn a consolidated level, MGL's liquidity metrics remain strong. As at March 2021, the group's cash and liquid asset portfolio stood atAUD 41.6 billion and MBL's quarterly daily average Liquidity Coverage Ratios at the March 2021 quarter was 174%. MGL's standardliquidity policy is to ensure that at least twelve months' maturities can be met from internal sources. This is reflected in MBL's very high`a1' Liquid Resources score.

The group's external wholesale funding is chiefly raised by MBL. The bank has also successfully grown its deposit base, up 26% fromMarch 2020. Factors we would view to support the stickiness of such deposits are the fact that they are transaction accounts withrelatively small average balances, such that there would be a high degree of coverage by Australia's Financial Claims Scheme (a form ofdeposit insurance).



The group’s funding structure remains exposed to high levels of wholesale funding. However, the weighted average maturity of thefirm’s long-term wholesale funding is 4.7 years, mitigating some of these concerns. Deposits rose to AUD 84.2 billion, up from 67.3billion at March 2020.

Environmental, Social and Governance (ESG) considerationsIn line with our general view for the banking sector, MGL has a low exposure to environmental risks. We view the banking sector ashaving a moderate exposure to social risk. Refer to our Environmental and Social risks heat maps for further information.

Governance is a key area of focus for banks that require ongoing monitoring. In this regard, we acknowledge the bank's track record oflow loan losses and maintenance of balance-sheet strength.

MGL's rating is supported by Australia's strong operating environmentAustralia's Strong+ Macro Profile reflects the country's very high degree of economic resilience, institutional and government financialstrength, and low susceptibility to event risk. Australia has had 28 years of uninterrupted economic growth, and unemploymentremains low. Our baseline scenario project a recovery in real GDP growth to 4.5% in 2021 and 2.8% in 2022.

The government's economic support package has provided financial assistance to companies and individuals, effectively mitigatingthe negative impact of reduced activity caused by the pandemic. Fiscal measures and partial government guarantees have providedcredit to small and medium-sized enterprises while wage subsidies and debt rescheduling efforts by banks have relieved the immediatepressure on borrowers and minimised a potential wave of bankruptcies. As the pandemic has been successfully contained, and with thescheduled rollout of vaccinations, confidence is high and economic activity has rebounded.

Government wage subsidy payments and bank loan forbearance expired at the end of March, which will highlight the underlyingimpact of the pandemic on residential mortgage quality and small business loans. Household debt is high, with household debt/annualised disposable income at 181% as of March 2021. However, employment growth, low interest rates, rebounding house pricesand low loan to value ratios on home loans, and small business loans which are typically secured by residential properties, shouldprovide buffers to asset quality risk.

Australian banks’ very strong pricing power has historically been supported by the high level of concentration in the banking sector.While loan loss charges have increased during the pandemic and loan volumes declined, rebounding economic conditions are onceagain supporting demand for credit. To date banks have successfully preserved net interest margin as lower funding costs, assisted bylow cost funding facilities from the RBA, offsetting the impact of the low interest rate environment on interest income.

Australia's structural reliance on external financing remains a key vulnerability. However, Australian banks have been extending theterm structure of their wholesale market funding for a number of years and pre-fund upcoming maturities well in advance. The RBA'scommitted liquidity facility, combined with its bond purchases and term-repo operations, has boosted system-level liquidity. Atemporary reciprocal swap line arrangement between the RBA and the US Federal Reserve has facilitated access to US dollar liquidity.

Support and structural considerationsGovernment SupportWe believe the probability that MGL would benefit from systemic support in case of need to be high. In contrast to many crisis-hiteconomies, we view the regulatory and political framework in Australia to continue to be favorable to bank creditor interests. We alsonote that, to date, the regulatory focus in Australia has been heavily on the preservation of systemic stability and that the Macquariegroup as a whole has a significant presence in Australia's financial markets.

Within the group, we believe that the chief beneficiary of support would likely be MBL, and accordingly we incorporate two notchesof systemic support in its A2 rating. We note that during the global financial crisis in 2008-10, only MBL was eligible under thegovernment's guarantee programme for debt and large deposits.

Nevertheless, considering the high degree of operational and financial integration between MGL and its operating subsidiaries, weview their credit profiles to be closely linked. In particular, although there is a global regulatory trend towards “pre-positioning”, suchas requiring separate, or easily separable, IT systems for different legal entities; we view the probability that, in a crisis, the Macquarie


https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1135665




group could swiftly be unbundled to be relatively low and, consequently, we believe it increases the probability that the group would besupported as a whole.

MGL'S relationship to the ratings of its operating subsidiariesMGL's A3 rating is positioned one notch below the A2 rating of MBL. 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.

We assign the following ratings to MGL's principal operating subsidiaries:

» Macquarie Bank Limited has a baseline credit assessment of baa1. The bank's A2 / P-1 for deposit and debt ratings incorporate twonotches of uplift for potential systemic support.

» Macquarie Financial Holdings Pty Limited is the intermediate holding company for non-bank's entities. MFHPL's operations areclosely interlinked: one of the group's four business lines cross over the boundaries between MBL and MFHPL. MFHPL's issuer ratingincorporates 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.



Ratings

Exhibit 7

Category Moody's RatingMACQUARIE GROUP LIMITED

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

MACQUARIE FINANCIAL HOLDINGS PTY LIMITED

Outlook StableIssuer Rating A3ST Issuer Rating P-2

MACQUARIE INTERNATIONAL FINANCE LIMITED

Outlook StableIssuer Rating A3ST Issuer Rating P-2

MACQUARIE 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

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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MJKK and MSFJ are credit rating agencies registeredwith the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and servicesrendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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