Response to Australian Financial Review, Friday 6 May 2016

Macquarie notes an article which appeared in today’s Australian Financial Review (AFR), 6 May 2016, about its Corporate and Asset Finance (CAF) Lending business which, like a previous AFR article on the business, was deliberately inaccurate and sensationalist.

Following publication of today’s article, Macquarie contacted the offices of the Shadow Treasurer and the Shadow Assistant Treasurer. Macquarie was advised by them that contrary to an AFR assertion, a bank Royal Commission terms of reference would not single out any particular bank but rather look at systemic and cultural issues across the sector. They advised that the terms of reference have not yet been set and also advised that if it comes to pass that a Royal Commission looks at this or any other issue, this will be decided by the Royal Commission.

Prior to publication of today’s article, Macquarie repeatedly offered the AFR a detailed briefing on CAF Lending with Macquarie’s Chief Financial Officer. These offers were not accepted. Macquarie also provided the following responses – prior to publication - in relation to a series of allegations made by the AFR.

― The AFR’s claims about Macquarie having a privileged position as a “government-backed bank” (which also appeared in the first AFR stories on CAF Lending), are incorrect. The Government Guarantee was part of a co-ordinated response to the onset of the global financial crisis by G20 countries.

• In Australia more than 200 financial institutions were covered by the Government Guarantee. Those that used the Government Guarantee were required to pay a fee for doing so. Macquarie has not received, and does not receive “government backing” and is no different from any other Authorised Deposit Taking Institution in Australia, and no different in that respect, to any of our its international banking competitors.

― The AFR’s implied criticism of sub-investment grade lending is a misunderstanding of the business of banking which has always included the provision of credit to non “investment grade” borrowers, including many corporates, small to medium sized enterprises (SMEs) and individuals.

• This lending has always been fundamental to the banking sector – a significant proportion of Australian (and global) bank lending is to non investment grade borrowers. In corporate debt alone, each of Australia’s largest banks’ non investment grade lending portfolios are many times the size of the CAF Lending portfolio.
• Importantly, the quality of a loan is determined not just by whether the borrower is investment grade but also by the quality of the security and covenants over the loan. Successful banking business requires this judgement, rather than only following public ratings.

― Suggesting the large global banks are not competing fiercely for sub-investment grade financing and have left a gap in the market for Macquarie is demonstrably untrue.

• The large global banks are very active competitors to CAF Lending. They provide considerably more sub-investment grade financing and have much larger sub-investment grade portfolios than CAF Lending’s – often by large multiples.
• CAF Lending’s assets are frequently held jointly with other banks or have been originated by other banks which have a substantially larger market presence than Macquarie.
• Macquarie is regulated by APRA and 190 other regulators around the globe. APRA standards are generally viewed to be among the most rigorous globally and are no less “tough” than those applicable in the US and Europe. Suggesting Macquarie has an advantage from more lenient regulation cannot be supported.

― Regarding the AFR’s comments about accounting treatment of the (CAF Lending) portfolio, Macquarie properly accounts for the portfolio as required under international accounting standards. Under these standards, where the intention is to hold an asset over its life, it should be accounted for on an accruals basis rather than mark to market. Macquarie follows this approach in its audited accounts and also funds the CAF Lending loan book with long term debt on this basis. Since inception, around 85% of the loans have been realised through repayment – clearly evidencing the appropriateness of this accounting approach. In addition, the standards require regular testing for credit quality and where there is a deterioration, that appropriate provisions be taken.

― Regarding the comment that Macquarie was “desperate” to use capital during the financial crisis, even a cursory review of (Macquarie’s) financial results at the time shows that (its) balance sheet footings did not alter.