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Chairman’s and Managing Director’s Report |
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Result |
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The Macquarie Bank Group (the Group) enjoyed a record result for the year ended 31 March 2001. |
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Consolidated after-tax profit attributable to ordinary shareholders increased 15.1 per cent to $242.0 million. |
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Consolidated pre-tax profit attributable to ordinary shareholders increased 2.3 per cent to $296.0 million. |
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The year was characterised by continued growth and strong transaction flows across most businesses. With the exception of the Financial Services Group, all Groups made a positive contribution to the result. The relative contributions are set out in the adjacent table. There were no material asset sales during the year, in contrast to the previous corresponding year when part of our holding in LookSmart was realised. |
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Across the Group there was increased activity in specialist asset-class funds (specialist funds). These funds are an important strategic opportunity, allowing Macquarie to combine our investment banking and industry sector expertise. The year saw strong growth in our infrastructure, property and development capital funds. Further opportunities are being developed in areas such as airports and utilities. |
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Total operating income grew by 22.7 per cent to $1.5 billion. The income was derived from a wide range of businesses operating in 22 international locations, reflecting the diversity of our business mix and geographic spread. Annuity income (income resulting from medium or long-term contractual arrangements) now represents approximately 32 per cent of total income. |
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Earnings per share grew 11.7 per cent to 138.9 cents per share. |
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After-tax return on average ordinary shareholders’ funds was 27.1 per cent. |
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The income tax expense for the period was 18 per cent, mainly due to increased offshore income, which is on average taxed at lower rates. |
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Success in global markets |
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Macquarie’s approach to global markets has been developing since the early 1990s. We remain committed to competing in markets where we believe we can add special value. We achieve this through organic growth supplemented by joint ventures with local market partners and, more recently, acquisitions in niche markets. |
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International operating income exceeded $400 million, an increase of 68 per cent over the previous corresponding year. This year 38 per cent of the Group’s profit was derived from international activities. Several of our businesses now earn more in international markets than in Australia, and we see this trend continuing across the Group. However, our strong Australian market positions remain critical to our ongoing success. |
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Balance sheet |
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The Group’s balance sheet grew significantly over the year ended 31 March 2001. Assets of the Group were up 19.1 per cent to $27.8 billion compared with $23.4 billion at 31 March 2000. This growth reflected larger marked-to-market revaluations of both assets and liabilities as a result of the declining Australian Dollar as well as strong growth in loan and leasing books. Asset quality remains high with impaired assets representing only 0.4 per cent of loan assets. Based on current deal flow we expect further growth in balance sheet footings |
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The total capital adequacy ratio was lower at 16.0 per cent compared with 18.4 per cent last year. |
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The Tier 1 ratio fell to 12.9 per cent compared with 14.5 per cent last year. |
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The changes in these ratios reflect risk-weighted asset growth. They remain well above the minimum levels imposed by the Australian Prudential Regulation Authority. Looking ahead, the Group expects further opportunities to grow risk-weighted assets to result in the Group’s Tier 1 ratio trending towards 11 per cent. |
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The Group expects to take advantage of growth opportunities in the United States and Europe, including infrastructure investments that leverage our distinct capabilities. For example, the Investment Banking Group recently launched the Macquarie Airport Group, seeded with our 50 per cent interest in the United Kingdom’s Bristol Airport. The fund will benefit from the Group’s financial management and operational capabilities. These opportunities are all expected to enhance returns to shareholders. |
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Total funds under management |
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Funds under management are those funds the Group actively manages where the underlying business is wealth creation. Details of these are given on page 61 of this Annual Review. |
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Total Group funds under management reached $30.9 billion, an increase of 17.5 per cent over the total at 31 March 2000. |
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Volatile financial markets |
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The markets in which we operate can often be difficult to predict. Financial markets are characterised by volatility and this has historically provided us with considerable market opportunities. |
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Equity markets in Australia were somewhat subdued when compared with prior years but volatility in Hong Kong produced some exciting opportunities. Commodity markets encountered varied conditions with subdued metals markets but good levels of volatility in sugar, cotton and wool. The Australian currency declined to record-low levels, creating opportunity for our foreign exchange operations. Interest rate markets also fluctuated throughout the year thus providing opportunities to implement structured solutions for our clients. |
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Retail financial services |
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Last year we announced significant changes in our approach to distributing retail financial services. We have now brought together almost all the Group’s retail operations into the Financial Services Group. As we indicated at the time, major investments in systems mean this business will not be earnings-positive for several years. We are pleased to report that the integration programme is progressing smoothly and tracking well against the business plan. Enhanced retail market distribution is not only a major business opportunity in its own right but also an important adjunct to our investment banking businesses. |
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Organisational change |
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In May 2001 we announced the formation of the Investment Banking Group, bringing together the Group’s wholesale structuring, stockbroking, underwriting and advisory capabilities. The Investment Banking Group will facilitate the Group’s continued growth domestically as well as internationally, where Macquarie has successfully entered niche markets in which we believe we have a competitive advantage. |
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The new Group merges the Asset and Infrastructure Group with the Corporate Advisory and Institutional Stockbroking Group. These Groups have been extremely successful as separate entities, each growing strong, industry-specialised teams across a range of major industries. We are confident that combining these resources will not only accelerate growth in these market sectors, it will also deepen relationships with new and existing clients. |
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In November 2000 the formation of the Equity Markets Group was announced. Previously part of the Equities Group, the Equity Markets Group now undertakes the Group’s product issuance, market-making, risk arbitrage and principal-trading activities in equities and equity derivatives. It also originates and structures equity-based financial products and solutions for retail and wholesale clients and administers the Group’s equity finance operations. |
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Dividends |
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The Board has resolved to pay a final dividend of 52 cents per fully paid ordinary share (2000: 52 cents) in respect of the year ended 31 March 2001. |
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The final dividend is 70 per cent franked at the 30 per cent company tax rate. |
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The record date for the dividend is 8 June 2001 and it will be paid on 3 July 2001. |
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The total annual ordinary dividend of 93 cents per share (2000: 86 cents) accords with the previously announced distribution policy. The policy will maintain future ordinary cash dividends at 93 cents per share until such time as dividends can be fully franked. Thereafter, consideration will be given to increasing ordinary dividends as the Bank’s franking capacity increases. |
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As part of its capital management programme, the Bank has indicated that it may supplement cash dividends with on-market share buybacks so that the total of cash dividends and buybacks is up to 100 per cent of earnings each year. The first on-market share buyback was carried out in December 2000 with $36 million worth of shares bought back. In light of capital requirements expected to be required to underwrite growth opportunities, the Bank has decided not to conduct an on-market share buyback in relation to this period. |
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When Macquarie announced its new distribution policy last year we planned to investigate a facility to allow shareholders to sell a small proportion of their shareholding each year free of transaction costs. After investigation the Bank has decided not to proceed with such a facility as the administration costs involved would outweigh the potential minor benefits to shareholders. |
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Modification to performance-based remuneration drivers |
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Since inception, Macquarie Bank has had a profit sharing scheme for staff. The key philosophy underlying the scheme has been to align the interests of our staff with those of our shareholders. |
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Profit share is paid out of a bonus pool determined by a formula. The amount accruing to the profit sharing pool has been driven by return on equity, with escalating remuneration levels as returns on equity increased. The formula has been effective in encouraging and rewarding commercial achievement. However, this approach has created a very high implied hurdle rate for new investments. The Board and senior management were concerned that this arrangement could discourage staff from pursuing acquisitions and seed investments in specialist funds that would be in shareholders’ interests. |
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Thus we have modified the bonus driver so that as from the year to 31 March 2002 performance-based remuneration will be a function of both after-tax profit and earnings in excess of cost of capital. |
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In addition, there has been a small upward adjustment to the amount accruing to the profit-sharing pool in recognition of competitive pressures in employment markets. If the new arrangements had been applied in the year ended 31 March 2001 total employment expenses would have increased by 3 per cent. Overall remuneration policies are subject to the discretion of the Board and can be changed to reflect market and business conditions. |
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Our people |
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In August 2000 we participated in a wide-ranging staff survey by Hewitt Associates in conjunction with the Australian Graduate School of Management and John Fairfax Holdings Limited. Macquarie was proud to be the most highly rated financial institution and ranked fourth overall on the list of the Best Employers to Work For in Australia amongst employers with more than 1,000 employees. The survey covered our own staff as well as an external evaluation. |
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At Macquarie, we try to provide opportunities for our people to develop to their full potential, both on the job and through development initiatives. Programmes offered include management and leadership development, appropriate workplace behaviour, communication and technical skills. Time is spent working with businesses and individuals to identify their specific developmental needs. Our aim is to provide variety and flexibility in development opportunities so that each individual can direct his or her own learning. In line with our commitment to developing our people, in March 2001 we announced the opening of Thinkspace, a dynamic and innovative internal corporate-training facility in Sydney. |
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We are committed to providing our people with an entrepreneurial environment in which to develop new and existing businesses, both in traditional investment banking markets and in those adjacent markets where we can bring expertise and special value. Our people at all levels are encouraged to develop new ideas and opportunities across the globe. Our approach to corporate planning gives staff the flexibility to respond quickly to the dynamic markets in which we operate, untethered by the rigidity of some larger institutions. |
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The autonomy we offer creates an open culture where we can draw on the expertise of our diverse, talented and professional team. The commitment of our people to Macquarie Bank is the key to our success today and will continue to be so in the future. We take this opportunity to publicly thank them for their contribution. |
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Retirement of Bryan Kelman |
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Bryan Kelman has indicated his intention to retire from the Board at this year’s Annual General Meeting. Bryan was a Non-Executive Director of Hill Samuel Australia from 1981 to 1985 when he became a foundation Non-Executive Director of Macquarie Bank. He has been a valuable contributor over these twenty years. He was Deputy Chairman from September 1993 to September 2000 and a member of the Board Compensation and Nominating Committees. We take this opportunity to thank Bryan for his substantial contribution in Macquarie’s development and to wish him well in his retirement. |
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The Board was pleased to appoint Mark Johnson as the new Deputy Chairman. Mark joined Macquarie in 1987 as an Executive Director. He was previously joint Managing Director (with David Clarke) from 1971 to 1977 when the Bank was known as Hill Samuel Australia. |
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Outlook |
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In the short term, the Group’s performance is subject to market conditions in the sectors and regions in which we operate. |
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As noted in this Annual Review, there are many initiatives underway across the Group’s businesses and we therefore remain positive about prospects for continuing growth. We remain confident that we can maintain or enhance our strong market positions over the medium term. |
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Macquarie has begun the current year with satisfactory transaction flows. |
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David Clarke
Executive Chairman |
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Allan Moss
Managing Director and Chief Executive Officer |
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Sydney
24 May 2001 |
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