Chairman's and Managing Director's Report

This year we are reporting our 14 th consecutive year of record profit. These results are made possible because of the quality of our staff and by taking a broader view of the markets in which we operate.

We have expanded the Bank's operations, geographic footprint and capabilities to provide a diverse range of financial services.

This willingness to selectively enter new markets, to invest alongside clients and to take long-term stakes in investments, delivers excellent results for our shareholders, business partners and clients.

• Consolidated after-tax profit attributable to ordinary equity holders increased
  13 per cent to $A916 million from $A812 million for the year ended 31 March 2006 ( 33 per cent increase excluding AIFRS and MGQ impacts.)
  
  
• Earnings per share increased 8 per cent to $A4.00 from $A3.70 .
  
  
• Total operating income increased 17 per cent to $A4,393 billion from $A3,752 billion.
  
  
• Trading, fee and commission, and interest income were all up on the previous year.
  
  
• Fee and commission income contributed approximately 56 per cent of income
  and rose 34 per cent on the prior year.
  
  

Consolidated after-tax profit for the Macquarie Bank Group ( the Bank or Macquarie ) was $A916 million, an increase of 13 per cent from $A812 million in the previous year ( which included the profit from the formation of Macquarie Goodman Group (MGQ)). Our earnings per share were $A4.00, an increase of 8 per cent from $A3.70.

By adjusting the 2006 result to remove significant AIFRS¹ impacts, the result under previous AGAAP² would have been approximately $A972 million, 18 per cent higher than the prior year's AGAAP reported result of $A823 million and 33 per cent higher when excluding the $A91 million profit on formation of MGQ.

¹Australian standards equivalent to International Financial Reporting Standards.
²Australian Generally Accepted Accounting Principles.

Dividends

The Board was pleased to announce a fully franked final dividend of $A1.25 per ordinary share.

This brings total ordinary dividends for the year to  $A2.15 per share, compared to $A1.61 per share in 2005, representing an increase of 34 per cent over the prior year and a payout ratio of 54.4 per cent.

The Board has re-introduced a 2.5 per cent discount for the Dividend Reinvestment Plan, with effect from the 2006 final dividend.

Our target payout ratio each year remains in the range of 50 to 60 per cent of net earnings. We expect future dividends will be fully franked for the next 18–24 months and thereafter at least 80 per cent franked, subject to the future composition of income.

Result overview

Total operating income for the year rose to $A4.4 billion, an increase of 17 per cent from $A3.8 billion. Trading, fee and commission, and interest income were all up on the prior year.  Fee and commission income contributed approximately 56 per cent of our total income, a rise of 34 per cent on 2005 .

All six of our operating Groups performed strongly with all results up on 2005, excluding the profit from MGQ last year. The graph below shows the relative contributions to profit by each Group. Operating Group performances are discussed in more detail in their relevant sections (pages 10 – 23).

The total value of assets under our management grew 45 per cent to $A140 billion over the period, with the specialist funds, including the property and infrastructure funds, increasing 61 per cent to $A88 billion, up from $A54 billion in 2005 .

The expense to income ratio increased from 69.1 per cent to 70.7 per cent, noting that the prior year included the profit from the formation of MGQ .

The year was also characterised by substantial international growth. We now have 2,517 international staff, an increase of 44 per cent on the prior year (compared to the growth in our overall staff numbers of 25 per cent). Our international colleagues now account for 31 per cent of all staff.

International income increased by 59 per cent to $A2.0 billion and now accounts for 48 per cent of total revenue.

Operating conditions

The business climate for investment banking was generally good, with no major changes in key economic factors.

Australian and international equity market conditions were strong throughout the year, resulting in significant advisory and equity capital markets dealflow and very strong performances by the Australian and Asian broking businesses.

In Australia, for example, we maintained our leading market positions, ranking No. 1 in Australian equity raised and No. 1 in completed mergers and acquisitions (M&A) (Thomson Financial) in calendar year 2005.

However, some markets, particularly Hong Kong, experienced more subdued conditions in the second half of the year, which impacted the performance of our Equity Markets Group.

Strong demand for commodities and structured commodities products provided good conditions for the treasury and commodities businesses.

Specialist funds

Activity in our specialist funds remained strong with the assets in these funds performing well.

Total returns for investors in Macquarie's listed specialist funds, both in Australia and internationally, from inception in December 1995 to 31 March 2006 were over 450 per cent.

A significant portion of assets in the funds are now international: 72 per cent of the property assets and 73 per cent of the infrastructure assets. As foreshadowed last November, we did not receive any substantial performance fees from listed specialist funds in the second half of the year due to short-term underperformance of the funds relative to their benchmarks.

Key business developments

Strong growth was experienced by all Groups and in all regions.

Australia/New Zealand

We maintained our leading market positions in Australia and New Zealand with Macquarie ranked No.1 broker in 2005 by ASX market share. The Macquarie Wrap and Cash Management Trust and businesses such as mortgages and margin and protected lending experienced strong growth in volumes. Retail client numbers exceeded 645,000.

There were a number of key transactions during the year, including the initial public offerings (IPOs) of Macquarie Media Group and Macquarie Capital Alliance Group.

Asia

Our businesses in Asia consolidated their positions across the region, leveraging the platform established by the acquisition of ING 's Asian cash equities business in 2004 .

A number of major transactions were completed during the year, including Macquarie MEAG Prime REIT 's $S990 million listing on the Singapore Stock Exchange (SGX), the $S803 million IPO of Macquarie International Infrastructure Fund on the SGX and the KRW1,026 billion IPO and dual listing of Macquarie Korea Infrastructure Fund (MKIF) on the Korean Stock Exchange (KRX) and London Stock Exchange (LSE).

We also established a securities brokerage and corporate finance business in Mumbai, India and a stockbroking joint venture with TMB Bank in Thailand.

Europe, Africa and the Middle East

There were a number of large transactions during the year including the $US1.7 billion acquisition by a Macquarie-led consortium of Norwegian-headquartered commercial explosives company Dyno Nobel. In a follow-on transaction, part of Dyno Nobel's international assets were subsequently sold to Orica, whilst the Australian and US assets of Dyno Nobel were listed on the Australian Stock Exchange (ASX) after year end, in April 2006.

During the year, we established a joint venture with UK-based office park developer Akeler and treasury and commodities and investment banking joint ventures with Abu Dhabi Commercial Bank. We also expanded our Italian mortgages business to include a new office in Rome.

The Americas

Our activities in the US increased substantially with a number of initiatives. Highlights include the acquisition of Los Angeles-based Cook Inlet Energy Supply, an energy marketing and trading company with more than 60 staff, and the $US425 million IPO of the Macquarie Global Infrastructure Total Return Fund on the New York Stock Exchange.

Some US assets purchased by Macquarie and the specialist funds during the year included Smarte Carte, an airport baggage cart, locker and stroller business; Icon Parking, a Manhattan car parking business and the Indiana Toll road (acquired by MIG).

Long-term performance and strategy

We continue to generate substantial profits and dividends for our shareholders. This record of consistent, strong growth is reflected in Macquarie's long-term share price rise and returns to shareholders.

As illustrated in the graph below, since listing our shares in July 1996 we have delivered a return to shareholders of over 1,340 per cent (to 31 March 2006). The average total shareholder return of the other companies making up the ASX 's Top 50 (at the time of our listing) was 221 per cent over the same period¹.

This return to shareholders reflects our business strategy of remaining focused on adding significant value for our stakeholders.

In Australia, we provide a full range of financial services and products. Internationally, our strategy is to expand selectively, seeking only to enter markets where our particular skills and expertise deliver real advantage to clients. This approach is documented on pages 2–3.

¹Total shareholder return measures the change in share value over a specified period, assuming that all dividends are reinvested and accounting for all corporate actions.

Our people

We identify, encourage and reward achievement everywhere in the organisation.

If businesses succeed, the staff in those businesses, along with shareholders, benefit through appropriate reward structures. 

We have maintained a consistent approach to remuneration, with only incremental variations over time. The overarching goal of our remuneration structure is to drive shareholder returns over the short and longer term by aligning the interests of staff and shareholders and attracting and retaining high quality staff. The principles underpinning these objectives contribute to the generation of strong long-term performance and long-term commitment from management and staff.

The components of the Bank's remuneration arrangements support these principles, achieving alignment by emphasising performance-based remuneration through the incorporation of both net profit after tax and return on equity in these remuneration components. Also, as we diversify, we increasingly compete to attract and retain people in the global labour market.

Our remuneration policies and practices are explained in greater detail in the Remuneration Report in the Directors' Report later in this document.

We would like to thank all of our staff for the excellent results achieved this year.

Australian standards equivalent to International Financial Reporting Standards (AIFRS)

Macquarie was required to adopt AIFRS for the first time for the March 2006 Financial Report. Throughout this report, comparatives for 31 March 2005 have been restated in accordance with AIFRS , with the exception of AASB 132 – Financial Instruments: Disclosure and Presentation, and AASB 139 – Financial Instruments: Recognition and Measurement, which management elected to apply from 1 April 2005.

Capital

Macquarie 's capital management policy is to be conservatively capitalised and to maintain diversified funding sources in order to support business initiatives, particularly specialised fund and offshore expansion, whilst maintaining counterparty and client confidence.

The Tier 1 Capital ratio of 12.4 per cent at 31 March 2006 maintains a buffer in excess of the Group's minimum acceptable ratios.

During the year, the Bank worked towards compliance with the requirements of the Basel II capital management framework. This framework aims for more risk-sensitive capital requirements that are based on a bank's own assessment of its risks. Macquarie is seeking accreditation from the Australian Prudential Regulation Authority (APRA) to adopt the advanced approaches, which require a more sophisticated level of risk management and risk measurement practices.

Board

Independent Director, Barrie Martin, has informed the Board of Voting Directors (the Board) of his intention to retire at the conclusion of this year's Annual General Meeting on 20 July 2006. The Directors, on behalf of shareholders, and everyone at Macquarie thank him for his valuable contribution to the Board since he joined in 1993.

Vale

It was with great regret that the Bank learned of the death of the founding Managing Director of Hill Samuel Australia (HSA), Christopher Castleman, in April 2006. As noted on page two, Macquarie Bank takes its origins from HSA, which was established in Australia in 1969 and began operations in 1970.

The success of the Bank is due in no small measure to the foundations that Christopher Castleman and his colleagues established. He had a long and distinguished career in finance around the world.

Outlook

We have had a very good start to the financial year ending 31 March 2007. Subject to prevailing market conditions continuing, we expect a strong IPO and M&A pipeline and good growth in the specialist funds. We expect the trading businesses to benefit from geographic and product expansion and from continued good equity broking volumes.

The Bank expects to maintain leading market positions in Australia and focused positions in international markets. We will continue the roll-out of investment banking services in Asia. International income will continue to make an increasingly important contribution.

We expect to benefit from recent staff growth and note that this growth will continue, with an emphasis on international.

Swing factors will include the performance of specialist funds, asset realisations and general market conditions.

The outlooks for each of the Bank's operating Groups are documented on pages 10–23.

Medium term outlook

Over the medium term we continue to be well placed due to our good businesses, the benefits gained from major strategic growth initiatives, our committed quality staff, effective prudential controls, continued strong global investor demand for quality assets and growth in the capital base. If market conditions do not deteriorate materially, we expect continued good growth in revenue and earnings across most of our businesses, especially the international businesses.