Thank you for joining us for our 2020 operational briefing. Thanks for your support. This morning, before I hand over to Shemara to go through the three-queue update, just a bit of housekeeping. If you wouldn't mind just turning your mobile phones to silent or turning them off, that would be appreciated. I will hand over to Shemara to go through the agenda in Q3.
Thanks, Sam, and welcome everyone from me as well. This morning, I'll be going through the third quarter, the update since the interim result at the end of the third quarter. Before I do that, I just want to spend a couple of minutes telling you about the agenda for this morning because we usually give you a deep dive into parts of the business. At this one, what we're going to be doing is looking at the banking group. Starting at 10:40 A.M., we'll have Mary Reams, who's the CEO of Macquarie Bank Limited, introducing the banking businesses and talking about our strong focus in terms of where the bank fits within our structure, the regulatory framework it operates under, and, as I was saying, the strong focus on governance and independence there in terms of making sure it's financially strong and independent.
I thought I'd just give you a bit of background on each of the speakers before they get up. Mary has been with us since 1999, coming over with the BT acquisition. She started in the investment bank, in the infrastructure business, having a leading role in energy, including renewables, and then moved, I think, in 2003 to be Head of Credit and had that role till 2014, and then moved to be CEO of MBL. She is also Chair of our foundation now. You'll find, as I talk through these people, they've all moved from the center and into the businesses and back and have roles right across the business.
Mary then will introduce the two group heads in our banking group, which are Greg Ward, who's seated with us with his team over there, and he'll talk to you about Banking and Financial Services and give you a much deeper dive into the customer focus there, how we streamline the operations and our risk management culture in that business, together with his team leaders, Ben, Dean, and Shawn. We will have Nicole Kane. I should say Greg has been with us since 1996. As you all know, he started in the finance area, helped a lot with the launch of the infrastructure funds. That was in 1996, 1997. He moved to take over the role of CFO and was in that role until 2011 and then moved in 2013 to take over running the BFS business.
It's been quite repositioned since he went across to that business. Again, moves from the center to the business and vice versa. Nicole Kane, who's also here in the front row, who's the group head of CGM, who's the longest serving of our presenters today since 1995, is going to talk to you and give you a deeper dive into the CGM business together with Cindy Keck and Simon Wright, who are also here in the front row. Nick has worked with us all over the world since he joined in 1995 in the CGM business. I think you've worked in Malaysia, Korea, then London, then went to the US in about 2005. Was that right, Nick? You can correct me when you have your right of reply.
Went to LA and then was involved in a lot of the growth of that, particularly the CMS division of CGM, the commodities business, and has been based in Houston now since about 2009. Nick and the team will take you through a much deeper dive into the commodities business and the client focus in that business and the deep expertise that we have. Preceding all of that, Patrick Uphold, who's also here in the front row, who's our Chief Risk Officer, will talk to you about our risk management group and the approach we have in terms of risk management, the development of that business, and the governance. Patrick has been with us since 1997 and, like Mary, joined into the investment banking group and had a leading role in that business before moving across into the finance role.
He was Treasurer and CFO for a while, transitioning until he managed to have Stuart Green, who's also with us, take the Treasurer role off him. Patrick was then CFO until he moved over to taking over the Risk Management Group a couple of years ago. All very varied roles across the business in their time, long-serving leaders of our group. Patrick will talk to you about the role the Risk Management Group plays. Risk management, obviously, is something that we think every single person who works at Macquarie has accountability for. Patrick's group is there basically to challenge and hold us to standards and bring that independent perspective to us. It is a very important function. Hopefully, you'll find that deep dive very useful.
I'll now take you through, as I said, the result update, and then we'll hand over for questions before the team present. Starting, as we always do, with just reflecting on the half result. As you'll recall, at the end of the first half, we had 60% of our contribution in the first half from our annuity-style businesses, which are the asset manager, banking, and financial services, and parts of the commodity and global market group, and then the other 40% from the market-facing activities in commodity global markets and Macquarie Capital. Looking then, as we move into the end of the third quarter, how we performed, we had satisfactory trading conditions across the whole group. In the annuity-style businesses, we were up on the prior comparable quarter and also up on the three quarters to date versus the previous year.
That was driven, as we've disclosed previously, by higher base and performance fees in the asset management business and continued volume growth in the Banking and Financial Services group, which was partly offset by margin pressure. In the market-facing businesses, at the third quarter, the result was significantly down on the prior comparable quarter. Also, for the three quarters to date in this financial year, the result was down on the prior comparable period. That was principally driven, as we've disclosed previously, by the investment-related income in Macquarie Capital being down, particularly in the third quarter last year, where you'll recall we had three very significant realizations, being the PEXA assets, the Quadrant assets, and the Energetics assets, which were very, very large realizations and all happening in the third quarter last year.
Now, that was partially offset by stronger activity across most of the businesses in the Commodities and Global Markets business. Looking group by group in terms of the third quarter experience, the asset manager has its assets under management at a record level again of $587.7 billion, which is up 5%. That was made up of the traditional asset management business, MIM, having a 6% step-up in assets. That was mostly the Foresters' acquisition and market movements offset by the foreign exchange. In MIRA, the equity under management was up 2%. In the quarter, we were able to raise $5.5 billion of new equity, have $7.2 billion of new equity invested, and $5.5 billion of realizations or divestments to leave us with $21 billion of dry powder at the end of the quarter.
The other thing we'd note in the asset manager is in the quarter, we entered into a sales agreement with Sun Super to sell another 25% of the Macquarie Air Finance business. We're continuing the transition of that business to a fiduciary business that follows PGGM, taking 25% previously. Looking at banking and financial services, the volumes are up there, as I said. Deposits are up 3%, and the mortgage book is up 11%, and the business banking book is up 4% over the quarter. Funds on the platform were flat, and the vehicle finance portfolio was down slightly at 3% down. In our market-facing businesses, the commodities and global markets business had a strong contribution in the commodities platform from across the platform, but particularly from global oil, North American gas and power, and MIR gas and power, and metals and agriculture.
We also saw continued strong customer activity drive results in both our FX and our futures businesses. The asset finance business that was transferred across, which is called specialized in asset finance now, had consistent performance through this quarter. Nick will talk to you about some of the outstanding achievements that we had when he and the team speak in CGM in the quarter and over the year. Turning lastly to Macquarie Capital, as you'll see, we say there that our fee revenue was up on the prior comparable period across all our activities in advisory, debt capital markets, and equity capital markets. As I said, the main impact was that investment-related income was significantly down on a very particularly strong prior comparable period, especially the third quarter. That is an update on the groups.
Looking at our staff and people footprint, we had 15,760 people at the end of the quarter, and 58% of those were working in international offices. Now moving on to some information on our balance sheet and capital position. You see our balance sheet remained strong at the end of the third quarter as well, with our term funding well exceeding our term assets. We had a slight growth in the balance sheet, and that was driven mostly by the growth in the loan assets in BFS and also the trading activity in CGM were the big drivers of the increase there. With capital at the end of the quarter, you can see there that our Basel III capital surplus is at $5.8 billion. That's come down from $6.7 billion at the end of the previous quarter.
That was mostly driven by earnings and movements in reserves of $0.7 billion, offset by $0.9 billion in terms of interim dividend that we paid, and $0.6 billion invested into the business. I'll take you through where that $0.6 billion was invested in a moment, but we just wanted to touch on one point in relation to additional tier one capital, a couple of points there. First of all, as you see, we announced that we intend to repay the $400 million of Macquarie income securities. These have been on foot now for over 20 years, and they received a transitional treatment under APRA's prudential standards that results in reducing capital recognition, and the repayment will reduce our tier one capital by $94 million. In relation to the bank capital notes, we also have announced that we intend to redeem the $429 million of BCM on the 24th of March.
We also announced that the BCN2 issued by Macquarie should or are to launch shortly. Alex, there's not an update on the timing of that. Oh, yeah, there you go. Right. I mentioned that I'd step through where the $0.6 billion was invested. Principally, that went into Macquarie Asset Management, in seeding and underwriting growth of the annuity-style income streams there. We also had some growth in the BFS loan book and CGM trading activity. The last point on capital is that our regulatory ratios continue to be well above the Basel III minimum levels. I'd particularly note the CET1 ratio is at 11.4% on an APRA Bank Group basis and at 14.2% on a harmonized basis. Now, in terms of regulatory update, you see on this slide, there's a long list of things we're working on with one of our two principal regulators, APRA.
The third last bullet point, I think we say that based on the information currently available, it's our expectation that we should have significant capital to accommodate any likely additional regulatory tier one capital requirements as a result of the items listed on this page, noting that a number of these are at early stage. A few that I would point out is that APRA is still finalizing its regime in terms of unquestionably strong, and we're working with them on that. Also, in relation to loss-absorbing capacity, APRA released a response to submissions paper in July 2019, and its approach in relation to lack in order to support an orderly resolution. We're working on that as well. The last thing I think worth noting is that in terms of resolution planning, we are working with APRA on that.
The discussions are progressing, and we'll continue working on these initiatives in consultation with APRA and update you as that progresses. In terms of offshore regulatory matters with Brexit, we just wanted to note that we now have all our required licenses for our activity in Europe. We continue to be very committed to both the U.K. and the European region, earning about 30% of our income from that region and seeing good opportunity to grow across the region. Lastly, in Germany, we've mentioned that we're cooperating with the German authorities and responding to requests for information in relation to both the 2011 German lending matter and the short-selling-related activities. We'd note that none of our staff have been interviewed to date by the German authorities and that the amount involved is not material and fully provided for.
The last section for me then is in relation to our outlook. In terms of the short-term outlook, as we've said previously in Macquarie Asset Management, we expect the base fees to be up on the prior year, but the other items we expect to be broadly in line, and that's performance fees and investment-related income, net of impairments, and net of operating lease income. In the Banking and Financial Services group, we continue to see higher deposit and loan and platform volumes, but we also have the competitive dynamics of margin pressure impacting that business. In Macquarie Capital, we're assuming the market conditions will stay broadly in line with FY2019, but as we said, investment-related income will be down on a particularly strong FY2019.
In the commodities business, we expect the strong customer base to continue to drive consistent flows for commodities, fixed income futures, and foreign exchange. We also expect a consistent performance from the specialized and asset finance business. The business has benefited from strong market conditions across the commodities platform year to date, and that's not something we've historically seen persist. Across all of the groups, the compensation ratio we've said we expect to be consistent with historical levels, and the effective tax rate we expect to be broadly in line. Putting all of that together, our forecast for the overall business is that while the impact of future market conditions does make forecasting difficult, we continue to expect that the result for FY2020 will be slightly down on FY2019.
Now, that's of course subject to completion rate of transactions and period end reviews, the market conditions, including the impact of geopolitical events, the FX impacts, and potential regulatory changes and tax uncertainties, and the geographical composition of our income. For the medium term, we continue to expect that we should be well positioned to deliver superior performance, and that's as a result of our deep expertise in very diverse geographic and segmental markets, which gives also a lot of protection and resilience to our income. That is supported, of course, by our strong and conservative balance sheet and our proven risk management framework and culture, and the fact that we'll continue to try to identify cost savings and efficiency initiatives as we move forward. We've dwelled on the medium-term by business, so I won't stay on that.
Also with the returns in terms of the businesses as at the end of the half year, I'll just note we've shared this with you previously, but the annuity-style businesses in which we have $7.9 billion of capital invested returned 24%, and the market-facing businesses in which we have $8.7 billion returned 18%. After taking into account the group surplus at the half of $6.7 billion, we returned 16.4% across the businesses. With that, I'll hand over to Sam to take questions that you may have. Thanks.
Okay. Thanks, Shemara. James. Just in the front.
Thank you. It's James Ellis from Bank of America. Just a question on slide 18, the short-term outlook. The statement around Macquarie Capital three months ago included a bullet point saying the pipeline of realizations was expected to be strong.
Given that that bullet point is no longer there, can you just comment on what were the realizations like in the third quarter and what you're expecting in the fourth quarter?
Yeah, we had a number of realizations. The most material of those was our Taiwanese wind asset, Formosa 2 and Formosa 3 as well. The others were just ordinary, smaller, realizations. Given that now that has been achieved, we do not expect in the fourth quarter that there is a material amount left to do. It will be ordinary course from here.
Brian.
Brian Johnson Jeffries. Shemara, I had two questions if I may. The first one is about Germany. What I'd like to do is to go back to a stock exchange announcement on 28th of September 2018. It was talking about Macquarie Bank was a lender to a group of independent investment funds in 2011.
The funds were trading shares around the dividend dates where investors were seeking to obtain the benefit of dividend franking withholding tax credits. The important bit, the investors' credit claims were refused and there was no loss to the German revenue in relation to this matter. I'm just wondering that last sentence, is there any reason why that doesn't seem to be included in the text anymore?
We're just adding any material information as it comes. That's all still valid. When we make further disclosures, we basically add what is material.
Just to confirm, the German government lost no money on the Macquarie transaction?
The statement you read out is correct.
Great.
The second one is if we were to go back to the first half, the comment was made then about the Commodities and Global Markets that the strong trading markets conditions—Wasi, just copy that down—the strong Commodities and Global Markets conditions were not expected to persist into the second half. That seems to have actually—am I interpreting what you have said today correctly? That does seem to have continued into the third quarter?
Yes, we had favorable conditions across the CGM platform in the third quarter as well. There has also been a lot of organic growth in terms of customers and the build-out of the business. When Nick and the team give you a deeper dive into CGM, you will see that organic growth coming through as well. We did have favorable conditions.
Shemara, I get the nuances of slightly down is slightly down, but what you have actually said there, it seems to be slightly less bad than what you were saying at the half? Slightly?
You can interpret it as slightly down is the guidance we are giving. That makes sense given that we had three very large realizations in Macquarie Capital last year that have not repeated. That alone would have brought our result down. Net was slightly down is the guidance we are giving.
Thank you.
Go to Jon. just behind .
Thank you. Jon Mott from UBS. Just a question on the realizations. Through the cycle, you have got some great returns out of these, but they also add a lot of volatility. Again, you have talked about the last PCP was a great period. This is not going to repeat.
I just wanted to get a feeling when you budget the year, when you look ahead, how do you manage realizations? Do you sit there and go, "We need to get a certain number of realizations in our guidance this year." What are you looking for? Is it completely opportunistic? How do you actually manage that, not just this year and into the future?
Yeah, there are two big factors that drive the timing of our realization. One is the business we've invested in operationally. Is it timely to be looking at realizing that in terms of—because usually when we invest, we're looking to drive greater earnings and growth out of that business and repositioning it. Is it ripe for realization? The second one is what are the market conditions like for realization?
Are they conducive, or should we actually look at going a little earlier because of our anticipation of conditions, or should we hold on? They are the main drivers of timing of realizations. Clearly, the large ones can give some sort of lumpiness to earnings in terms of timing. It just happened in the third quarter last year that it was timely to exit three very big businesses. Ordinarily, those principal investments, you find them typically in Macquarie Capital in both the advisory and capital solutions business and the infrastructure and energy group. In the infrastructure and energy group, where we are mostly investing in renewable projects that have a shorter-term hold, they are moving through quite regularly. We are investing and realizing every sort of three years to five years investments.
In the advisory and capital solutions, where there's a range of industrial investments we make in the old principal finance, in the telecommunications, media, and technology space, and across the legacy advisory and capital solutions, those can be held for a longer time. So PEXA we held for about four or five years—sorry, Quadrant for four or five years. PEXA for much longer than that, and Energetics for a shorter period. It was really driven by when is the best time to drive the best results for shareholders and for the group from realizing those assets. There will inevitably be timing implications in the investment-related income of Macquarie Capital.
I think it's maybe just to add to that, Jon. I mean, obviously, you've seen that slide in the last few results where we talk about the capital deployed alongside Macquarie Capital's business.
One of the key things that we look at, I think, is how's the team realizing. Are we actually getting the realizations? We have ongoing conversations with them at an individual asset level about how they're tracking towards realizations and what stage of development they're at. We're also interested in the deployment of capital. The key for us, I think, from a go-forward basis on your volatility point is, is the team deploying capital, continuing to deploy capital? If you think about an average life of two and a half years or three years coming through that book, obviously, what you put on the books today, you expect to realize on average over that period of time. You start to see that coming through. If there's a drop-off in the investment, then that's something obviously we look at from a go-forward viewpoint.
I should just clarify that we would not sculpt the timing of an exit based on a result for a year. What we are trying to do is drive the best returns from those investments. We want to realize them when they deliver the best return.
Richard, just in the front here, Richard.
Good morning. Richard Wiles, Morgan Stanley. Shemara, I have asked this question before, but I am going to have another go. You have described the conditions in the quarter as satisfactory. I would like to know why your commentary is not more positive on that. In Macquarie Asset Management, which is 40% of your group, your AUM is up, your AUM is up. You have raised more capital than you have ever raised before. Surely the conditions are strong in that division. In commodities, you have said the conditions are strong.
Why is the commentary about the third quarter not more positive than how you're describing it? Are there any areas of the group where they're actually pretty weak and you're concerned about the operating performance?
At the moment, as we said, we actually think they're satisfactory across the business. There aren't areas where we're particularly concerned about the operating performance at this point. Even in Macquarie Capital, where we've guided that the numbers should be down, it's in timing of investment-related income, but the market conditions are satisfactory, as we said. They're conditions that are conducive to all our businesses being able to operate, and that's why we describe them as satisfactory.
Let's start with Brendan. Just go to Brendan first. Yeah. Sorry. Brendan. Brendan.
It's Brendan from Citigroup. I just got a question on tax.
I mean, you guided to a flat tax rate from last year, but obviously the first half it was significantly lower. Could you maybe talk about the revenue composition from a tax perspective in the third quarter? Is there anything that you're expecting in the fourth quarter that may give rise to a higher tax rate when you compare half on half?
Yeah. I mean, obviously, as you said, Brendan, we've guided in line with where we were last year. Based on where we were for the first half, you can sort of get an estimate of where we think the full year is going to be from a tax rate viewpoint. I don't think there's anything particular from a composition viewpoint other than to say that the tax rate obviously reflects the geographic composition of income and the nature of income that's coming through.
Some expenses are non-deductible for the sake of the example. There's some variances to effective tax rate based on the nature of incomes going through. I don't think there's anything particularly we want to call out either for the third quarter or the fourth quarter. It's the same, I guess, message that we've been giving over the last little while. The geographic composition of income and the nature of income is really driving our effective tax rate.
Matthew Wilson from Evans & Partners. Just further to Jonathan Mott's question, how do you think about the size of the equity portfolio that you invest in? Going into 2007, it was 85% of your book equity. Today, at $8.5 billion, it's around 50%. What's the constraint on the size of that portfolio? Because the world's a big place. There's lots of investment opportunities.
How much equity are you willing to put at risk?
Yeah, we do look at that from a top-down perspective of our total equity position and how much equity risk we're prepared to have. We also very much look at it from a bottom-up position of every single investment. Patrick will speak to you about the risk management culture. We need to make sure that we've looked at the downsides in terms of every investment we're holding, the correlations of those investments, and is it tolerable within our risk appetite. Importantly, what we're looking to do is, can we add real value to that investment, bring human capital to it, which means that we get upside that warrants taking all of that downside risk.
At the moment, the board is very involved as well in looking at the level of equity risk we're prepared to take at a point in the cycle. We're comfortable with the level we're at at the moment, given how we see broader macro conditions, but also where we see the capabilities. Typically, that equity investment is allocated broadly across the various groups that are investing. Obviously, the three main users of the equity capital are in the investment bank, the infrastructure and energy group, and the advisory and capital solutions, and then Macquarie Asset Management are the three big users. We have rough indications of what appetite we have from the top down, and then from the bottom up, we sweat every single investment.
There may be times where we're prepared to spike above because something exceptional comes up or because things are due to roll off soon, and other times where we'll sit a little bit below. That's the broad approach. Patrick can elaborate when he speaks. Can you give us a feel for where the upper band is? Secondly, correlations are nice, but when we have an event, they all go to one. Yeah, look, we do look at we've just been through our whole annual stress testing process, and we have a level of tolerance for how much we'll wear. We run many factors through that epidemic scenario, a whole lot of different stresses, liquidity-related ones that can cause stress to the book. We're certainly comfortable through this rigorous process we go through.
We must have spent a good part of this year on settling our stress tests for this year that we're comfortable with not just the size, but the nature of exposures we have. Because when you say they all go to one, the liquidity is also important, and we are turned out with our funding, as we discussed. If we're holding really good, robust infrastructure assets and they're term funded, those tend to be much more resilient than other sorts of assets that could suffer in the short term. We also look at when do we have to realize what earnings capacity do we have against it, etc.
We've got time for one more question. Andrew, we'll go to you.
Andrew Triggs from JP Morgan.
Shemara, I just wondered if you could give a few more details around the performance fee side of things, both in terms of what was realized in the third quarter, but also if there's been any change in the near-term outlook.
Yeah, I mean, look, in the third quarter, we had some reasonable realizations of performance fees across a range of the funds and across all geographies as well. In terms of the outlook, Martin Stanley, when he spoke a few years ago, gave guidance on where performance fees typically are in terms of basis points of equity under management and where investment-related income is, and they were 50 and 20 basis points from recollection. For the last few years, we've been a little bit above that, but I guess we can review whether we would guide higher. At this point, we're comfortable with the guidance that we've given previously.
Yeah, maybe just to add to that, in terms of the third quarter, we saw some realizations or some, I guess, settlement of transactions coming out of the European infrastructure funds, particularly one and three. We saw some divestments out of the US assets, which we're anticipating to happen in third quarter, and then some performance fees from some assets down here in Australia. Very happy, I think, with the geographic diversity on a go-forward basis. Again, I think the point we made at the half is probably right. What we are seeing is obviously more equity under management, which is good for the future, but we're also seeing more diversity in where those performance fees are coming from. I guess we're happy with the way the balance of the portfolio is coming together.
Yeah, I mean, the big realizations are usually made public.
Hobart Airport here, Brussels completed, but we obviously recognize those performance fees when there's a highly unlikely probability of reversal. We had Long Beach container terminal in the US. They'd all be quite.
How many of those funds have extinguished their ability to have basically matured and extinguished their ability to earn performance fees in the future of those big MIF and MIF funds? The big funds.
No, we're continuing to raise. The most recent MIF fund, this EUR 5 billion, is the biggest we've done. MIF 6 is raising now. We aren't allowed to comment while we're raising. Each of the funds we're raising at the moment have been record size. MIF 5 has just been raising, and it was EUR 5 billion US fund.
I think those funds we raised at the time before the GFC, which were large, that have pretty much run off by now, were followed by some smaller funds, but since then, they've been getting bigger and bigger. A lot of our equity under management now is in record-sized funds.
Okay, thanks very much. I'll ask Alex to exit the stage. I'll invite Mary and Patrick up onto the stage. Post Patrick and Mary, there will be an opportunity for further questions, and we'll have questions in between or after the BFS and then the CGM presentation as well. Thank you. I think you can go straight up, Patrick. Patrick, I think you can go straight up. Oh, right. You can't sit down.
It's been a while. You can tell I'm a little bit rusty here. Good morning, welcome, everybody.
I'm going to take you through an overview of our approach to risk management and take you through a little bit of the risk management group and what we've been doing. I've been in charge of risk management for the last couple of years. Okay. As hopefully most of you are familiar with, our approach to risk management is a long-standing one. Risk is integral too, and risk management is integrated across all of our businesses. It's based on three fundamental principles, which you can see there. Firstly, the business owns the risk. Really important. We enable our people to go out and seek opportunity. Ultimately, they must be accountable for and must retain ownership of the risk that that opportunity entails. Secondly, when assessing risk, we must understand worst-case outcomes.
We must be prepared to accept, reject, or reduce such outcomes to be within our risk tolerances and our overall risk appetite settings. Risk is not to be assumed away or rationalized away on the basis of likeliness or remoteness. Risk is something which must be confronted. Finally, all material risk decisions are subject to independent review and sign-off by the group that I head, the risk management group. The role of this group is to basically objectively assess, accept, and manage risk. Hopefully, and it has, this will contribute to the long-term success of Macquarie. It does this in a number of ways. Firstly, we anticipate emerging risk and assess risk impacts. We do that across a range of scenarios, situations, and industries. Secondly, we're a force of challenge.
Shemara mentioned that before to the business in reviewing and signing off on risk acceptance decisions. Finally, we monitor and mitigate risk, and we embed our risk management framework and a strong risk culture. I'll talk a little bit more about that and manage incidents as and when they occur. This approach, which I say is long-standing for us, is entirely consistent with the three lines of defense approach. Line one being the business owning the risk, line two being R&G independently assessing that risk, and of course, line three, the internal audit function, providing independent assurance to senior management and the board. Let's talk about risk culture. I can talk about our risk management and the structure of the three lines of defense.
Ultimately, I think the effectiveness of our risk management framework and the resultant risk outcomes, what we witness, is significantly impacted by our culture. Our culture is a reflection of who we are and what we stand for individually and collectively. The slide behind me here provides some historical points of reference over the last 35 years on how we've gone about developing our risk culture within Macquarie. What I think this slide reflects, I think there's three important characteristics that you can associate with Macquarie's culture. Firstly, there's a fear of complacency. Just because something's performed well in the past and delivered success is not a reason in of itself for us to believe that this is going to be the case in the future. Hand in glove with that, secondly, there is a willingness to challenge.
You can see there, whilst what we stand for and code of conduct have been long-standing features of our approach to maintaining and cultivating our risk management culture, we've constantly reflected on the appropriateness of these having regard to the environment in which we operate. We've seen that change certainly recently. The changing expectations of our stakeholders include our shareholders, our staff, regulators, and the people in the communities in which we're given the license to operate. This has resulted in a number of meaningful updates and refreshes over the journey. Finally, there's a desire to continue to evolve. I think a really good example of this is just looking at 2010 there, where in internal audit, we established a risk mindset's capability to undertake risk culture reviews.
Now, more recently, this team, together with teams focused on culture, conduct, environmental and social responsibility, and work health and safety, have come together to form R&G Behavioural Risk. This team is there to help raise awareness and provide guidance to the businesses on how our behaviours may impact our stakeholders, both internally and externally. Just having a look at the divisions that we have now within R&G, there are nine plus internal audit, which also has a direct reporting line into the chair of the audit committee. It will be familiar to most of you, the divisions of compliance risk, operational risk, credit risk, and market risk. More recently, since I've stepped into this role, we've introduced a number of new divisions, of which I'll just highlight three of those.
As I mentioned on the previous slide, behavioural risk brings together highly skilled employees to focus on culture, conduct, EHR, and work health and safety. A common feature of their focus is the behaviour we want to see exhibited individually by our staff and collectively by Macquarie as an institution. Financial crime risk, most recently, was part of compliance but now stands on its own, and it reports directly to me. I think this change reflects the importance of the function, the expertise, and specialisation of the staff within that function. Of course, the evolving expectations of our communities, staff, and regulators on the role that financial institutions like Macquarie play in detecting and preventing bad actors from using the financial system. Finally, the last group I'll mention is the regulatory affairs and aggregate risk group.
This works across the institution to ensure that we have a very consistent approach in our dialogue with our regulators, which is open, honest, and transparent, and also provides portfolio analysis and insight across the risk types across all of Macquarie. Looking at our people, we have invested significantly in recruiting professionals with a very diverse skill set, including those with backgrounds in risk management, those, importantly, with front office experience, such as in trading, or those with highly specialised skill sets, such as data science, engineering, construction, geology, work health and safety, legal, and behavioral psychology. Now, our staff levels have continued to increase, as you can see over there. That reflects the growth in our businesses, both across geographies and industries, the types of products and services that they provide, and increasing regulation around the world.
More recently, we've seen an increase in risk staff focused on non-financial risk. You can see that as a result of that, our headcount's moved from around 5% over a number of years closer towards that 6% mark. Our staff are geographically diverse. That's really important. We're independent from the business units, but we're not separated from the business units. About 60% of our staff are located in offshore offices, which is entirely consistent with the overall Macquarie geographic footprint. Most importantly, R&G and its staff are well supported by the board and senior management and very well respected across the institution. This has been critical to allowing R&G to perform its role and to Macquarie to achieve the success it's had over a very long period of time.
Finally, just thought I'd touch on risk governance and highlight our overarching risk governance structure. As I mentioned, we're well supported by the board and senior management, and we have a governance structure in place which helps facilitate this. To facilitate the board, there are five subcommittees, four of which I'll note have been the board audit, board risk, board governance and compliance, and board remuneration committee. Now, these committees, importantly, have overlapping membership to help ensure that matters that may impact a broad range of areas are properly considered by the board from multiple perspectives. Regular attendance by R&G and the business units allows the boards to challenge and test the risk acceptance decisions that are being made and the robustness of the risk management frameworks and controls that we have in place.
As the head of the risk management group, I report into Shemara, but I also report into the chair of the risk committee. Our internal auditor has a similar reporting structure, reporting into me, but also a direct reporting line into the chair of the audit committee. At the executive committee level, at the executive management level, there are a number of committees that support management and governance across Macquarie. One which I will highlight is that we have, for a long time, had a dedicated risk and compliance committee. That reviews the risk across the institution and monitors the operation of key internal risk management controls, with a particular focus on non-financial risk. That is the quick summary of our approach to risk and the risk management group. To finish up, as I mentioned, we are well respected across the institution.
Risk does not just sit within R&G. It is integral to the way in which we operate across the businesses. We have a short video here that you will hear from some of our key senior business leaders sharing their view. After that, Mary will step up and give an overview over the bank. Hopefully, this will work.
When we are engaging with a client and thinking about risk, we really try and put ourselves in the position of the client and think long term. We think about whether the financial risk of working with the client is balanced in the right way from a risk return point of view. There are all the non-financial risks in terms of whether we can actually deliver, whether this is a client that we can work with, whether it is a network that we want to get associated with.
All of those non-financial risks are central to what we do as well. Business ownership of risk is a deeply embedded principle. Whether we're working with a client or investing the firm's capital, it's our responsibility to manage the risk. Everyone on the team shares a respect for the privilege of taking risk for Macquarie. We think about worst-case outcomes. If the worst case isn't manageable, we don't go ahead. Macquarie Asset Management, of course, is a fiduciary business, so we have to look at it from both sides. Obviously, the first side is to make sure that we understand the risks that we're taking on when we deal with those clients.
We are also making sure that the products that we are offering them are appropriate for the client and making sure that they fully understand the risks that they are taking on, etc., because we are going to have those relationships for a long time. We spend an enormous amount of time with the risk team, and we continue to test and probe to see whether the R&G group has covered risk off from every angle we can possibly think of. Risk is at the heart of everything we do. We think about risk alongside the risk management group. It is not a group that we hand off our transactions to. They are there to actually challenge our thinking. Working with R&G is a two-way street. Clearly, we bring our people who have experience in the field, and they work with R&G deal by deal or as we move into new areas.
The great thing about R&G is because it is a function that sits across the entire group, there are many lessons learned or experiences and networks that the R&G team has in other parts of the business that they can bring to us as we're moving into new areas. From a cultural point of view, all of our staff are actually trained to take on the risk as if it were their own, their own money, their own reputation. We're also employing people with the right skills. When it comes to things like credit issues, for example, we're working hand in glove with the R&G team, getting good support, getting good advice, getting pushed, but also getting encouraged to make sure that we're doing the right things. When it comes to compliance matters, of course, that's a key part of the role that R&G plays.
The R&G relationship's really important to us. We wouldn't be the firm we are if we didn't have a wonderful risk culture. That dynamic between R&G and the front office businesses is the heart of that. We, as the business, are primary owners of the risk. We're in the front line. We're in contact with all of the primary information. We're talking to the people. We have the best opportunity to form a sense of the opportunity and the risk. We can never escape the responsibility that goes with that.
Good morning. Today, you're going to hear from the two groups that operate within Macquarie Group, Macquarie Bank. First, it's my pleasure to give you a quick introduction. Macquarie Group is structured as a non-operating holding company and has a banking group and a non-banking group.
The banking group comprises Macquarie Bank Limited, which is the authorised deposit-taking institution, and its subsidiaries. It operates a diverse set of businesses through Banking and Financial Services and Commodities and Global Markets. Banking and Financial Services operates only in Australia and provides a wide range of personal banking, vehicle finance, wealth management services, and business banking. Commodities and Global Markets, on the other hand, is an international business operating in 27 markets with 51 offices around the world. They too provide a comprehensive range of services and products to their clients, including commodities, futures, foreign exchange, and asset finance. Just a few words about the regulatory framework. The banking group is well regulated, and we engage with 200 regulators across the globe. Our regulatory relationships are of prime importance to us, and all staff at Macquarie are held accountable for the way they conduct themselves with regulators.
As an authorised deposit-taking institution, we're regulated by APRA, and of course, other key Australian regulators include ASIC, AUSTRAC, and ACCC. Most of our regulatory relationships are longstanding, and we aim to maintain an open, cooperative, and respectful relationship with all of our regulators. Consistent with our principles, our long-held principles of accountability and integrity, this defines the expectations of staff in dealing with regulators. It's also important to protect the interests of Macquarie Bank, and we do this through a very, very strong governance process. Macquarie Bank and Macquarie Group have separate boards, separate executive committees, and separate charters and minutes. As Patrick just noted, clear roles and accountabilities are established through a strong risk management framework.
The banking group adopts the Macquarie-wide risk management framework, consistent with its principles of ownership of risk at the business level, which you just heard, is tremendously important, understanding worst-case outcomes, which you also heard about, and independent sign-off. In terms of funding and capital, the bank remains well funded with strong regulatory ratios. Last year, in December, Standard & Poor's upgraded Macquarie's rating from single A, which it had held for 28 years, to A plus. Standard & Poor's advised that the upgrade was raised on the strengthening risk management and took into account, amongst other things, the reorientation of earnings towards sustainable and repeatable income, the significant diversity of activities in terms of geography and product, and the resourcing of the group's risk management team. In a moment, you'll hear from Greg Ward on BFS and Nicole Kane on CGM.
The two groups provide a diversity of business for Macquarie Bank. The bank also benefits from being part of the wider group. Diversification benefits include geography, with BFS being Australian-focused, and CGM's international presence providing revenue-generating capacity in Australia, EMEA, Americas, and Asia-Pacific. Similarly, less concentration in revenue streams is achieved by the provision of different products. BFS is focused on the domestic market and a predominantly retail and SME client base, generating annuity-style income. CGM, on the other hand, focuses mainly on market-facing businesses with repeat customers and multiple products to wholesale customers. The diversification of geography, customer, annuity, and market-facing businesses provides resilience and less concentration, providing a better ability to withstand economic shocks. The group structure also provides economies of scale and cost efficiency.
The combination of a diverse business model and the cost efficiencies from being part of a broader group have allowed Macquarie Bank to drive innovation and competition over the years, which has been illustrated in both groups. Thank you, and I'll now hand over to Sam for questions.
While Sam's coming up, I was just thinking we should note that, as well as the group heads who are presenting today, we've got out from New York, Michael Silverton, who's a co-group head at Macquarie Capital, and next to him, Florian Herold from also Macquarie Capital on the principal investments, and Nicole Sorbara here in the front row as well. They're available for questions.
Great. Thanks, Shemara. Before we hear from BFS, a couple of minutes question time. Richard, please.
Richard Wiles, Morgan Stanley.
Patrick, you said the staff numbers in the risk management group have grown at a compound rate of about 7%, and it looks like they account for about 5% of the group total. Do you expect the staff numbers will continue to grow at that rate or perhaps flatten out a little bit? Do you think 5% is about the right number as a percentage of the overall group?
Look, it's hard to be prescriptive on whether 5% is the right number. Ultimately, we're responding to the environment in which we're operating. Pretty clearly, at the moment, there's a real focus by regulators across a whole range of areas that impact risk management.
Operational risk, compliance, financial crime risk are just some of the areas that we've seen increased expectations and that increased regulations, and that necessarily means that we need more people on the ground to ensure that we're meeting those expectations. I expect that it will continue to drift upwards in terms of numbers overall in the short to medium term.
Does that number that you gave on staff numbers, I think it was about 900, does that include the risk professionals embedded in each of the divisions, or is that just within your group?
That's just within my group. There are substantial resources within risk resources within each of the business units. For example, in my operational risk group, we currently have about 60 or 70 people that sit in operational risk.
Out there in the business units, we have business operational risk managers, and they would number in excess of 200. That is just one element of risk. I come back to the point that I made before that risk is integral to who we are, and it is integrated all across Macquarie. I think Greg can perhaps talk a little bit about just some of his risk people within his group when he gets up to speak.
Brian Johnson, Jefferies. Patrick, good to see you again. Two questions. Many years ago, two questions. The first one is, many years ago, and this held Macquarie in a particularly good stead during the GFC when the earnings still fell. When it came to risk, it used to be very much about earnings at risk.
The other model is capital at risk, which means that you could tolerate quite significant losses. I'd just be intrigued, is Macquarie still run with the constraint being an earnings at risk measure or capital at risk? The second one I had, one of the most comical things of all time, I'd encourage everyone to grab out the Westpac Pillar 3 and read about their three lines of defense and how they manage reputational risk, etc. I'd just be intrigued, how can we be confident that the disclosures made at the front of the Pillar 3 can truly be relied upon?
Yeah. Okay. Just dealing with the first one in terms of earnings and capital at risk. I think for some time we've said earnings and surplus capital, we carry surplus for many reasons, but one of which is to provide a buffer against adverse market conditions.
Nothing has changed on that front. We're continually operating stress tests to test that, to test that we do hold sufficient capital and that we're looking at the composition of our earnings to make sure that our earnings are resilient through all kinds of market cycles and downturns. There's been no fundamental change in that front. We have put more resources into that space, and I think we're getting better at the work that we perform on that front. I can't say that I've looked at Westpac's Pillar 3 disclosures, so I can't really comment on that. I've just outlined to you the three lines of defense model that we operate. You just heard from some of our business leaders about how risk culture is truly embedded within the institution. I've given you a pretty good feel for why we think it operates effectively.
Ultimately, however, I think it's kind of our history, which I think can give you comfort that Macquarie is an appropriate approach to risk. I think on that front, I think our record speaks for itself.
Ed.
All right. Ed Henning from CLSA. You talked about the need for ongoing increase in people in risk. Can you just touch on the technology side, what you're doing there, and can technology play a role in reducing the costs going forward in the risk department?
Yeah. It certainly can play a role and indeed does play a role. We worked hand in glove with Nicole's team in terms of applying technology to minimise the cost of, for example, compliance. However, some of that technology still needs to develop and evolve.
There is a lot of manual processes, and there's still a need for, still a need for a lot of human touch at multiple points. I can give you an example of that. For example, something like monitoring surveillance, we're very focused on voice technology. Voice technology hasn't hit the point where it is entirely reliable because we're still going from voice to text. We are using some of that technology, but we're compensating for the deficiencies in that technology with the use of people. We'll undoubtedly see an increase in the use of technology over the years to come. I'm not sure that that's going to necessarily mean that headcount won't increase over that journey.
Probably time for one more question, Michelle.
This is a very basic question. How do you source people for the risk team?
If I wanted to work in risk, what degree and qualifications would I have? And do many people that work in risk move back and forth from the businesses, like Shemara was saying, other people had opportunities to do?
Yeah. Look, it's a really good question. We really want—I'm a true believer in diversity on a whole range of fronts. One of the things I say to my direct reports is, "Don't report someone who's—don't go and hire someone who's exactly like you," because we actually want to have that multiple perspective, people with different backgrounds who are able to kind of challenge things which are new and actually challenge the status quo. So we're constantly out there looking for all types of people. I don't think I can kind of summarise it in one form. I gave you a bit of a hint before it.
I think we've got geologists. We've got engineers. We've got people who've come from medical backgrounds. It is a diverse range of people that we ultimately look for. The characteristics that I like to see in people is that willingness to challenge, that independence, and that independence of thought are some of the key characteristics that I would look for.
We said that people move back and forth all the time. You talked about people who moved into risk roles. Our two heads of the investment bank at the moment, Michael Silverton, who's here, and Dan Wong, started their life in RMG. Alan Moss was head of RMG and became CEO. As far as we're concerned, it is a fantastic training ground for understanding the business. We really value people going both ways.
Yeah.
I should add to that that it's a real focus of mine that we do like people in RMG going out into the business units. Whilst we're sad to see them go from RMG, they're picked up within a business unit. That helps educate the business unit on risk. It helps give the business unit the perspective of where the risk management group is coming from. At the same time, I'd like to see people from the business unit—I am obviously one of those people that have come from the business unit—come into the risk group and actually bring that commercial lens to risk-making decisions. I think that's where you get the best result. We get that movement coming both ways.
All right. One more, Matt.
Thank you, Shannon, Matt Wilson, Evans & Partners.
How does the role of MD and CEO influence the risk appetite of the group? How has it sort of evolved through Alan, Nicholas, and yourself? You all start at different points in the cycle. You all come from different sort of expertises. How does your judgment at the end of the day influence the ultimate decision?
Do you want to go? I think that's a good question.
Okay. Yeah. Look, interestingly, we actually had all our former CEOs back in November for a panel to talk to our executive directors at our 50th anniversary.
I think all of the directors that were there said they were really struck by the consistency of the attitude going right back to when Stan Owen set the business up of the culture under which we've operated, which is trying to hire the best people, create a framework that empowers them all to go and look for opportunity in their communities where we can bring our skills, but then very much be accountable for the disciplined execution of that and act with long-term integrity in terms of making sure we add more value to communities and all stakeholders than we cost. That's been core to our culture through all of our CEOs. There've been different market cycles. We've all operated through. Tony Bird was there, in the deregulation of the 1980s. Alan was there post the 1991 global recession through a period of strong growth.
Nicholas took over at the GFC and rode through the recovery from that. I have come in at the market environment we have now. We all had different styles as well, but it has been fundamental that we had the same focus on opportunity, accountability, integrity. Whilst we empower people to go and be entrepreneurial, take some risks, fail, look for opportunity, we very much say everyone who works at Macquarie, all 15,700 people, are accountable for risk management and accountability, integrity. That has been consistent for 50 years.
I think just a more general comment that there has been no sudden movement. We have evolved. Our business evolves. We take cautious steps, I think, when we move into new areas. A good example of that is our green energy business, where we started off relatively small and got to really understand the risks involved in that business.
I think that's an important point to remember, that there's no kind of sudden sort of moves into new areas. The second thing is that there's a lot of longevity in the senior management team and within the board. Longevity ultimately means that you'll have scar tissue from many of those kind of market cycles that Shemara's referred to in the past. That's very much still there within the management team.
Okay. That's great. Thanks, Mary and Patrick. I'll ask you to step down off the stage. Greg, Ben, Dean, and Sean, if you can come up, we'll hear from BFS. As Greg and the team are coming up, we will play a short video for BFS, and that will focus on clients of BFS plus staff. Thank you.
The advantages that Macquarie brings to our business is really about the relationship.
Beyond the bank working capital overdraft facilities, there was some real understanding of the challenges of our business through the good time and the bad. The relationship that we've had with Macquarie and the customer service we've had has been second to none. All our clients have a personalized banking relationship, but we're also very focused and specialized in the industries. Macquarie Bank's understanding of the built environment and our world made the conversation chalk and cheese compared to other banks. We're listening to our clients. We're learning about what they have to say, and we're acting off the back of that to ensure that we deliver consistently great customer experiences. Human-centred design is integral to the way we operate in BFS. Every problem, idea, or opportunity starts first with understanding the client's experience with us.
One of the best examples of human-centred design in action has been the reduction we've seen in the time it takes to assess and approve a home loan application. We bought a house at auction, so it was really important that we were able to turn it around. It was quite stressful, I remember, because you pay this big deposit, and you have to settle everything in a month. Just knowing that we could turn that around quickly and that we were able to get a pre-approval really quickly as well just gave us that peace of mind. Our digital banking platform has been built from the ground up using the same technology as companies like Netflix. That means that we can be personalised, intuitive, and deliver exceptional customer experiences. We love the digital app. I think it's fantastic from Macquarie. The technology behind it is so sophisticated.
The thumbprint, boom, you're in. The user interface is really intuitive, easy to use. I really love the data visualisations, and we get to see where all of our money's going. Being a fintech, being a relatively new company, partnering with Macquarie has enabled us to build trust with our partners. We've been able to provide with Macquarie this full digital integration, which means everything's very seamless for the customer, from onboarding to even transferring funds. Every single one of our private clients uses a Macquarie CMA. The technology for us, it's absolutely vital to how we run the business. It's vital to our client value proposition. It's been a real cornerstone of the way that we actually want to service our style of client. We were originally part of a Queensland firm. We were their Sydney office.
When we were looking around to work out how we're going to do our separation with our Queensland friends, it was really apparent we needed someone who could really help us financially. For Glenn and Paul, this was a new business, a new firm. We were able to de-risk and provide some comfort for them and that we were there to support them. Their focus would be then on being good lawyers. We are 100% committed to Macquarie. They've been very good to us, and they've supported us in our initial stages. There is no reason why we can't see them progressing with Macquarie in the future.
Fantastic. Let me add my welcome to that of my colleagues. A little video there showcasing some of the experiences we provide to our customers. We think they're market-leading experiences that they have.
The very important relationships that our customers have with us and the way they view those relationships. We have relationships going back nearly 40 years with customers, and our client retention rates are very, very high. The other thing I think you see in that video is the mindset of our people. Customer obsession is really at the forefront of the way they operate. They have a growth mindset and an innovative mindset. We think that sets us up really, really well. In terms of BFS, lots of you will know this business. A very successful business, we think, now operating wholly in Australia. Financial services, both wealth management and banking services, one and a half million clients and growing significantly. We operate through three channels, and you'll hear shortly from the channel heads, so personal banking, business banking, and wealth management.
Very familiar, I think, in terms of the nature of those operations. We leverage a very sophisticated technology platform across all of those businesses, and that has been instrumental and key to our growth. In terms of the history of this business, you can see that there. Perhaps surprisingly, this goes back a long, long time, so 1980 with the establishment of the CMT, so 40 years ago and still a very successful product today. We know that today, of course, is the CMA, the Cash Management Account. You can see on this slide the early establishment of the business bank back in 1985 when we got our banking license and some of the earliest segments in that business. In the early 1990s, we started in the home loan business.
Back then, of course, it was an originate-to-securitise business, so not really a balance sheet business as it is today. In the late 1990s, the Wrap platform, which has gone on to be the leading platform in this market. Fast forward a number of years, and I joined this business in 2013. At the time, we relaunched our strategy. What I saw at the time was an opportunity to make use of technology which was available, which could significantly change the experiences and the way we serviced clients. No longer did it seem necessary to have a very large branch presence to build scale in this business. That was a real game changer. We set about a new strategy. I'll talk about some of the features of that strategy in this deck, but mainly just under three headings.
The first one was to really put clients at the centre of everything that we do. That has been pivotal. We worked out that more than price and more than anything else, clients stay with firms, are attracted to firms based on the experience they have. Client experience is at the centre of our strategy. The second part was to earn trust through excellent risk management. We had a tough lesson in 2013 with the enforceable undertaking, and we learned then the importance of strong risk management and strong governance. Risk is at the centre of everything we do. The third was to make this big investment in technology to enable us to build a business with scale and to provide those experiences to clients. You can see down the bottom there the profit over the last five years or so.
The strategy has been working well for us, and we think sets us up going forward. As I say, the first part of our focus is on client experiences. Now, I'm sure all businesses and all retail financial services businesses say they are focused on their clients, and they're all about client service. It really is different here. This is absolutely at the center of everything we do. Whenever we think about a change or a new product or a change of process, the first thing we ask and want to understand is, what does it look like to the customer? We encourage all our staff to be customers. We want them to understand firsthand the experience that they're building and what it's like to use that product. I'm a customer, of course. I know Shemara is a customer. Alex is a customer.
We encourage our staff customers to be vocal about their experience. They're a very tough judge of the characteristics of the product. We don't just rely on that, and we don't presume to know what customers want. We use a range of measures to understand the experience customers are having with us. You heard on the video, human-centred design. That's one of the techniques we use. We have voice of customer work that we do, but there are a range of analytics that we run ourselves to have a better sense of the experience customers have. We then make heavily data-based decisions in all of the changes. The changes that we make, the new products, the changes of features are fact-based, driven on real knowledge about what customers are experiencing.
It is very, very powerful because we know we're spending our money in the right areas. With this focus on clients and them being at the center of what we do, we want to make sure that their experience is always positive and there are no bad experiences so that their best interests are looked after. There has been a number of industry changes over the last while. Often, what you will see is that we have moved ahead of the industry in terms of these changes to make sure that the products operate in the best interest of customers. We were the first to remove ATM fees. We were the first to have an open banking platform so customers had more control of their data. We were the first to ban gambling transactions on credit cards to make sure we were protecting vulnerable customers.
We stay very close to industry groups, to regulators, and to customer lobby groups to make sure that we evolve the business in a very proactive way. We don't just wait for rules to change. The other thing we've got, of course, is a very strong risk culture. You heard Patrick talk about that before. There is a really strong governance and accountability culture within Macquarie, as you heard Patrick explain. The tone from the top is very, very present at Macquarie. The tone from the board, you saw Peter, the chairman, on the video, and Peter's here today. He's very present in the business, as are the board. The tone from the top is very present, as it is from Alex and Shemara and Patrick and the other leadership team. We then have a very experienced senior leadership team.
That senior leadership team have a long tenure at Macquarie. This is a team that's been operating the business for a long period of time. When they make decisions, they're making them for the long term in the best interest of clients and the best interest of the business because they will be here over the long term to work through any issues that arise. It's a very, very senior team. We've kept up our investment in terms of compliance and in terms of risk. We find ourselves well positioned in terms of changes coming out of the Royal Commission. There were no specific findings against Macquarie. We've been proactive in changing our business, as I mentioned on the previous slide, for changes that we think will come through the industry.
Finally, the governance measures here and the need to be a risk professional are not just at the senior level. They are with every person in the business, regardless of their role. They have risk management KPIs that we assess a couple of times a year and constantly, in fact. There is a very strong consequence management framework if they do not meet the very high standards that we set of our people in this area. The next part I will talk about is the simplification of our operations. What we recognized was we could really win here if we focused on a limited number of things. We understood what we are doing, and we do those well. We spent a lot of time closing offices and operations that did not have the scale or the payback that we might want. We exited a whole range of non-core businesses.
We combined businesses to get operational efficiencies. Just recently, we put the finance leasing business into BFS for similar reasons. You see there a discontinuation of a range of products, simplification of our pricing structures and other arrangements we have in place where clients deal with us, and a significant decommissioning of our systems. All of this making it a much more simple business to operate, which means we get more things right. It's simpler to manage. We make less mistakes. It's easier to control risk, and it becomes more efficient. We see some of that efficiency coming through in our cost story. What you see here is the costs over the last five years or so, and they're basically flat. They went up in the last year as we bought across the motor vehicle finance business. For that, the costs have remained flat.
What that has meant is that we have been able to invest more money proportionately in technology whilst keeping costs flat. That technology investment is allowing us to grow at scale. On that right-hand chart there, you see the line is our funds under management, our loan assets, and our platform assets have been increasing, and our staff numbers are not increasing. We are building scale. I expect this graph to look similar as we play forward over the next couple of years. Volume is going up, cost base not going up. This is just an example of some of the technology investments that we have made. There are literally hundreds of features and investments under this. I just picked out some of those. The key thing I think was in 2013, we decided to do a full digital transformation.
Rebuilding the tech stack from the bottom up. New infrastructure, new environment, new applications, new core banking system, everything from the ground up. That has brought tremendous benefits. You are seeing that now paying off in the home loans space. Ben will talk to that in a little while. We have had great leverage from those investments in our digital assets and our environments and also that core banking system. We are turning our attention now to the wealth platform. We are replatforming the wealth platform. That is the first time in 20 years. That is a significant upgrade. It will bring with it tremendous benefits, I think, in terms of our wealth business and likewise in our business banking business. They have not had significant technology upgrades, and we are leveraging the investments we have made on the personal banking side across the business banking.
I expect us to get the rewards there as well. In the interest of time, I might just jump over to the next slide. We are a little bit behind, but this is just some of the technology stack that we have. Some tremendous functionality here. I can see Justin, who runs our IT team, with Nicole who's in the audience. We have a superb tech team and product team, and we really do have some leading technology here. A lot of it, the first time it's been seen in financial services, has been at Macquarie. I think we're very sophisticated in terms of our cloud strategy as well and much more advanced than what you'll see in the industry. I'll hand over now to the channel heads. You can see here the way the business is structured. We go to market through three channels.
Again, this customer obsession and this focus on customer. It is the three channels which face the market and face our customers. You will hear from the channel heads. We are supported by our product teams, our IT teams, our operations teams, our risk teams, and so forth across all those platforms. Today, I have Ben here. Ben runs the personal bank. Ben joined Macquarie 23 years ago and has worked in the Macquarie Capital business and the asset management business, both here in Australia and in the US, and joined BFS in 2013 and has been a big driver behind the overall BFS strategy, but importantly, the personal banking business. Dean has been with Macquarie for, I think, 25 years, wholly in the business bank, and has been running the business bank for about the last five years.
Sean joined us back in 2011 after a career at ANZ, running the private bank high-net-worth business in Asia and time also at BT. It has been a big part of the driver behind our platform growth. I might pass over to you, Ben.
You can see here that we have grown our home loan book by $14 billion over the last 18 months. Since the middle of 2017, we have been increasingly focused on our Macquarie-branded loans. We ceased originating all new white-label loans about a year ago. Because of the strong growth we are seeing in our book, it is weighted towards more recent originations, with two-thirds of the book having been originated in the last three calendar years. Our application volumes more than doubled in 2019, which we attribute to our focus on delivering a superior client experience.
One dimension of client experience is the time it takes to approve loans. It's particularly important in the broker channel, where we originate 90% of our new business. Brokers tell us that we have the best approval times in the market. We're consistently at least twice as fast as the industry average. That's a result of our multi-year investment in people, technology, and processes, and a willingness to invest ahead of time and build scale and capacity for a much larger business than we had. You can see that scalability in the top right chart. We were able to maintain our industry-leading processing times in 2019, even while our application volumes more than doubled. At the same time as winning more new customers, we've also been focused on delivering outstanding client experiences for our existing customers.
You can see in the bottom right-hand chart that's had a dramatic impact on the number of customers leaving us, with our external refinance rate for Macquarie-branded loans now in line with market and improving every month. Our strong growth is happening in the context of a very prudent, indeed conservative, risk appetite. We've moved ahead of the industry over the last five years to implement tightening measures. For example, in May 2015, we were one of the first lenders to start buffering other debts. That means our servicing calculator added a margin of safety on the interest rate of a client's other debts that they were not refinancing with us. We think that moving early to implement tightening measures laid the foundation for the step change in market share that we saw in 2019.
Another example of our prudent risk appetite was our strategic decision in July 2017 to reward customers who have more equity in their homes. We were the first lender in the market to introduce a separate pricing tier for customers with at least 30% equity in their homes. For two years, we were the only lender in the market with that strategy of focusing on lower-risk loans. You can see it's had a dramatic impact on the mix of clients we're attracting and the business that we're writing. In this financial year, 56% of our new volume has been at a loan-to-value ratio of below 70%. We write almost no business or very little business above an 80% LVR. At both ends of that spectrum, we compare favorably to market. On the top right chart, you can see that loan-to-value ratio is highly correlated to arrears rates.
We're confident that our strategic focus on having a very prudent risk appetite means that we're building a better quality loan book. Both our 30-plus and 9-plus arrears rates are materially better than the industry. This page presents another lens on how we've repositioned the business over the last five years. You can see the change in our mix of business over time. When you look at our recent flow, you can see that we're attracting a higher proportion of owner-occupied clients than the industry. Our average loan size has increased to about $600,000 for new business. Our overall portfolio is more weighted to the Eastern States than the underlying population. I'm now going to hand over to my colleague, Dean Firth, who runs our business bank.
Thanks, Ben. Good morning, everybody. The business bank has been built on a strategy of specialisation.
That specialisation has really been focused around a segment strategy. As you can see on this slide, there are 11 segments that we're specifically focused on. Eight segments are relatively mature in the context of our offering, and three we would consider to be emerging. As a consequence of this segment strategy, what we're able to do as business bankers is put the same bankers and the same teams in front of the same business every day of the week. As a consequence, we build really great insights and knowledge about what's important to that business, not just their financial requirements, but their business requirements. As a consequence, we believe that we can innovate and provide very unique propositions into the marketplace. I think the best way to articulate that is by way of example.
We very, very early recognized that the collection of rent was an issue for our real estate agent clients. We developed a product called DEFT. DEFT was the first outsourced provider in terms of invoicing, receiving, and reconciling the collection of rent for our real estate agents. It did a number of things. It removed cash from their office. It automated a process, and it improved their operational efficiency. That was only really part of the equation. The money had flowed from the tenant to the trust account. We then had to get the payment from the trust account to the landlord. At the time, real estate agents were really reconciling line by line with landlords.
With the knowledge that we'd gleaned from the client interviews that we'd been doing, we understood that business management systems that they were operating on were pivotal to their operational efficiency. We built integration between our payments platform, our banking platform, and the property management systems that our real estate agents were operating on to automate this transaction from tenant all the way through landlord. That delivered operational efficiency once again into the back office of our clients and actually dropped profit to their bottom line. That was really the accounts receivable side of our client's business. We then put our mind to the accounts payable side. Each property throws off about 25 bills a year: gas, electricity, energy, rates, the electrician, the plumber, the painter. As a consequence, we had big manual processes happening inside of our client's businesses.
Once again, we built automation between our accounts receivable process, our accounts payable process, and automated that within our client's back office. Finally, and more recently, we've taken the product attributes of DEFT to develop a product called AuctionPay. If you were to go to an auction and buy a property from an agent that actually banks with Macquarie, you don't need a bank check. You just use AuctionPay, and that removes the check and the paper process from our client's back office and makes them more efficient again. It's this process that we've taken to every one of the segments that we bank, which we believe demonstrates a real understanding of our client's needs, not just from a financial services perspective, but from a business services perspective.
Internally, our mantra is endeavour to be more than a bank to our clients and make them really critical in the way that they run their business on a day-to-day basis. Small business typically do not have the resource to build these technology solutions, so we partner and collaborate with our clients to make that possible. That really goes to the heart of our client retention rate. Our churn is low. Our client retention rate over the last five years is running at 93%, and it has not been below 90% for 20 years. Our growth in lending volumes is at 11%. That is from December 2018 to December 2019. Importantly, deposits represent more than 60% of our balance sheet running at 1.6 to 1.
It is also underwritten at 100% growth in our loan and deposit books from relatively small bases over the last six years, and the outlook is looking very positive. This is just a bit of a deeper dive as it relates to what we do from a business deposits perspective. We have not just built this integration with real estate agents. We have built this integration with every one of the segments that I referenced earlier. This integration, combined with the payments platform that we have, is delivering a unique proposition to our clients. You can see that our deposits are weighted towards property services, but as we build out our propositions into other segments, we can see great opportunity there.
As evidenced by the slide on the bottom right there, our deposit growth year-to-date from December 2018 to December 2019 is 6%, with the predominance of that growth coming from the emerging segments that I mentioned earlier. This slide goes to the composition of our loan book. You can see at the top there that our loan-to-value ratio is conservative and that our level of realised losses is low. We think that goes to the heart of understanding the businesses that we're lending money to, not just against bricks and mortar, but against their working capital assets. On the bottom left side, you can see that 44% of our exposure is against the business themselves. I can tell you that small business owners love the fact that we recognise the sweat equity that they're building in their business on a daily basis.
Finally, the composition of our loan book is changing as we build out into emerging markets. Vehicle finance, and Greg referred to this earlier. This is the business that transferred from CAF into BFS recently, just over 12 months ago. Half of this business actually sits within business banking. We look at the dealer finance as another segment that we provide finance to, both them and to their clients. The consumer component of the vehicle finance business sits within Ben's business, which is really the consumer and the novated side of what we provide from a vehicle finance perspective. Thank you, and I'll now pass you over to Sean.
Thank you, Dean, and good morning, everyone. I'll just spend the next few minutes talking about our wealth management business, a business that's had a long-term commitment to the advice market in this country, both in terms of the thousands of advice businesses that we serve in the open market and, of course, our own advice business. This commitment actually dates back, as Greg alluded to earlier, to more than 40 years ago now with the launch of the Macquarie Cash Management Trust, or cash management account, as we now say, or CMA.
Today, the CMA is approaching $30 billion in funds under management and is used by thousands of investors around the country, including more than one in three, I should say, self-managed super fund accounts in Australia have a Macquarie CMA, still known for its service proposition and leading functionalities such as data connectivity for financial advisors. In fact, we leveraged our cash management capability to launch Macquarie Wrap some 20 years ago now. Our Wrap now is the second-largest wrap platform in the market with over $90 billion in funds on platform and an excess of 20% market share, still growing strongly today from a net flows perspective with $3.3 billion in net flows for the 12 months to September 2019 last year.
Since inception, we've continued to enhance the capabilities of our Wrap platform, our managed accounts capability, for example, being a more recent enhancement, seeing very good growth. We know the advice market is changing. Advice businesses around the country are rethinking their business model and their service model, with around a third of them expected to make a change in the coming 12 months. We believe the expertise we've gained and the capabilities we've delivered over the last 40 years position us well to partner with advisors to help them navigate this change. We're very focused on delivering an exceptional client experience. That's really important to us in terms of advisors and clients. We're investing in our people and our technology and using human-centered design techniques to very much co-create solutions for advisors and clients.
We're replatforming our Wrap platform, very much focused with cloud-based open architecture technology to integrate within an advisor's business or an advisor's ecosystem. We're also leveraging our core banking platform from a CMA perspective. Replatforming provides a whole range of benefits, actually, for advisors and clients, including greater, if you like, international capability from a Wrap perspective and real-time banking from a CMA perspective. It doesn't just provide benefits to advisors and clients. It also helps us continue to get the benefits from scale in our own business. We're not just investing in our core platforms. We're also investing in our digital interfaces, so advisor online capability, which helps advisors run more efficient businesses. We're integrating our award-winning e-banking and mobile banking technology so clients can see their wealth and banking in the one place. We're always looking for opportunities to innovate.
Our digital portfolio manager capability is an example of that, which enables advisors to manage clients' investments more efficiently by automating investment recommendations, advice documentation, and portfolio implementation. We're very much investing for the future. Moving now to our private bank, in an evolving advice market, we chose to be very specific on the segment we focused on in our own advice business. We brought together our private bank and private wealth business to focus clearly and focus our growth strategy on the high-net-worth segment. Certainly, this was a natural or logical evolution for us in that business. We've been serving high-net-worth clients for many years now, albeit not exclusively. We believe that very much a segment-focused strategy represents a significant growth opportunity for us as we bring the best of Macquarie to high-net-worth families.
We now have a very focused business that is very well-awarded business as well and serving the needs of clients very, very well. In summary, we believe that our long-term commitment to the advice market in this country over the last 40 years and the expertise we have gained during that time, combined with the fact of our continued investment as a result of our scale and the strength of Macquarie's brand and balance sheet, will continue to benefit advisors and clients and enable us to make the most of opportunities available in a very much evolving market. Thank you, and I'll hand back to Greg.
Thanks very much, Sean. As you can tell, we think we're very well placed for growth. We're expecting growth going forward across all three of the channels in all parts of our business. Sam, in the interest of time, I'll hand back to you. I'm not sure that we've got time for questions, but let me hand back to you.
Thanks, Greg. We'll just take a couple of questions. Matt.
Thanks. Matt Wilson. Evans & Partners. When we look at the numbers on page 44, you're sort of, on average, you're 10% the size of an average major bank, yet you spend more than a third of what they do on average on technology. You've clearly got the best technology. As we've heard today, you can price risk, and you don't have a backbook to protect. There's huge inertia rents that sit in the sector. How are you holding yourself back because you've got this tremendous opportunity and all the tools and expertise to grab it?
Yeah. No, we share your sentiments that we're well positioned. We think we do have the best technology. We do not have anywhere near the old platforms to sort of worry about. I think this is why we're seeing the sort of growth that we've seen. The Wrap business will soon be the largest Wrap business in the market. The mortgage business is growing significantly. The business bank business is growing significantly. We think there is lots of upside here. Importantly, as you see on this slide, we're trying to do it in a way where we pace our investment, and we could sort of accelerate a little bit, but we think we're growing at a manageable pace.
Jon, let's take one more.
Thanks. Greg, just a quick one. You say at the very beginning in the operating update, "Volume growth is fantastic. We can see it. We see it in the upper steps every month." You also talk about margin, and the margin pressure is there. There was no comment here today about margin. Can you talk about how margin is performing and how you expect that to go, especially as you continue to focus on premium product, as Matt talked about, in this very competitive space and the industry margins that continue to be driven down?
Yeah. Yeah, the key margin pressure we've seen is on the deposit side, I think, with the rate cycle going down, and that's eroding some of the margin in terms of the sort of the mortgage product. In business banking, margins are about the same as they were in business banking. Likewise, in leasing, and probably the mix of business in leasing for us is changing a little bit, so our margin is up a little bit in leasing. The biggest margin compression we've seen is in the Wrap business. There's been lots of pressure there coming from, again, the deposit side, but also there's a lot of competitive pressure in terms of fee rates there. On the mortgage side, in terms of the credit margin, that looks okay. That looks okay.
If we were to think to a standard sort of transfer price, then the margin is sort of okay, but the deposit margin is coming down, so the overall margin is down a little.
The volume growth will offset the nim pressure. You'd still expect revenue growth coming through?
Yeah. Yeah. As you've seen, the volume is very strong in mortgages, particularly in the last quarter, but it has been all year, and it's been very consistent in business bank the whole period.
All right. Last one, Andrew, as long as it's a quick one.
Thank you. Just a quick question on funding. Obviously, 40% annualized home loan growth is very strong. You did a Puma series late last year. I think it was almost a $3 billion deal. How many of those do you need to run per annum to keep NIM in check, I guess?
Yeah. We're very fortunate. We've had this very substantial deposit base. We had more deposits than loans for a long period of time, and deposits are still growing significantly. As Dean has shown, we have a whole range of new segments that we can grow deposits. We'd like to accelerate deposit growth. As you say, we did a $2.88 billion securitisation issue. That was the largest non-major deal ever done. We've done some unsecured issuance. Funding markets are very attractive. We're underrepresented in the term deposit side, and frankly, we're underrepresented in transaction and savings accounts where the growth for us is only about $80 million a month. There is a range of mechanisms for us to lift the deposit side. The technology suite that we've brought to bear is primarily on the mortgage side.
I think as we shift our focus to enhancing the deposit offerings, I think we'll see deposits start to increase, and we'll be able to fund that growth.
Just in the interest of time, we'll leave it there.
Thanks.
I'll come back to you, Brian. BFS, if we can have you exit the stage. Thank you very much. We'll have the CGM team come up, Nick, Cindy, and Simon. As Nick and the team come up, we'll play a short video on CGM.
When we first knew that there was going to be a smart rollout in GB, it's really clear that there were enormous challenges for us. We needed a funding partner to fund the meters, and the deal with Macquarie was the first one of its kind.
Macquarie, over the years, has become a true partner. They have been beside us in very different scenarios. Even in an upmarket or a downmarket, they always try to find a different aspect, a different angle. They have been very creative in bringing solutions to us.
Clients commit to long-term relationships with Macquarie because they trust the people they work with. It's the people that drive the relationships, and it's the people that are the face of Macquarie.
Everywhere we talk to Macquarie, even if it's in Brazil, if it's in the U.S., in London, in Australia, they have fantastic people. They understand our business better than anyone else that we have been working with.
We're able to come up with ideas, think outside the box. What's really powerful is then having the financial institution behind you allow you not just to think outside the box, but step outside it and actually execute on those ideas, which is pretty exciting.
We are working in the refinery business, diesel, gasoline, you name it. Crude prices move quite up and down. They're quite volatile. When we were looking for financing, we obviously were first and foremost looking for inventory financing. When we then started discussing with Macquarie, they actually not only brought the inventory financing facility, but as well the additional hedging facilities, the additional services, which helps us to take volatility out of the inventory and therefore helps stabilizing our financials.
We have a great pool of expertise. We actually spend time to listen to what the clients' problems are. We do not give a cookie-cutter kind of solution.
Our team leading is a point-of-sale financing platform focused on the recreational market. Our business is constantly changing. We like to try new things. They've been with us at the table to think through how they might be able to accommodate our needs as we scale our business.
We've had great success backing people from startup right through to the maturity of their business.
Domivest is a party that provides buy-to-let loans in the Netherlands. It's a market that has evolved from virtually non-existing to now somewhere between EUR 2 billion-EUR 3 billion on an annual basis. From the outset, Macquarie helped us with being very proactive in providing working capital loan, knowing from the U.K. experience what it takes to set up a buy-to-let lender, enabling us to build up the portfolio. I think Macquarie differentiates itself from other banks in taking more a niche approach and taking more a partnership approach.
When we talk to manufacturers, everyone knows who Macquarie is, and it provides a level of credibility to us as a company.
Senior management of all levels really takes the time to meet the clients, go down to the factories, and then understand their business from the bottom up.
That kind of face-to-face meeting really helps strengthen our client relationship.
One of the things that differentiates Macquarie is that they behave like market leaders. They have a point of view on the sector. They understand the GB market context really well. There is the wanting to help and wanting to solve our issues. Macquarie can go away, find an answer to my problem, and come back maybe with something I have not even thought of. I also value the amount of challenge I get, actually. If we are not thinking about things the right way, it is a two-way conversation often. It has been really great that we have had this mature, very consistent funding arrangement and this good partnership, which has helped us through what has been a really, really challenging period for us and for GB. We have rolled out over 7 million meters, and that is more than any other supplier. Macquarie has been an absolutely instrumental part of that.
Good morning, everyone. What a fantastic video. I think it really clearly demonstrates that link between our staff, our customers, and the solutions that we're providing them on a daily basis. Today, I've got the pleasure to talk to you about the core elements that define Macquarie's CGM business. Shortly, I'll be joined by two of my colleagues who run two large yet diverse businesses within that platform. CGM is a client-focused business. We have deep, long-standing client relationships. Our staff have specialised, strong technical expertise across a broad range of geographies and products. Our business lines are diversified, resulting in a strong and stable earnings base. Finally, risk management overlays every decision that we make and is core to everything that we do. Once again, customers are the most important element of our business.
We have over 5,000 unique customer relationships, each having exposure to either a financial or commodity market or a requirement for some kind of capital. They include sophisticated investment managers, producers, and consumers of commodities. Each year, our customer base continues to grow. 85% of our client revenue is generated from existing relationships, demonstrating the core strength of our customer franchise. This leads to a confidence to be able to forecast future activity levels, helping us make sound investments and decisions when it comes to things like staff, products, and markets. Our customer relationships are well-diversified over a full spectrum of products and services, with limited concentration in any given sector or product.
Given how important our customers are to our core business, we often ask them about their experiences, like we did in the video, like we've done through human-centred design processes, as our colleagues in BFS and other parts of Macquarie have. Some of the insights that they share with us include they appreciate the bespoke offering that's tailored specifically to their needs. We make them feel like they are our only client. They respect our strong understanding of the market, which results in a shared partnership experience. Finally, they tell us that they buy Macquarie for our people. This is an offering that has evolved over many years.
This is a really interesting slide, and a lot of data on the slide, but I think it really clearly demonstrates the evolution of this business over the past 40 years in partnership with our clients into a broad range of products and markets. Some of this activity has resulted in businesses that are niche, and some of it has resulted in businesses with scale. This is further evidenced by industry recognition. In the past 12 months alone, our businesses have been recognized as Natural Gas and LNG House of the Year, Asian Electricity and Environmental Products House of the Year, and Energy Research House of the Year. This results in scale across some of our business lines. Our futures business is ranked number one on the ASX. Our North American gas business has grown to be the second largest in that market.
Our asset finance portfolio has grown to be over $8 billion in notional value. Over the 40 years, our clients have been at the forefront of our portfolio. We have evolved into different geographies where our clients are located and where their risks need to be managed. This has resulted in coverage across 50 offices in 27 countries. One of our more recent expansions has been into gas trading in Mexico City, where the domestic gas industry there has recently deregulated. This was a journey that took us 12 years in the making, waiting for the right time to identify to enter that market. When our customers demonstrated that the need was there and we deemed that the regulatory environment was appropriate, we were able to move quickly, one of the first in the industry to do so.
Our people have a broad range of skills and specialist technical expertise. Over 2,500 of our staff are tailored to solve our customers' risk management, capital, and logistical challenges. Some of those specialist skills include logistical experts who help us manage the movement of commodities from where they are produced to where they are consumed, meteorologists who forecast weather patterns that impact commodity prices on a daily basis, and data scientists and quant PhDs who help us interpret the wealth of data we accumulate on a daily basis. This combination of a diverse customer base, broad geographic reach, and deep client relationships results in a strong and stable earnings base. One of the least understood aspects of the CGM business is that 65% of our portfolio represents recurring income from either annuity business lines like lending, leasing, and financing, or from repeat revenue that comes from our stable client base.
In fact, when we analyse the CGM business lines further, and more specifically our commodities business lines, we find that between 60% and 70% of those business activities have either very low or no correlation between them. When volatility does drop in one of our sector portfolios, it is likely offset by increased activity in another business line. A good example of this was last financial year. We saw reduced volatility and subsequent reduced customer activity in our global oil businesses. This was offset in our portfolio by an increase in volatility and subsequently customer activity in our North American European gas and power businesses. This correlation results in a lower risk of volatility for our earnings base. Let's talk about risk a little bit further. When I'm talking to investors, they often ask me what keeps me awake at night.
Invariably, it will come down to some kind of discussion about risk, whether that be geopolitical tension in the Middle East, the impact on global demand and demand of oil for the coronavirus, or the impact of technical technological disruption on our markets. Risk management is a factor in every decision that we make. This experience has been accumulated over half a century of managing risk across our organization, resulting in a mature and consistent control environment governed by Macquarie's risk management principles. This includes managing our global risks right down to managing our independent granular risks. As we have heard from Patrick and Shemara, we have a very strong second line of review and challenge that comes from our central RMG function. We are all focusing on the worst-case outcomes in every decision that we are making.
There is a really strong focus on risk culture across CGM, in much the same way that that focus permeates all other parts of Macquarie. Every individual in our business is held accountable for all aspects of risk management. If you were to ask any of our colleagues across New York, Singapore, Geneva, or Houston, every one of those individuals will tell you that they are each held accountable for all aspects of risk management, including credit risk, market risk, operational risk, non-financial risk, and conduct risk. This manifests itself in not only our ability to manage our own risks, but to partner with our customers to manage theirs. As I mentioned earlier, we have a lot of diversity across all of our businesses. Roughly 60% of our revenue is generated from commodities, a further 25% from our financial markets activities, and 15% from our asset finance activities.
Today, I'd like to introduce you to two of our business heads who run commodities and financial businesses. Firstly, we have Cindy Keck, who's joined us here from Houston. She co-heads our North American gas and power business. Cindy joined us via an acquisition back in 2005 and has well over 20 years' experience in managing risks and relationships across that industry. After that, we'll hear from Simon Wright. Simon has been with the firm for over 30 years and runs our fixed income and currencies business. Simon has been at the forefront in driving the growth of that business over the last two decades. Cindy.
Thanks, Nick, and good morning. I'm delighted to be here today in Sydney. North American Power and Gas's mission is very much a people business. Many individuals in our trade team have over 20 years of experience and a senior team member that worked together for over 14 years. We have strong expertise in specific markets and regions, and we have very high retention rate, which is unique in our industry. Our long tenure and continuity as a team underpins our strong Macquarie risk culture and has enabled us to build a seamless, round-the-clock client and market coverage. This evolution of our business growth didn't happen overnight. Our growth has been a steady and continued organic growth, strategic acquisitions, and seamless integrations over the last 15 years. I'll touch on the most significant ones of those now.
Like many of my long-standing colleagues, as Nick mentioned earlier, I joined the company in the acquisition, in my case, through Macquarie's purchase of Cook Energy Trading Business in 2005, based in California. As part of a diverse, minority-owned gas trading company, Cook Energy's legacy continues to be an important part of Macquarie's business today, especially through its strong footprint established in California natural gas markets and disciplined risk management culture. Between acquisitions, we maintain our focus on organic growth. For example, as we integrated Cook Energy's business, the team was building out the Eve Power team through a patient, client-led, and physical approach to create the significant business we have there today. Macquarie subsequently acquired Constellation in 2009, then one of the largest natural gas marketers, integrating the teams to one central Houston location that now forms our regional headquarters with over 400 staff.
Our most recent acquisition was in 2017, where we successfully integrated the Canadian gas team in Calgary and its Southeast Texas and West Power team in Minneapolis. Each acquisition and the steady organic growth was additive to the platform that provides a full coverage of North American gas and power business that we have today. Our business is very much physical in nature, which means we do not look like our industry peers. Our position in the North American market is supported by a strong emphasis on deep-dive analytics, through which we actively manage over 80 natural gas physical systems, including pipelines, storage facilities, and local distribution companies. As you can see on the slide, where it is highlighted in blue, we physically ship and find ways to optimise on over 80% of all major interstate pipelines, with at least average receipts of half a BCF a day.
We accomplish this mainly through leased physical assets. Our peak physical volume hit 13 BCF just this year. To put that in perspective, total North American natural gas production is 90 BCF as of December 2019. Patrick and Nick earlier talked about ownership of risk, and our business is no different than the rest of CGM and Macquarie. All of our activities are underpinned by a strong Macquarie framework and culture, and everyone and individuals are accountable across all aspects of risk analysis and risks owned at the business level. With our extensive physical coverage, we have built a diverse and long-standing client base comprising more than 500 counterparties that include producers, utilities, power generators, and marketers. Many of these clients have worked with us for many years and benefit from the mix of our analysis, expertise, and the physical presence, market reach that I described.
Turning to the macro and how we're responding, we have witnessed massive shifts in the natural gas market over the last 5 to 10 years. These rapidly changing markets present continued opportunities for our business. Although the shale natural gas revolution began more than a decade ago, our production continues to climb. Not only has overall production grown, the geographic distribution of production has shifted dramatically. With the Northeast region growing the most over that time frame, it has moved from an importer to an exporter to other regions in this time frame. Today, the U.S. has built six world-scale LNG facilities from zero just four years ago. In total, exports out of the U.S. have increased over 355% in the last five years. As a result of these rapidly changing supply and demand dynamics, interregional flow across North America has completely reversed.
New bottlenecks have appeared and disappeared, while the amount of storage available to absorb the supply and demand dynamics has actually declined. What does this mean for our business? Given this constantly changing landscape, both producers and consumers have a greater need to manage their energy products and to understand the implications for price volatility as well as physical flow logistics. With our long tenure, an experienced team, and extensive physical coverage of North American power and gas grids, we believe we're well-positioned to service our clients' needs and continue to help them navigate the uncertainty and volatility of an ever-evolving market. Thank you. I'll hand it over to Simon Wright.
Thank you, Cindy. Thank you, Nick. My name is Simon Wright, and I'm the division director of the fixed income and currency business. I've been looking after this business and its many evolutions and iterations for over 20 years. What I can tell you is true today, and it's been true for the last 20 years, is that we have a client-led business model. Our primary focus is based upon finding client or market-based solutions for our clients and then managing the resultant risk of that activity. In terms of coverage, we are all things FX, both G10 and emerging markets, operating out of all the major centres. With regards to rates, markets, and products, we choose not to engage as deeply in all markets, but basically to pick those markets where we have a competitive advantage.
In credit markets, ex-US, we largely focus on the structured end of that market around origination, structuring, distribution, and trading of asset-backed securities, particularly around mortgages and the ANZ and AMEA. With regards to clients, we find our capabilities resonate with corporates, private equity, real money, leveraged money, and a little bit of activity around money service brokers and some high net worth. As you've heard today, risk management is key. It is key for us, and it always has been, as the centre of everything we do. Our risk management team and basically our product managers, our line managers, our regional managers have, on average, a tenure of over 18 years, and all are very well-schooled in our risk management systems and our risk management culture. Growth and evolution have largely been in two stages for us.
In the 1990s and the 2000s, we were very much an Australian-led business model operating in our domestic markets focused on the primary market that is talking to end users directly, and then servicing the international market much more in the secondary markets that is talking to those institutions and brokers servicing their end clients. Post-2008, there was a change. We had to change our focus. We had to change our strategy in response to those changing market dynamics. We basically sought to target those primary markets offshore. In doing this, we knew we had to basically hire local origination capability and then harness it and couple it with long-standing Macquarie DNA risk management capability and product capability. We focused on the Americas, Japan, AMEA, and Asia. As a result, we are now servicing an excess of 250 primary client relationships.
As can be seen by the graph in the top right-hand corner, we're experiencing and enjoying year-on-year incremental growth, regional diversity, and revenues that are marked by low volatility. Looking at three stages of this evolution, what is true to all of them is we put our client outcomes first. Starting in the US and Canada, we focused primarily on private equity and corporates. Our clients here have benefited from our ability to partner with Macquarie Capital and build out our complementary skills to provide a much more holistic client experience. In Japan, our experience had been around through joint ventures and partnering with banks and brokers. In 2011, we basically went and originated a small local team to focus on local corporates.
What we developed and achieved was a diverse range of corporates, multi-generational corporates with strong balance sheets in industries as diverse as education, shipbuilding, electrical, and food importation. In AMEA, again, we hired local. We found people who knew their markets, knew the nuances, cultural ties, those sorts of things, and part of Macquarie capability and risk management. Here again, client base has been diverse: fish stock importers, steel fabricators, timber importers, agri businesses, asset originators. What has been a real win for us through this whole evolutionary process has been our ability to harness and leverage our experiences in one region and make them portable to another client sector. For example, we designed and executed a term FX hedge with volume variability based upon underlying jet fuel price for a North American client.
We took this idea and made it portable to Japan, where we were talking to a shipbuilding client where the same FX type exposure was linked to copper pricing because of the demand for copper wire. In both instances, these were first for our clients, and it solved a problem for both of them and gave us real leverage. From an outlook perspective, we have lots of room to grow. Our coverage model is only partway complete. With the current strategy of stable incremental growth, we are very much focused on the continued maturation of the strategy. Thank you.
Thanks very much, Simon. As you've heard, CGM is acutely attuned to the evolving market opportunities and well-positioned to take advantage of them as they present themselves. When we think about these potential areas of growth, we can categorise them in two ways. The first one is areas that are adjacent to where we are already operating, have expertise, and market relationships. This could include the investment in disruptive technologies such as blockchain, participating in the replacement of aging energy infrastructure, or expanding into new geographies, including growing our PIC business in Asia, the Americas, and Europe, as Simon has just talked about, or indeed growing our SAF platform deeper into Europe, including expanding our smart metres portfolio and our solar business. All the way, we are looking to capture new classes of customers with this expansion.
Secondly, we see a really exciting opportunity in the transition to a low-carbon economy. Macquarie and CGM understand the global energy footprint. We understand gas. We understand electricity. We understand oil and renewable markets. We also understand how to move energy both in domestic markets and international markets. We think this uniquely positions us to capitalise on the opportunities that will relate to the energy transition. This includes participation in the LNG markets, where demand is forecast to triple over the next 10 years, or the emergence of hydrogen as a new energy class. Finally, the production of renewable energy, where we find ourselves collaborating very, very closely with other areas of our organisation. We're currently pursuing an interesting opportunity alongside an independent crude producer.
We're looking at a program that will capture the carbon where that carbon is emitted, and ultimately, we will use that in an enhanced oil recovery project. That carbon will then be permanently sequestered into the ground, resulting in a carbon-neutral production of a barrel of oil. Also, we're experiencing high growth in demand from our clients for voluntary carbon offset schemes. We are working with those clients on bundling the offset schemes with other commodities and indeed creating new asset classes. For example, we're talking to a customer about a jet fuel bundled supply contract with an offset so that we will provide a single one-stop solution for that customer. There is also the opportunity where we are talking to a customer about development of a carbon-neutral aircraft where the total expected lifetime emissions of that plane are calculated and offset at delivery.
The costs can be built into the CapEx of the aircraft, get financed, and then amortized over the working life of that aircraft. Finally, we're discussing with a major rideshare company to include an offsetting button in their app to allow customers to elect to offset their carbon footprints at the time of purchasing their ride. The commonality across all of these opportunities is that we are partnering with our clients as they transition. As you can see, it's a really exciting time for CGM. 65% of our earnings are derived from recurring business lines. We're well-diversified across customer revenue and geographies, with the majority of our business lines having very low or no correlation with each other.
As we've just discussed, we see significant upside and potential to grow into adjacent spaces to the ones that we're already operating in or to partner with our clients as they transition to a low-carbon economy. Thank you.
All right. Thanks, Nick. We've obviously gone a little bit over time, so thanks for your patience. In the interest of time, we'll just take a couple of questions. We're obviously catching up with investors over the next couple of days, so if we don't get to your question now, we will then. So Richard.
Nick, you went through a period where you made quite a few acquisitions between about 2007 and 2011 or 2012, and then in the last few years, you've only made one. Do you think from here there's going to be more acquisition opportunities, or has the business become so diverse and so big that it's primarily organic from here?
Look, I think the business is quite diverse, and we have built a significant franchise over the course of that period, but we are constantly reviewing potential acquisition opportunities as a normal course of business. Over the course of the journey, there were many acquisition targets that we looked at which were not appropriate, and we continue to do that as a normal course of business. We will find out when those opportunities, we find the opportunity that we think represents the right opportunity for us, both from a cultural perspective and all other aspects of the opportunity.
Just a follow-up question. Given the changing dynamics and the growth in the US market, do you think it becomes a bigger proportion of your total revenue and earnings over time? North America rather than just the US?
We feel, as we talked about earlier in the presentation, that we've got good diversity across all of our business lines, and we are exporting technology developed in the U.S. to other markets that we're operating in, and we're seeing a significant increase in customer franchise, particularly in places like Europe.
Brendan.
Hi, it's Brendan Sproules from Citi. I was just going to ask about the transport and storage opportunities that you've had. You've had quite a step up in the revenue, I think, about this time 12 months ago. Can you talk about the outlook for that across the business?
Again, when we review our business and the performance of the business, the majority of our activity is customer-led, and sometimes it will come in one business line versus another business line. Specifically, as it relates to the transport business and the storage business, we're constantly seeing opportunities present themselves as the market evolves. I think Cindy did a good job of demonstrating just how we see changes in the U.S. market in terms of where energy is produced and where it needs to be consumed, and that is constantly evolving. What we do is provide the solution to our customer where our customers need to get that energy from where it's produced, and the other side of our customers need to consume it. Our job is to get it from where it's produced to where it's consumed.
Whilst there's a need for our customers to do both those things, we think there'll be opportunity.
All right. If there's no further questions, thank you very much for attending. Thanks to all our presenters. Very interesting presentations, and we'll catch up with you over the next couple of days. Thanks very much.