Well, good morning, everyone, and welcome to Macquarie's first half 2027 results. Before we begin, I would like to acknowledge the traditional custodians of this land, the Gadigal of the Eora Nation, and pay our respects to elders past, present, and emerging. For everyone present in the room, I would ask that you turn your phones to silent, please. Today, as is customary, you will hear from our CEO, Shemara Wikramanayake, our CEO designate, Greg Ward, and our CFO, Frank Kwok. Before I do hand over to Shemara, given that it is her last day as CEO, I would like to, on behalf of our shareholders, thank and congratulate Shemara on her tenure as CEO, and obviously her tenure at Macquarie, culminating in today's record first-half result. With that, I will hand over to you, Shemara. Thank you.
Great. Okay. Thanks very much, Sam, and welcome to everyone from me as well. As usual, we will start by just reflecting on the mix of businesses and central service areas we have. You can see there the four businesses that we have that give us very good diversification and resilience across them and are structurally well-positioned for medium-term growth. We show you the mix of annuity style and market-facing income, and in this half, we have had a slightly bigger weighting to the market-facing because of the Macquarie AirFinance realization in Macquarie Asset Management. With that, turning to this half result, you will have seen we announced a result of $ 2.478 billion. That was up 50% on the first half last year, the PCP, and that was because of some one-offs that happened in this half, plus things in the previous half.
But we had good revenue growth with costs fairly flat and delivered an ROE of 13.8%. The only other thing I would note on this page is our tax rate was lower than our typical range at 22.5%, and that was because of the composition and the nature of income with some realizations we had. Looking at the contribution by each of our businesses, the net profit contribution from the operating groups was up 23%, and three of the groups were up on the prior comparable period and one down. Macquarie Asset Management had an increase in the previous result, principally through the Macquarie AirFinance realization that I mentioned, and we had lower performance fees, but that is really the lumpiness and timing of realizations.
Banking and Financial Services continued its ongoing steady growth across all aspects of its business, but we had some margin pressure from the mix in our portfolio and changing, and also a couple of other things I would note is that we kept investing, so our expenses stepped up because of that, and our credit provisions as well. Frank will take you through in more detail. The ECL went up because of our modeled adjustments. Macquarie Capital was down on the prior comparable period, and we did have a really strong first half last year. I think it was our strongest since 2007 or 2008, Michael. But the big factor there is the timing of realizations of the equity investments, which again are lumpy, and last year we had a few, plus a lot of market activity. This year, less this front, weighted to the second half, the result.
CGM, a good result in that we had good contribution from all three divisions in CGM, so that was up quite a bit. Looking at the geographic diversification, as you see, we still have good diversification across all regions, with outside of Australia, the contribution still being over 60% of our income. The Americas was down a bit this year, and that was because of the exit of our public investments in Macquarie Asset Management. Turning then to the operating groups, starting with Macquarie Asset Management, and as usual, all the leaders of our operating groups and our central service groups are here in the front row with us, together with Stuart Green, CEO of Macquarie Bank, and Glenn Stevens, our Chair. Macquarie Asset Management, as you can see, the result of 1.509 billion was up 28% on the prior comparable period.
Big driver there was the Macquarie AirFinance realization. We are showing our assets under management here by the four sectors that they are in, and you can see the assets under management are up 3% to just over 742 billion. We are also following market practice now and in the private markets showing the fee-paying assets under management, which at just on 530 billion are up 6%. Some things to note in this result is it was a very good period of raising at 15.3 billion. We also had over 19 billion of capital return to investors, so a strong period of realization while the sector environment is more challenging. We had some targeted investments of just over 17 billion. The public investments also had net inflows of over 16 billion, and that was helped by the Spire acquisition, the CLO business.
Turning then to Banking and Financial Services, up 6% at 840 million, and this is the business that under Greg's leadership has continued every year to deliver solid growth in results, and will continue, no doubt, under Ben Perham, who is just taking over at midnight tonight, or minute after midnight as group head, but has been with BFS a long time through this steady, strong delivery. As I said, up across everything, so I saw in the APRA stats that we had grown at a five-time system in terms of home loan portfolio and three-time system in deposit.
You can see a good pickup there in our home loans, where we are at, I think, Ben, now 7.6%, up 1% in terms of market share, but also growth in our business banking book, our funds on platform, and our deposits, where we raised about another 23 billion of deposits this year. All of this helped a lot by our very high net promoter score, and I think our client numbers are up 300,000 over this year. So, ongoing continuation of the trajectory of BFS with a very long runway to keep going. Commodities and Global Markets at just over 2 billion there, 2.034 billion, up 83%. We did have quite a weak prior comparable first half.
Simon, Liberation Day and things had impacts on the prior comparable period, but still a very strong result from CGM, and pleasingly spread really well across all three divisions. So, for the first time, commodities, which had a good step-up, is only 49% of CGM's income. That has been helped by the fact that in financial markets, we had strong performance and good increase in contribution from activity in financing, in FX, in futures, and in equities. And also in the asset finance business, we had a very strong period where we particularly had gains from asset sales in technology and energy investments there. And the book grew, if you take out the OnStream meters, which went out in this quarter, by 30%. Again, investment in technology and shipping drove that. So, a great contribution from CGM in the first half.
Macquarie Capital, the result of 278 million, it was down 61% on the prior comparable half, but that was because, as I was just noting with Mike, we had very strong first half M&A activity, strong, and realizations. This half, the private credit book continued to grow, so we're just over 28 billion. But we didn't have the level of prepayments that we had in the first half last year, so that's made a difference half on half. Also, the M&A activity, while global peers have had a very strong first half in markets like the Americas, Europe, we're much more focused in the Australasian market, where activity wasn't as buoyant. But the main contributor is the timing of realizations of our equity positions, where we realize at the best time to get best return for the investment.
In the periods where we're not having big realizations, we have the funding costs and the equity accounted losses, et cetera. We've guided that this would be a year of second half realizations, principally. With that, let me just turn to capital and funding. We, on funding, continue to have our term funding comfortably exceeding our term assets, and Frank will give you more detail on this. Our deposits are at 244 billion, just over, with 23 billion raised in this period, which is impressive. Our term funding that we've raised, similar to the prior comparable period, is about 16 billion. On capital, the main thing to note there is our Basel III Level 2 CET1 ratio is at 12.9%, which is a very solid level.
In terms of capital movements, we've had this earnings of roughly 2.5 billion, as I said, a record in the first half, offset by the dividend for the full year last year of 1 billion and some investment in our businesses. The main areas where we invested, if you look to the right-hand side of that chart, is BFS continued to absorb capital as it grew its business. Also in Macquarie Capital, we continue to make small few hundred million investment in what we think are very attractive digital opportunities, principally. In CGM, the net number is flat. We did grow our credit books, but that was offset by the capital released in the first quarter from the OnStream meters. Our regulatory ratios sit well above the Basel III minimums.
The last thing I am just going to do is just mention the board for this half has declared a dividend of $ 3.25, 35% franked. That represents a 50% payout ratio. I will be handing over now to Frank Kwok to take you through the results in more detail, and then Greg Ward will cover the outlook. Before I hand over, I just wanted to note, because as Sam Dobson said, this will be my last set of results, that I wanted to say a thank you to analysts and investors who are with us today, but also have been following us for many years, even going before my eight years as CEO.
We have, as you see, a diverse and unique mix of businesses, which we think gives us very good resilience across the businesses and really good opportunity to respond to a whole lot of circumstances, but it makes us more complex for all of you to look at. We really appreciate the support and the commitment you have given in terms of getting across this in so much detail, the insights, the challenges you have provided over the years. Our team have done a great job sending me out on a record first half result, but having worked here for more than the eight years and more than many of your lifetimes, I have to say I know it is hard work delivering this stuff. Nothing is a given. It is great the external world keeps changing. Our people respond. Their culture is amazing.
I am not taking for granted what needs to be done from here, but I am going to say that I do think not just our amazing businesses, but our team should position us well to deliver. As part of that, Greg Ward stepping up to be our CEO, the seventh, I think, Greg, that we have ever had. We had two joint CEOs, and then Greg Ward will become the fifth of us after that. I think Greg Ward is bringing a whole lot of things that we need for the next chapter in terms of his experience with technology, operating platforms across our business, dealing with stakeholders like regulators, governance bodies, et cetera, but also having been CFO for a long time before he, with the team, built our BFS business, really understands what we are doing in the world, and not just funding capital, but the entrepreneurialism in the businesses.
I am excited to see what the team can deliver. I have been right there with you all for 39 years, never sold a share, very much believe in the business, and hope I will continue to see, or confident I will continue to see great returns. With that, I will hand over to you, Frank Kwok.
Well, thanks, Shemara. Before I start, I would like to take the opportunity to thank you for being an extraordinary leader of our business. From a personal note, we have worked together ever since I started 30 years ago, from with the Macquarie Capital days to Macquarie Asset Management and to the role I have today. Thank you for that amazing support and guidance you have given me throughout my career. I could not have asked for a better mentor. Now, just moving to our first half results in a bit more detail. We are going to start with the consolidated income statement. As Shemara said, the group delivered a net profit after tax of $ 2.478 billion, up 50% on the first half last year. As outlined by Shemara, this equates to a 13.8% return on equity. Group net operating income increased 10% to $ 9.6 billion.
You can see the drivers of this increase on the slide. Net interest and trading income is up 26% to $ 5.7 billion. What we have seen is in CGM, we have seen higher income across all three business divisions, with strong client activity in risk management, growth in the financing volumes, and higher inventory management and trading income driven by oil trading. In BFS, we have continued to see growth in the loan and deposits portfolio. Fee and commissions income decreased 29% to $ 2.8 billion. This reflects lower base fees in MAM following the sale of our public investments business in North America and Europe, lower performance fees, which was really due to the timing of asset divestments, and lower M&A fees in Macquarie Capital, which had a strong first half last year. These were partially offset by stronger fees and brokerage income from increased equities and futures activity.
Net investment and other income increased substantially to $ 1.2 billion, comprising primarily of the gain on the previously announced sale of Macquarie AirFinance, high gains on sales in assets in CGM, asset finance in the first quarter, and lower impairments and expenditure on green investments in corporate. We have taken net and other credit impairment charges of $ 220 million in the first half, reflecting a small number of specific credits in CGM, together with the impact of movements in our modeled credit provisions, particularly in BFS, which has been driven by a change in the macro outlook for the Australian market. Our actual credit performance continues to be very resilient, but given the uncertainty in the current environment, we think our credit charge, which follows the 4 61 million charge we took in the second half last year, to be appropriate.
Turning to costs, operating expenses increased marginally by 1% to $ 6.3 billion. This was primarily a function of higher profit share due to the operating performance of the group. We continue to see the impact of cost management discipline while we proactively invest in our technology platforms and people. Income tax expense is $ 730 million, resulting in an effective tax rate of 22.5%. This rate is a consequence of the composition and geographical makeup of our operating income. Now, turning to the operating groups and starting with Macquarie Asset Management. MAM delivered a net profit contribution of AUD 1.51 billion, up 28%. The principal driver was higher investment income, primarily from the sales of Macquarie AirFinance and Aligned Data Centers, which both closed this half. Performance fees decreased on the PCP, primarily due to the timing of asset realizations.
Current period performance fees included contributions from MIP III, MIP IV, and MAIF2. Excluding FX movements, base fees increased, reflecting investments and positive inflows, and the acquisition of Spire Partners, a European-based CLO manager. As you are aware, we closed the sale of our North American and European public investments business last year, so you will see the impact on net profit contribution on the slide. In terms of assets under management, it increased 3% during the half to $ 743 billion, comprising 347 billion in real assets, 248 in credit and insurance, 120 in solutions, and 27 in real estate. Over the period, we saw good inflows, investments, and positive valuation movements, which were partly offset by the capital return to investors, which Shemara referred to, and also adverse FX movements.
Now, turning to BFS, where we continue to see strong growth across our core portfolios, noting the more challenging backdrop we have here in Australia. Net profit contribution increased to $ 841 million, up 6%. Personal banking profit contribution increased by 154 million. This increase has been driven by growth in average home loan volumes of 26% in the last 12 months, and average deposit growth of 27%, which has been partially offset by margin compression. Business banking income increased by $ 40 million on the PCP, supported by 8% growth in average lending volumes and 7% growth in deposit volumes. As we touched on earlier, BFS saw adverse movements in modeled credit provisions, which was driven by changes in our outlook for the Australian economy. BFS operating expenses are slightly higher, reflecting wage inflation, increased headcount, and our continued investment in technology.
This investment is critical to the ongoing success of our digital banking platform, allowing us to support business growth. Importantly, the cost-to-income ratio in BFS continues to decline. It is now at 50.1% compared to 51% at the full year. We continue to see strong volume growth across all of our core products in BFS. Home loan balances have now reached $ 198 billion, representing 7.6% of market share, with growth in the half at five times system. Similarly, deposits increased to 236 billion, representing 6.9% market share and three times system growth. You can also see that business banking loans increased by over 1 billion to 19.2 billion. Now, turning to CGM. CGM delivered a strong, broad-based result of $ 2.03 billion, with increased contributions from all three divisions. Commodities income increased by $ 420 million to $ 1.8 billion.
This increase has been driven by higher client-led risk management activity, especially in global gas and power and resources, and increased lending and financing activity across all of our energy sectors. These results were supported by higher inventory management and trading income, primarily due to the elevated volatility of oil, driven by the ongoing conflict in the Middle East. Financial markets continue to grow, with its net profit contribution up by $ 169 million, reflecting increased contribution from financing origination, with the book increasing by just over $ 2 billion over the half, as well as strong client and trading activity in equities products. Asset finance delivered growth with increased volumes in the shipping sector in particular, which is now at approximately 4 billion, offsetting the decrease in operating lease income following the sale of our OnStream meters business.
Asset finance also delivered gains from asset sales in technology and energy sectors, which is reflected in the significant increase in investment and other income that you can see on the waterfall. It is also worth noting that CGM's operating expenses, excluding brokerage costs, have decreased compared to the first half last year, primarily due to the non-recurrence of transaction-related expenses. CGM continues to demonstrate its resilience and diversification, with underlying client growth across both commodities and financial markets. These businesses remain client-led, and our teams have been focused on expanding our offering to attract new clients while strengthening existing client relationships. As we previously noted, we are continuing to see strong repeat client business, with over 80% of client revenue generated from existing relationships. This growth in client activity is the main driver of the increasing regulatory capital requirement for CGM.
This is reflected in the graph on the bottom right, where you can see that credit risk capital is driving our capital usage. Our market risk capital remains in line with historical levels. Finally, turning to Macquarie Capital. Macquarie Capital delivered a net profit contribution of $ 278 million, down significantly on a strong first half last year. Investment-related income decreased $ 344 million due to reduced realizations across the equity portfolio, which really reflects their timing, and lower prepayment income from our private credit portfolio. Excluding that prepayment income, net interest income from our private credit portfolio increased, reflecting growth in the book. Fee and commissions income decreased by about $ 100 million, driven by a decrease in M&A activity following a strong first half last year.
This was partially offset by stronger brokerage performance, especially in Asia, where revenues increased 20%, benefiting from stronger inflows and elevated market volatility. Our capital usage in Macquarie Capital was $ 6.5 billion for the half, a slight increase from the full year. Just under a half of that capital is to our $ 28 billion private credit book. The book remains highly diversified, with just under 200 positions across industry sectors characterized by strong operating cash flows and defensive or structurally attractive risk profiles. The portfolio continues to perform well, delivering margins of over 400 basis points. As you can see on the pie chart, approximately a quarter of our exposure by capital is in software. Over the period, there continues to be no visible impact on portfolio quality from AI disruption or uncertainty in the macroeconomic environment.
Turning to the broader platform, you can see on this slide our regulatory compliance and technology spend. We continue to invest significantly in regulatory compliance, with over $ 600 million of spend in the half. This was slightly lower than PCP, reflecting a reduction in project and change expenditure as several major initiatives near completion, following sustained investment to evolve our operating platform and deliver more scalable compliance capabilities. Our technology investment of $ 1.17 billion remains a significant component of our cost base and is a key strategic focus area across the group. We will continue to invest to support our scalable growth, strengthen risk management and controls, and enhance client service and operating efficiency. In terms of our funding profile, we continue to diversify across product, currency, and tenor, with a weighted average life of term funding at 4.1 years.
The growth in our deposit book continues to be very strong, allowing us to grow our BFS business. Deposits grew by 10% in the last six months to 244 billion, with 87% of the deposit base from savings, transactions, and offset accounts. Deposits are a key high-quality funding source for the bank and now represent over 50% of the funded balance sheet. Our loan portfolio was now at $ 273 billion, which is up 8% from the full year, primarily driven by growth in that home loan book. In terms of our equity investments, they are now at $ 11.6 billion, down AUD 1.4 billion from the full year. This reflects the sale of the Macquarie AirFinance business and a significant reduction in our green energy exposure in corporate, which is now at approximately $ 200 million following the sale of our European solar platform, Cero.
We provided on this slide an outline of our key regulatory matters. I note that we reported a breach of our prudential obligations related to the capital treatment of MGL's structural interest rate risk hedging. The capital treatment has now been corrected, and we have applied a $ 100 million overlay. These have been incorporated in the numbers presented today. Our capital position remains strong, with our CET1 ratio at level 2 at 12.9% and a harmonized rate of 17.7%. Our liquidity position remains strong. We remain comfortable maintaining LCR above regulatory requirements, especially in the current environment. Finally, to capital management. Our businesses continue to find opportunities to generate good returns, and we supported this by allocating additional capital.
With the current uncertainty in the macroeconomic environment, it is important that we continue to have the balance sheet to withstand this uncertainty, but also to support our businesses to pursue opportunities that the current environment with heightened volatility may provide. With this context, as Shemara has outlined, the board has declared a dividend of $ 3.25 for the half, with 35% franking, and has resolved to continue the dividend reinvestment plan with a discount of 1.5%, with shares being issued to satisfy that DRP. Also, as we previously noted, APRA has released changes to prudential standards to phase out hybrid instruments as eligible capital, which is effective 1 January next year.
Given the requirement to hold additional CET1 capital, with respect to the Macquarie Bank Capital Notes 2, or BCN2s, we intend to resell all these notes at par to a nominated purchaser, followed by the proposed exchange of all or some of those notes for Macquarie Group shares. On that note, I will hand over to Greg Ward to take you through the short and medium-term outlook for the group.
Thanks very much, Frank, and it has been a really good pleasure working with you over the last couple of months, as it has with our leadership team. We have an incredible leadership team, as Shemara said, at Macquarie, and we are very, very lucky. I am really appreciative of this role and the opportunity that the board and Glenn Stevens, our Chair, has given me, and the support from Shemara . I want to congratulate Shemara on yet another amazing result. Every one of your results has been amazing, and it is going to be a tough act to follow, and a tremendous tenure as CEO and a wonderful career. We will have lots of opportunities later today to celebrate. I will continue the celebrations. We have had lots of celebrations overseas.
My job today is a really small one, just to present the outlook, and I will have an opportunity to talk to you in a lot more detail in February next year at our operational briefing. Just see if I can get this working. There it is. As usual, I will start with the factors impacting our short-term outlook for each group. In MAM, our base fees are expected to be broadly in line, excluding the 2026 contribution from the public investments business in North America and Europe. We continue to expect net operating income to be up, with the outcome subject to the timing of asset realizations. In BFS, we are continuing to see good growth across loans, deposits, and platforms, subject, of course, to market conditions and customer activity, and that continues the trend we have seen over the last decade.
Market dynamics and portfolio mix are expected to continue to drive slightly lower margins there. In Macquarie Capital, you can see, subject to market conditions, we are expecting transaction activity and investment-related income to be down compared to last year. In CGM, again, subject to market conditions, we are expecting net operating income to be slightly up, excluding the impact of OnStream meters divestment, which was in 2026. In other words, you cannot just double the result for the first half. We also note volatility may create opportunities across the platform. At the corporate level, we are expecting the compensation ratio and the effective tax rate to be broadly in line with historic trends.
At the group level, there are a normal range of factors that can influence the short-term outlook, and these include the global economic conditions, inflation and interest rates, significant volatility and geopolitical events, as well as the completion of period-end reviews and transactions. Of course, our results can be affected by the geographic mix of income, foreign exchange movements, and potential tax or regulatory changes and uncertainties. As a result of all that, we continue to maintain a cautious stance and a conservative approach to capital funding liquidity, as you heard from Frank . Medium-term factors, they are consistent with previous periods, and probably have been unchanged for a long, long time. If we look across our businesses over the medium term, they are as well-placed as they have ever been to capitalize on all the trends we see across the world. I will hand back to you now.
Thanks, Sam.
Great. Thanks. Excuse me. Thanks, Greg. We'll start in the room, and then we'll go to the line. Maybe we'll start with Jon, just at the front here. Thanks.
Thank you. Jon Mott from Barrenjoey, and on behalf of myself and, I think, pretty much all the analysts in the room, congratulations on a great career. You've been very supportive of us as well, and the whole team, so well done. My question could be on Commodities and Global Markets, or it's a very good Commodities and Global Markets, I should say. It's been a very good result and very diverse, more so than we've seen in a long time. We usually hear about the gas business, but it looks like oil, in particular, has had a good time. Other commodities, probably resources, have had a good time as well, as well as the markets and across the board. Can you give us more flavor on, is it just clients are more active given the volatility that's going through the system at the moment? People want to hedge given the commodities exposure.
Are you thinking you're winning share, especially in oil, given just the size of that market?
Yeah. Frank, I will comment first and hand over to you or Simon if you have anything to add. There was a lot of activity in this first half, particularly not just in energy, but in technology. The asset finance business had a very strong half. We had realizations and gains on sale of assets, and I think in that page 25 of the pack, Frank, you showed how much the gain on investments, et cetera, was. You can see that is a material, hundreds of millions number. Then we did also, because of the activity, and you mentioned there oil particularly, but we did have far more activity. Last first half, as I said, we had the Liberation Day impacts. Underlying CGM is all about growing franchise, to your question. We are happily growing customer numbers in all of our business lines.
We grew our asset finance book. We have grown customers in financial markets and in commodities. We are managing to gradually grow our share, but we have benefited in this half from one-off benefits, both through the tech digital sector in asset finance and across the business, and then in the energy sector in CGM. I do not know if I should comment, but I was going to say, as we look forward, we have just had the midterms. Brent crude is off a lot. The market is hoping for a more subdued environment, both in the digital space and in the energy space. If data center rollout slows, that will not just impact technology, but also energy and metals as well. We will have to see what happens, but really our focus is on that underlying franchise growth.
As we have given guidance for the second half, we are expecting a standard ongoing growth in franchise.
I will just go to Matt behind you. Thanks, Jon.
Thank you very much for your ongoing engagement and very thoughtful messaging, Shemara. If I could ask on the regulatory side, APRA's review of non-operating holding companies. We saw the very small capital penalty today, but just wondering if you could make any comments around if this signals a direction of travel for capital, what reversal of the NOC could cost you, and if there's any costs associated with the latest small capital penalty.
Yeah, and I'll let Frank elaborate, but basically, we had self-imposed that penalty, and APRA will work with us in reviewing the work we do in terms of that coming off. As you say, it was a small penalty and tiny compared to our capital levels. But we are working constructively with APRA. I think the AT1 changes will probably be more material for all of us in terms of capital, but we will work constructively with the regulator and continue to target appropriate returns for all our business, having regard to the amount of capital required for them. Frank, do you want to give more detail on that?
Yeah, in relation to NOC review, that's been planned for a number of years, and so that will happen as outlined by APRA. It's something that we will work constructively with APRA on. And as you note, in relation to the capital overlay, that was self-imposed in relation to governance, and specifically in relation to the Macquarie Group. So nothing to do with the bank. It's actually with respect to the group, and how we treated our interest rate structural hedging there. And as I said, it's $ 100 million over a capital base on the bank side of over 12 billion. Not much, but it's obviously something which APRA today endorsed.
Sorry, could I just follow up on the cost of regulatory programs? You'd noted, Frank, that some of those are starting to wind up, and can that continue to come down given recent scrutiny?
Look, we have uplift programs across the organization, and we've shown a lot of progress, for example, on our liquidity uplift, where APRA in the last 12 months reduced NCO overlay from 25% to 15%. We obviously would like to see that go to zero, and so there's ongoing work there. Specifically on capital as well, we're going through the capital uplift program, working very collaboratively with APRA to ensure that we've got the systems to ensure that we can report appropriately, and hopefully over time, we can reduce that. So, we'd expect spend to continue, but it's obviously important not just for the regulatory outcomes, but also for the operating efficiency across the platform.
Briefly, without dropping Greg in it, I think the background Greg brings in terms of technology, efficient operating platforms will benefit us across the business, not just in terms of the regulatory processes we're going through. CGM's costs you saw slightly down. So we're on a program that's been going for multiple years of updating with technology, data, et cetera, to drive more efficiency in our operating platform. That's got time to go, and Greg, don't want to drop you in it, but that'll be an area of focus.
No, I think that's right. I think you've overseen for many years now a lot of foundational work in our data and platforms, and this is incredibly important because I think the requirements of APRA are extensive and not going down. We've seen a lot of deregulation overseas. That hasn't been the case in Australia. In fact, it's probably been the opposite. Lots of businesses have talked about the regulatory burden and the compliance burden and so forth, and that's what we see. It's very important that we get things right, of course, as a regulated NOC and bank. This particular case was obviously unintentional, and it was The rules are complicated and nuanced, and this was something that was an interpretation that had been there for some time and not visible to us and not visible to the regulator.
We think it's an isolated matter and a small matter, but it just does highlight to us the importance of continuing investment to make sure that we get everything right.
Thanks. We will go to Andrew Triggs first, just in the second row. Thanks.
It is Andrew Triggs from J.P. Morgan. Just adding my congratulations, Shemara, for a fantastic career at Macquarie. If I am just looking at guidance perhaps for Greg or members of the ExCo, there is a reasonable amount of step-up required in performance fees and MacCap realization activity in the second half to achieve guidance. Could you just perhaps provide a little bit of color on market conditions in those two markets and the degree of confidence in achieving that?
Yeah. Yeah, I think in Macquarie Capital, I think the first half was a very quiet period in terms of realizations. In fact, there was no significant realizations. That is not from failed transactions or things that did not happen that we were disappointed by. It was just the timing of when to take things to market. Things are taking longer, and we had not really taken things to market. Now that the North American summer period is over, there is a number of transactions in market, and we are getting good feedback on a number of these assets. These are very good assets, and we feel a reasonable degree of confidence about material gains there in line with expectations. I just would highlight that, of course, it is a very uncertain environment, particularly, well, here it is uncertain, but it is certainly uncertain in America and other parts of the world.
Transaction timing is hard to forecast. Having regard to that is why we have sort of made our forecast. The underlying business in terms of our M&A franchise is tremendously busy. We have just been around the world and met with the teams and a number of clients, as we have in Australia. I think, if anything, we do not have enough staff. We are that busy. Of course, transaction completion is the thing that we cannot control there. The franchise, even in the U.S., is extraordinary. I mean, the level of M&A income in the six months is as big as Australia in the six months. So there is reason for great optimism there. Of course, the private credit portfolio is in tremendous shape. We have deployed more capital there over the last six months.
As we look at the credit watch list, it is the lowest it is ever been, looking at annual, the lowest certainly in the data set that I have seen. I think lots of optimism in terms of that, but it does depend on the transactions are lumpy. It will depend on completion. We are optimistic that a lot of those will complete in this six months, but that is subject to risk. I think in terms of MAM, I do not know whether, Frank, you want to add to
Obviously, it is the same environment, but I note that this half we continue to book performance fees for MIP III, MIP IV, and MAIF2. They have assets which are still to be realized. Obviously, still subject to the timing of those, because they were already in performance fee territory, we would expect them to generate performance fees, as we have obviously made guidance in terms of the timing. But if asset realizations do move around, that might change some of the timing, but we are obviously confident in the portfolio that we have. And the teams will realize the assets when they think it is going to be the best for the LPs in those funds. And so we will obviously have to see whether that occurs in the half, but those funds are obviously already in performance fee territory.
I would reinforce what you were saying, Frank, is we realize those assets at the time when we can get the best return for the investment. So if the markets We had always said for Macquarie Capital, it would be second half weighted. We have got processes underway. They are quite advanced, are not they, Michael? But we will see if the market is not conducive, we can hold on for a while, because across the whole business, it is not make or break. And then in MAM, Ben, we have got limited realizations which are well advanced as well. And MAM, I think, is not as second half weighted. It is a bit more BAU.
Richard?
Good morning. I would just like to ask a question about BFS. You talked about the cost-to-income ratio at 50%. How long do you think it will be till you have a lower cost-to-income ratio than any of the major banks? What sort of market share do you think you need to achieve that lower cost-to-income ratio? And you also mentioned technology spend continuing within the group. Does that mean the cost growth is going to go up in BFS, or this is just a continuation of the path that you have been on?
Yeah, I'll hand over to either Greg and/or Ben to respond to that, but I don't think, Greg, CTI is like the biggest focus for us. It's continuing to grow the franchises at good returns.
Yeah
and invest to do that.
That's right. I think the overall cost-to-income is probably a little misleading compared to the major banks because it has a very large platform business, which is not normally the case, well, not the case at all with the big banks other than the investment that CBA has, and I'm sure they don't consolidate it, so it wouldn't appear in their cost-to-income. That's the highest cost-to-revenue business. In that part of the business, because we have such scale already at that sort of 21% market share, we're very focused on lowering the cost-to-revenue in that part of the business. But as Shemara says, in the personal bank and the business bank, we are in growth mode, and so we're investing for growth.
That's a good place to be, because it's working, and we can see in those parts of the businesses, particularly in the personal bank, our cost-to-revenue keeps coming down, and we think it's really competitive compared to the major banks, and will only get even better as we get even more scale. I think that's a pretty wonderful place to be.
The spending, the cost growth, is that just a continuation of the trend you have been on, or do you actually think cost growth in BFS goes up from here?
Well, I think what we will see overall is the cost-to-revenue go down. I think that is what you are seeing now. You will see the cost-to-revenue go down as the work in the platform, on the actual tech side of the platform continues. You will see that cost to revenue go down. I think with scale and the other investments we are making, you will see the cost to revenue go down in the personal bank and the business bank. If the costs are going up, that means the revenue is going up even more, and I think we would be happy with that.
We will go to Ed behind you. Thanks, Richard.
Thanks. Ed Henning from CLSA. Just pass on my congratulations as well. Just a couple on CGM. Can you just clarify a little bit about the guidance, first off? You talked about standard growth in the franchise. You also talked about a weakening outlook. Are you assuming weakening volatility into the second half and no cold snap with El Niño as the first one? Second part of it is, can you just touch on the asset finance business, and you are willing to continue to invest capital into that business and continue the really strong growth there? Then the last one, just on the costs and CGM was flat in the half. Can you just talk about the cost outlook for CGM for the existing business and how we should think about that as well, please?
Yeah. I mean, we don't make assumptions on volatility. The guidance that we've given, which is slightly up, is assuming ongoing franchise growth from where we are. We have said here that volatility may create opportunities, and that's always the case. At this point, none of us are in a position to call whether cold snaps in Europe that you referred to will cause TTF surges and give us opportunity, et cetera. We're just assuming underlying franchise growth for now. We are seeing an environment where the markets were off last night. They think tech activity could come off, as well as energy markets with the Iran war. We're ultimately growing franchise, and that will respond if the markets do anything like that. That impacts the asset finance business as well.
They, as I mentioned, had material gains in this first half from investment, principally in digital assets, data centers. Their book is down a lot at the moment, so we've realized a lot of the positions we've got. So, we're not positioned to respond as much if the environment picks up, but also quite resilient if there's issues there. Then in terms of costs, as Greg mentioned as well, we are investing in that platform, but are actually getting cost efficiency. So, you saw it was really in MAM where Ben and the team are really growing into new channels and products, and in BFS where we've invested in expenses, but in CGM and Macquarie Capital, we've been getting some efficiencies.
Yeah, and I think just on costs for CGM, in the first half last year, we had some transaction-related costs.
Yes.
Obviously, that hasn't repeated, which is why the cost base for CGM slightly decreased. That was the main driver. So effectively, costs have remained flat. To Shemara's point, we're continuing to invest in the platform, especially across CGM.
Actually, we will go to Brian. Yep. Then I will go to you, Andrei Stadnik, next.
Congratulations, Shemara.
Thanks.
Just like to come back to something, I suppose, that is a genuine little bit of a surprise. If we look at slide 37, you are talking about the BCN2 note.
Right. Yeah.
Macquarie always says that you have got surplus capital. There has been a lot of perhaps scurrilous debate in some of the media about whether you do or not. I would just like, Frank, can we get a little bit more detail on this conversion into ordinary shares? Is this effectively, I apologize. How big is it? What dollar value are we talking? Are we talking about fresh ordinary shares on issue?
Sure
That dilute long-suffering shareholders' returns?
Sure. As I noted, APRA has changed the rules in relation to CET1 by removing AT1. So, we actually have to increase our CET1 by 25 basis points in the bank. Based on our risk-weighted assets, it is about $ 450 million. Our BCN2 has a face value of just over $ 600 million, and that has a call date at the end of December. So, in response to the requirement to hold additional CET1 capital in the bank, we have a bank note out there which can be converted. What effectively happens is those note holders will still receive their $ 100, and we will have a nominated purchaser who will take those shares and put them into the market.
Really, it is just a reaction, a response to the increased capital requirements which APRA has imposed on the entire industry, with respect to, given the removal of AT1s. It is just over $ 600 million.
Frank, can I just go back, I suppose, to the messaging? You have, what, $ 10 billion in surplus capital, which you would think would be more than enough to actually satisfy that requirement. Could we just get? You are issuing DRP stock today again, and we see you converting this. It seems a little bit of a contradictory signal.
No, I think broadly, we have surplus capital of regulatory minimums, as you said, just over $ 9 billion. That is relatively consistent where we have been. I think from a capital position, we want to make sure that we continue to support our businesses and their growth. You continue to see growth across the businesses, BFS in particular, Macquarie Capital, and CGM, once you take out the realizations as well. We want to make sure we have got the capital to do so. I think given the regulatory change which has been imposed on us and the industry, we thought it was appropriate with respect to the BCN2s, which happened to have a call date before the end of the year. On 1 January, we have to actually have that additional capital requirement.
It actually was quite good symmetry in relation to kind of using that as the basis to effectively have the capital to meet that regulatory requirement.
Thank you.
We can go to Andrei in the back corner, please.
Good morning. Andrei Stadnik from Royal Bank of Canada. Congratulations, Shemara, on a terrific run. Can I ask one question? Can I ask around private credit? Just in terms of the appetite to grow private credit in all sorts of forms and vehicles across the group, because it seems Macquarie Capital has been growing that. Just curious about your appetite continuing to grow that, whereas in MAM, it seems like private credit assets under management have been a little bit stagnant. How are you thinking about that, and how is the collaboration between Macquarie Asset Management and MacCap going in terms of delivering more private credit solutions?
Yeah. Well, first of all, our first play into foreign, into private credit has been in Macquarie Capital with the team there going back a dozen years at least. We have had really solid track record there. Our loss ratio is 0.3%. It is a very diversified book, as you have seen, and we have been growing that gradually. The main constraint there is concentration in terms of our overall portfolio and our overall balance sheet. We have been slowing the rate of growth more recently. They are 28 billion now in an almost 3 trillion market today. They are able really to pick the eyes out of very, very good credits in sectors where they see opportunity. Pivoting a bit more to Europe now, Michael, I think, as we see much greater competition in the Americas, in the U.S. particularly.
But we have appetite to grow that book with the balance sheet and as they find good risk for return. The bigger growth, as you said, is Ben and the team in MAM have started working now with the private credit team to take that senior secured mid-market direct lending to investors as well. And Ben, we are having very good success in terms of raising funds. Initially, it is a long period, even though their track record is phenomenal. They are seen as a first fund as we go out to fiduciary market. But the first funds now are pretty much hitting their requirements, Ben, in North America and Europe. And gradually after that, we will do seconds and thirds. So certainly, MAM is committed to growing in the private credit space, and this is one of the important strings to the bow where we have capability.
Equally, the asset finance capabilities that are inside CGM, et cetera, we look to bring to fiduciary investors as well as the strategies MAM has in MAM itself. Does that cover it, Andrei? Okay, thanks.
All right. We will go to the lines. We have got a couple of questions on the line. But before we do, for those joining online, if you have not already joined the live audio queue, please do so now by pressing request to speak at the top of the broadcast. And if you are asking a question via phone, please use the dial-in number and access pin provided, followed by the hash. So if we can go to the lines, please.
Thank you. Our first question today comes from Matthew Wilson from Jarden. Matthew, please go ahead.
Yeah, good morning. Matthew Wilson, Jarden. Also echo the market's congratulations today, Shemara, on a superb tenure at Macquarie Bank. Fantastic innings. Two questions, if I may. Firstly, in BFS, 77 million uplift in provisions, mainly coming from an uplift of about 30% in the ECL provisions for home loans, which is a tad surprising given the nature of your book. Can you sort of give us more color on how you see the macro outlook changing? You seem more consistent with what we saw at NAB and very different to what was sort of projected by Westpac on Monday. That's the first question. Secondly, if we could tease out a little bit more the review of the NOC structure. Obviously, there's been a major bank out there that's been particularly public. Does this end their concerns, or does this confirm them?
I'll let Frank. Do you want to go first on the first question on ECL?
Sure. I can't speak for others in terms of what their concerns are. All I can say is that with respect to how we measure our capital, as we've talked about before, in the period, we reported a breach in relation to what we had done for the capital treatment in relation to our structural interest rate hedging in the non-bank, and we put a self-imposed $ 100 million governance overlay, and that seems to have been accepted by APRA. So, we really can't.
I think we might be ECL modeled in terms of the outlook for the home loans, where our economist, Ric, is here with us, and we had views on the Australian economy that may be different to other banks.
Well, on the first question in relation to ECL, yes, we have taken an additional charge, really reflecting our view of the Australian macroeconomic environment and potential impact on house prices. Obviously, the quality of our book remains very strong, especially when compared to our peers. We are comfortable with the level that we have taken, but we think we are being prudent, given things that we are seeing across the broader market at the moment.
Thank you, Matthew. Our next question comes from Brendan Sproules from Goldman Sachs. Brendan, please go ahead.
Hi, good morning. Brendan Sproules from Goldman Sachs. Again, I would like to congratulate you, Shemara, on what I thought is a fantastic career, and particularly the support you provided to us analysts over the journey. My question relates to BFS. We have seen quite an increase in net interest income relative to the last half. In fact, it looks like that it grew faster, say, than spot lending. Could you maybe talk contrast the NIM change that you saw in this half relative to maybe the March period?
Corey, do you want to NIM change versus-
Well, I can handle that one. I thought my CFO might have the NIM one covered, but anyway. Lucky I'm a former CFO. I know how NIMs work.
Sorry, you're not moving out of your job until midnight tonight, so you're BFS still in the box.
Yeah. The NIM, we've been really pleased with the NIM performance half on half, and I think that's because we've done well in the business bank, which has a slightly higher NIM, and so we had good growth in the business bank. I think also on the deposit side, we made a couple of little tweaks to our deposit pricing, which helped with the deposit NIM. Obviously also there's been some rises in interest rates, and we have sadly only a small amount of non-interest-bearing deposits, but we obviously benefit from that as well. We don't get the big benefit that the larger banks get on the deposit side with the very large portfolios of non-interest-bearing deposits.
Thank you. I just had a second question just around CGM, and just the outlook for what is the Northern Hemisphere winter. Last winter, you had a very strong contribution from North America Power and Gas. Obviously, we've seen a lot more volatility in gas prices in Europe. I was wondering if you can give us a view of how you see the differences in this coming winter versus what we saw 12 months ago.
Yeah, I think as I said before, it is sadly very difficult to call. We cannot sit here and say whether event is going to happen. We are in an El Niño year. Does that mean we have cold snaps in Europe? The expectation is it is going to be a warm winter. All we can do when we give you our guidance is call how we see the franchise growing in each of the three divisions in CGM, and then say that volatility can create opportunities. But each, we have had, certainly in my time as CEO, very varied winters every year. Some of them quite subdued, a couple of them really active, because we had one where North America had a lot of issues, and we had the Russia-Ukraine, and then we have had much more subdued winters.
We are just assuming a normal second half with a little bit of franchise growth at this stage in our guidance. But, yeah, I am not going to crystal ball weather, sadly. Got no expertise.
Thanks, Brendan. Thanks, Matt. Another one from Brian, just in the middle there. Thank you.
Greg, could I trouble you to put on that hat again? The intangible assets in the second half have gapped up quite a bit. Is that the capitalized software in BFS? The second one, with that same hat on, if we look at the deposit changes that you put through, you put those through kind of halfway through the half, I think. From memory, I think it was late June.
Does that actually suggest that slowing housing, business lending perhaps slowing, but still stronger than housing, but you have the full period impact of the deposit pricing to come through? Is that kind of signaling that the NIM could actually now start to expand?
Sorry, just on the first one, it is not Paul Greg's hat, because it is the acquisition that we have done in MAM, really, that is driving intangibles. We expense all our software, and I will let you talk to that.
We expense all software. Again, a difference to the major banks. We expense all the software. It is what you said. We might get a bit more, depending on how things go, in the second half, we might get a little bit more benefit from those deposit rate changes. The other thing, of course, is that credit growth has slowed appreciably, and so the need for deposit raising has slowed for us. We are not pushing deposit growth much at all, because we are so well-funded, and so that gives. We do not need to try and really. You see us hardly participate in the term deposit market, for example. We can turn more to deposit margin, I think, management going forward.
Okay. If there are no further questions, thank you all for your interest, and we look forward to catching up over the next few weeks. Thank you very much.