Macquarie Annual Group 2016 Report 2016 Annual Report Macquarie Group Year ended 31 March 2016 MACQUARIE GROUP LIMITED ACN 122 169 279 The Holey Dollar In 1813 Governor Lachlan Macquarie overcame an acute currency shortage by purchasing Spanish silver dollars (then worth five shillings), punching the centres out and creating two new coins – the ‘Holey Dollar’ (valued at five shillings) and the ‘Dump’ (valued at one shilling and three pence). This single move not only doubled the number of coins in circulation but increased their worth by 25% and prevented the coins leaving the colony. Governor Macquarie’s creation of the Holey Dollar was an inspired solution to a difficult problem and for this reason it was chosen as the symbol for Macquarie Group. 2016 Annual General Meeting Macquarie Group’s 2016 Annual General Meeting will be held at 10:30am on Thursday, 28 July 2016 at the Sheraton on the Park (Grand Ballroom), 161 Elizabeth Street, Sydney NSW 2000. Details of the business of the meeting will be contained in the Notice of Annual General Meeting, to be sent to shareholders separately. The Macquarie name and Holey Dollar device are registered trade marks of Macquarie Group Limited ACN 122 169 279. Macquarie Group Limited and its subsidiaries 2016 Annual Report macquarie.com Annual Report Contents Financial Highlights 2 Chairman’s and Managing Director’s Letter 4 Operating and Financial Review 6 Corporate Governance Summary 19 Diversity Report 21 Environmental, Social and Governance Report 25 Risk Management Report 33 Macquarie Group Foundation Review 52 Directors’ Report 53 – Schedule 1 – Directors’ experience and special responsibilities 59 – Schedule 2 – Remuneration Report 64 – Schedule 3 – Auditor’s independence declaration 101 Financial Report 102 – Income Statements 103 – Statements of comprehensive income 104 – Statements of financial position 105 – Statements of changes in equity 106 – Statements of cash flows 108 – Notes to the financial statements 109 – Directors’ declaration 217 – Independent auditor’s report 218 Ten year history 219 Additional Investor Information 220 Glossary 222 1 Macqu arie Group Limited and its subsidiaries 2016 Annual Report macquarie.com Financial Highlights FY16 Net Profit FY16 Operating Income $A $A 2,063million 10,135 million Up 29% on FY15 Up 9% on FY15 $A million 1H 2H $A million 1H 2H 2,40024002400 12,000 2,00020002000 10,000 1,60016001600 8,000 1,20012001200 6,000 800 4,000 400 2,000 000 FY13 FY14 FY15 FY16 0 FY13 FY14 FY15 FY16 FY16 Earnings Per Share FY16 Ordinary Dividends Per Share $A $A 6.19 4.00 (40% franked) Up 23% on FY15 Up 21% on FY15 $A 1H 2H $A 1H 2H 7.00 4.00 3.50 6.00 3.00 5.00 2.50 4.00 2.00 3.00 1.50 2.00 1.00 1.00 0.50 0 FY13 FY14 FY15 FY16 0.0 FY13 FY14(1) FY15 FY16 (1) In 2H14 eligible shareholders also benefited from the SYD distribution in January 2014 which comprised a special dividend of $A1.16 (40% franked) and a return of capital of $A2.57 per share. 2 FY16 Net Profit Contribution(2) FY16 Return on equity By Business Type Annuity-style Capital markets facing 71% 29% 14 .7% Up from 14.0% in FY15 Assets under management as at 31 March 2016 $A billion (2) Net profit contribution is management accounting 479 profit before unallocated corporate costs, profit share and income tax. Annuity-style businesses include From $A486 billion Macquarie Asset Management, Corporate and Asset Finance and Banking and Financial Services. at 31 March 2015 Capital markets facing businesses include Macquarie Securities Group, Macquarie Capital and Commodities and Financial Markets. FY16 International Income(3) FY16 Operating expenses By Region Australia Americas $A 32% 30% 7,120 million Up 6% on FY15 FY16 Effective tax rate EMEA Asia 24% 14% 31.0% (3) Net operating income excluding earnings on capital Down from 35.9% in FY15 and other corporate items. 3 Macquarie Group Limited and its subsidiaries 2016 Annual Report macquarie.com Chairman’s and Managing Director’s Letter Continued strong performance Dividends and Capital We are pleased to announce Macquarie Group achieved a The Board has resolved to pay a final ordinary dividend of net profit of $A2,063 million for the year ended 31 March $A2.40 per share (40% franked), up from $A1.60 per share 2016, up 29% on the prior year. (40% franked) in the first half. This results in a total ordinary The Group reported operating income of $A10,135 million, dividend payment for the year ended 31 March 2016 of an increase of 9% on the prior year. $A4.00 per share, up from $A3.30 in the prior year. Five of Macquarie’s six operating groups achieved a higher Macquarie has a longstanding policy of holding a level of net profit contribution(1) during the year with record net profit capital that supports its business and has consistently contributions from each of our annuity-style businesses grown its capital base ahead of business requirements. The Group’s APRA Basel III capital was $A17.2 billion and Macquarie Asset Management, Corporate and Asset (3) Finance and Banking and Financial Services. the Group’s surplus was $A3.9 billion at 31 March 2016. Our annuity-style businesses had another strong year, with Professional Conduct a combined net profit contribution of $A3,124 million, an The Board and Management are committed to achieving the increase of 10% on the prior year. These businesses have highest standards of professional conduct across all continued to grow in the challenging market conditions of Macquarie operations. Compliance with all regulatory recent years, highlighting the diversity of Macquarie’s requirements and our Company specific policies and business offering and its ability to adapt to changing procedures is core to our business and has been since conditions. inception. Among the annuity-style businesses: Our Code of conduct and What We Stand For principles of – Macquarie Asset Management benefited from growth in Opportunity, Accountability and Integrity guide the way that underlying base fee income, strong performance fees staff are expected to manage their responsibilities and and increased gains on disposal of investments conduct themselves on a day to day basis. It is a – Corporate and Asset Finance experienced increased fundamental responsibility for all staff to deal honestly and lending and leasing activity including the acquisition of fairly in their relationships with our clients and counterparties. an aircraft portfolio Staff must not engage in any improper, unlawful, or unethical – Banking and Financial Services experienced continued behaviour. There are appropriate consequences for any staff volume growth in Australian mortgages, business member who fails to meet these high standards. lending, deposits and the Wrap platform. To assist Board, Management and staff to meet their The net profit contribution from our capital markets facing responsibilities, we have a range of comprehensive and businesses (Macquarie Securities Group, Macquarie Capital effective programs in place, including reporting, training, and Commodities and Financial Markets) was monitoring and surveillance. The programs are subject to $A1,295 million, a decrease of 3% on the prior year. ongoing review and enhancement. Our formal conduct risk Among the capital markets facing businesses: program, which was initiated in 2015, is an example of this continuous improvement approach. We are emphasising – Macquarie Securities Group experienced significantly that staff must not engage in any actions that may have a improved trading opportunities, particularly in China in negative impact on our clients, or the fair and effective the first half of the year operation of the markets in which we do business. We are – Macquarie Capital benefited from gains on sale and enhancing our approach to conduct risk management, continued activity in mergers and acquisitions and including articulating what conduct risk means in each of our Equity Capital Markets (ECM) businesses and our approach to managing these risks. We – Commodities and Financial Markets experienced have made substantial progress and the program continues challenging credit market conditions particularly in the to evolve. northern hemisphere, partially offset by increased client activity in commodities resulting from price volatility Also during the past year, we have continued to reinforce our during the period. Company wide expectations of behaviour through multiple mechanisms, including policies, procedures and direct Total Group operating expenses of $A7,120 million for the communications to staff. year ended 31 March 2016 were up 6%, while the effective tax rate of 31.0% was down from 35.9% in the prior year, reflecting the nature and geographic mix of income and tax (1) uncertainties. Net profit contribution is management accounting profit before unallocated corporate costs, profit share and income While our Australian franchise maintained its strong position, tax. the offshore businesses continued to grow, with international (2) income accounting for 68% of the Group’s total income(2) for International income is net operating income excluding the year ended 31 March 2016. Total international income earnings on capital and other corporate items. (3) was $A6,734 million for the year ended 31 March 2016, an Calculated at 8.5% Risk Weighted Assets (RWA) including increase of 4% from $A6,461 million in the prior year. capital conservation buffer (CCB), per APRA Prudential Standard 110. The APRA Basel III Group capital surplus is $A5.3 billion calculated at 7.0% RWA, per the internal minimum Tier 1 ratio of the Bank Group. 4 Environmental, Social and Governance Outlook The Board and Management view our commitment to While the impact of future market conditions makes Environmental, Social and Governance (ESG) performance forecasting difficult, it is currently expected that the as part of our responsibility to clients, shareholders and the combined net profit contribution from operating groups for communities in which we operate.