MACQUARIE BANK 2011 ANNUAL REPORT MACQUARIE BANK LIMITED ACN 008 583 542 Macquarie Bank Limited and its subsidiaries 2011 Annual Report macquarie.com.au Directors’ Report for the financial year ended 31 March 2011 In accordance with a resolution of the Voting Directors (the The Directors listed above each held office as a Director Directors) of Macquarie Bank Limited (MBL, Macquarie of Macquarie Bank throughout the financial year ended Bank, Company), the Directors submit herewith the 31 March 2011. Those Directors listed as Independent income statements and the statements of cash flows for Directors have been independent throughout the period the year ended 31 March 2011 and the statements of of their appointment. financial position as at 31 March 2011 of the Company Mr D.S. Clarke was the Non-Executive Chairman of and its subsidiaries (the Consolidated Entity) at the end of, Macquarie Bank from the beginning of the financial and during, the financial year ended on that date and year until his resignation which was effective on report as follows: 17 March 2011. Directors Details of the qualifications, experience and special At the date of this report, the Directors of Macquarie Bank responsibilities of the Directors and qualifications and are: experience of the Company Secretaries at the date of this Independent Voting Directors report are set out in Schedule 1 at the end of this report. H.K. McCann, AM, Chairman1 M.J. Hawker, AM P.M. Kirby C.B. Livingstone, AO J.R. Niland, AC H.M. Nugent, AO P.H. Warne 1 Appointed as Chairman on 17 March 2011 Executive Voting Directors W.R. Sheppard, Managing Director and Chief Executive Officer N.W. Moore 4 Directors’ meetings The number of meetings of the Board of Directors (the Board) and meetings of Committees of the Board, and the number of meetings attended by each of the Directors of Macquarie Bank during the financial year is summarised in the tables below: Monthly Board meetings Special Board meetings 12 3 Eligible to Eligible to Board meetings attend Attended attend Attended D.S. Clarke1 11 11 3 2 H.K. McCann 12 11 3 3 W.R. Sheppard 12 12 3 2 N.W. Moore 12 12 3 3 M.J. Hawker 12 12 3 3 P.M. Kirby 12 12 3 3 C.B. Livingstone 12 11 3 3 J.R. Niland 12 12 3 3 H.M. Nugent 12 12 3 3 P.H. Warne 12 12 3 3 1 Mr Clarke ceased to be a Director on 17 March 2011. Board Audit Committee meetings 72 Eligible to Board committee meetings attend Attended P.M. Kirby 7 7 C.B. Livingstone 7 7 H.K. McCann 7 5 P.H. Warne 7 7 2 These are meetings held by the Board Audit Committee (BAC), which is a joint committee of Macquarie Group Limited (Macquarie) and Macquarie Bank. The Macquarie BAC assists the Boards of Voting Directors of Macquarie and Macquarie Bank in fulfilling the responsibility for oversight of the quality and integrity of the accounting and financial reporting practices of Macquarie Group. 5 Macquarie Bank Limited and its subsidiaries 2011 Annual Report macquarie.com.au Directors’ Report for the financial year ended 31 March 2011 continued Principal activities The principal activity of the Consolidated Entity during the financial year ended 31 March 2011 was to act as a full service financial services provider offering a range of commercial banking and retail financial services in Australia and selected financial services offshore. The Bank is a subsidiary of Macquarie Group Limited and is regulated by the Australian Prudential Regulation Authority (APRA) as an authorised deposit-taking institution (ADI). In the opinion of the Voting Directors, there were no significant changes to the principal activities of the Consolidated Entity during the financial year under review not otherwise disclosed in this report. Result The financial report for the financial years ended 31 March 2011 and 31 March 2010, and the results herein, have been prepared in accordance with Australian Accounting Standards. The consolidated profit after income tax attributable to ordinary equity holders for the financial year ended 31 March 2011 was $A803 million (2010: $A663 million). Dividends and distributions MBL paid dividends and paid or provided distributions during the financial year as set out in the table below: Payment Payment In respect of financial Security date type $A year ended/period Ordinary shares 2 July 2010 Final Dividend 450,000,000 31 March 2010 Paid 15 December 2010 Interim Dividend 184,800,000 31 March 2011 Paid Macquarie Income 15 April 2010 Periodic 5,888,221 15 January 2010 to Paid Securities1 14 April 2010 15 July 2010 Periodic 6,292,715 15 April 2010 to Paid 14 July 2010 15 October 2010 Periodic 6,654,246 15 July 2010 to Paid 14 October 2010 15 January 2011 Periodic 6,563,510 15 October 2010 to Paid 14 January 2011 15 April 2011 Periodic 5,588,603 15 January 2011 to Provided 31 March 2011 Macquarie Income 15 April 2010 Periodic 2,294,615 16 October 2009 to Paid Preferred 15 April 2010 Securities2 15 October 2010 Periodic 2,229,073 16 April 2010 to Paid 15 October 2010 15 April 2011 Periodic 1,917,399 16 October 2010 to Provided 31 March 2011 1 Macquarie Income Securities (MIS) are stapled securities comprising an interest in a note, being an unsecured debt obligation of Macquarie Finance Limited (MFL), issued to a trustee on behalf of the holders of the MIS (MFL note), and a preference share in Macquarie Bank. The MIS are quoted on the Australian Securities Exchange (ASX). The MIS distributions set out above represent payments made, or to be made, by MFL to MIS holders, in respect of the MFL note component of the MIS. The payments are not dividends or distributions paid or provided by Macquarie Bank to its members. The MIS are classified as equity under Australian Accounting Standards – see notes 31 and 32 to the financial report for further information on the MIS and MIS distributions. 2 Macquarie Income Preferred Securities (MIPS) are limited partnership interests in Macquarie Capital Funding LP (Partnership), a partnership established in Jersey as a limited partnership, which are traded on the Luxembourg Stock Exchange. In certain circumstances, preference shares issued by Macquarie Bank and held by the general partner of the Partnership may be substituted for the MIPS. The assets of the Partnership include convertible debentures issued by Macquarie Bank (acting through its London Branch) which are listed on the Channel Islands Stock Exchange. The MIPS distributions set out above represent payments made, or to be made, by the Partnership to the MIPS holders. The payments are not dividends or distributions paid or provided by MBL to its members. The MIPS are classified as equity under Australian Accounting Standards – see notes 31 and 32 to the financial report for further information on the MIPS and MIPS distributions. No other dividends or distributions were declared or paid during the financial year. 6 State of affairs The Consolidated Entity’s capital management policy is There were no other significant changes in the state of the to be conservatively capitalised and to maintain diversified affairs of the Consolidated Entity that occurred during the funding sources in order to support business initiatives, financial year under review not otherwise disclosed in this particularly specialised funds and offshore expansion, whilst report. maintaining counterparty and client confidence. Review of operations and financial result Macquarie Bank is subject to minimum capital requirements Consolidated net profit after income tax attributable externally imposed by APRA. Macquarie Bank has received to ordinary equity holders of $A803 million for the year APRA accreditation to adopt Foundation Internal Ratings ended 31 March 2011 increased 21 per cent from Based Approach for the calculation of credit risk capital and $A663 million in the prior year. Net profit for the second half the Advanced Measurement Approach for operational risk, of the year of $A509 million increased 73 per cent from under the Basel II regulatory capital framework. In addition, $A294 million in the six months to 30 September 2010. Macquarie Bank received APRA accreditation to use Recently acquired businesses, including Sal. Oppenheim, an internal model to calculate Interest Rate Risk in the Macquarie Private Wealth Canada and Delaware Banking Book. Investments, contributed to increases in both operating The Consolidated Entity has met its externally imposed income and expenses. capital requirements throughout the year. The Consolidated Total operating income of $A4,795 million for the year Entity is well capitalised, and as at 31 March 2011, it had a ended 31 March 2011 increased 31 per cent from Tier 1 capital ratio of 10.7 per cent and a total capital ratio $A3,652 million in the prior year. The main drivers of this of 12.4 per cent. increase were: Events subsequent to balance date – a 25 per cent increase in net interest income to At the date of this report, the Directors are not aware of any $A1,651 million for the year ended 31 March 2011 from matter or circumstance which has arisen that has $A1,325 million in the prior year driven by an increase in significantly affected or may significantly affect the Corporate and Asset Finance’s corporate lending; operations of the Consolidated Entity, the results of those – equity accounting income from investments in associates operations or the state of affairs of the Consolidated Entity and joint ventures of $A45 million for the year ended in the financial years subsequent to 31 March 2011 not 31 March 2011, up from $A7 million in the prior year otherwise disclosed in this report.