Sydney, March 16, 2012 -- Moody's Investors Service has downgraded the senior unsecured debt
rating of Macquarie Group Limited to A3 from A2, and its short-term
rating to Prime-2 from Prime-1.
Moody's has also downgraded the senior unsecured debt rating of
Macquarie Bank Limited to A2 from A1, but confirmed its short-term
rating of Prime-1.
The standalone bank financial strength rating of Macquarie Bank was downgraded
to C- from C+, which equates to Baa1 on the long-term
scale, down from A2.
The long- and short-term issuer ratings of Macquarie Financial
Holdings Limited (MFHL) were downgraded to A3/Prime-2 from A2/Prime-1.
The Aaa ratings of debt securities issued by Macquarie Bank between 2008
and 2010 under the Australian government's guarantee scheme were not under
review and they remain unchanged.
The outlook for all of Macquarie's ratings is now stable.
These rating actions conclude the review commenced on 4 November 2011,
which was then extended on 15 February 2011, when Moody's
announced a broader review of banks and securities firms with global capital
markets operations. In all, the ratings of 16 other global
capital markets intermediaries were placed on review for downgrade together
with Macquarie.
RATING RATIONALE
"Today's rating actions reflect ongoing earnings challenges
for Macquarie and the evolution of its business model against the backdrop
of protracted weakness in financial markets," says Patrick
Winsbury, a Moody's Senior Vice President. "The
actions come as part of a global sector review of banks and securities
firms with capital markets operations."
Economic weakness and deleveraging in crisis-hit markets,
as well as increased regulatory burdens, will continue to dampen
the profitability of, and demand for, many financial products
and services. Furthermore, while market conditions for wholesale
funding have improved, the cost of wholesale funding is high,
and the potential for sporadic fragility of confidence remains.
In future it may therefore be challenging for Macquarie to maintain its
traditionally strong capital cover and moderate risk appetite --
which have always been important supports to its ratings -- whilst,
at the same time, meeting investors' expectations for equity
returns.
The financial crisis of 2008/09 forced Macquarie to make significant adjustments
to its business mix, and it has adapted or exited business lines
that were important sources of income before the crisis. Macquarie
has also been quick to seize opportunities afforded by the crisis,
and increased investment in businesses, such as funds management,
that have the potential to generate smoother revenue streams.
However, since these important initiatives are ongoing, the
sustainability and profitability of Macquarie's future business
profile is hard to predict.
Macquarie shares some of these challenges with the broader wholesale/investment
banking sector, as highlighted in Moody's February 2012 report,
"Challenges for Firms with Global Capital Markets Operations:
Moody's Rating Reviews and Rationale."
Other persistent vulnerabilities faced by the sector include the confidence-sensitivity
of customers and funding counterparties, a high degree of interconnectedness,
and opacity and rapidly changing risk positions, and which expose
these firms to unexpected losses that can overwhelm the resources of even
the largest and most diversified groups.
In Moody's view, such tail risks warrant a lower rating for
these firms.
Relative to its peers, Macquarie has very low exposure to euro-area
risks. It had very low exposure to stressed asset classes during
the financial crisis in 2008/09. Additionally, its earnings
are more stable since proprietary trading is not a core activity.
Macquarie's liquidity and capital metrics are also at the upper
end of its peer group.
On the other hand, a greater proportion of Macquarie's revenue
is related to financial market volumes than is the case for the universal
banks in its peer group.
Moody's believes the regulatory and political framework in Australia
will to continue to be favourable to the interests of bank creditors.
Accordingly, the A2 senior debt rating of Macquarie Bank incorporates
two notches of uplift, relative to its standalone rating of Baa1.
This reflects the systemic support the bank is likely to receive,
in case of need, as a consequence of its significant presence in
Australia's financial markets and its deposit base, whose
size is on par with Australia's regional banks.
The A3 debt ratings of Macquarie Group and MFHL also incorporate uplifts
from this systemic support, in recognition of their close operational
relationship with the bank.
WHAT COULD CHANGE THE RATINGS -- UP
Even if operating conditions improve markedly, the prospect of an
upgrade is remote as long as Macquarie retains its current business mix.
Moody's views wholesale / investment banking businesses to be appropriately
rated in the Baa range. The standalone ratings of Baa1 on Macquarie's
operating units, Macquarie Bank and MFHL, already position
the firm at the higher end of this range.
WHAT COULD CHANGE THE RATINGS -- DOWN
Protracted earnings weakness that results in the firm taking on additional
risk and/or materially reducing capital to boost return on equity could
result in a downgrade.
As the ratings of Macquarie Group, Macquarie Bank and MFHL incorporate
the potential for systemic support, any signal from the regulator
or government that suggests a less creditor-friendly stance on
bank resolution could create downward pressure on the supported ratings.
Moreover, Moody's is conducting a global re-assessment
of government support in its debt ratings of subordinated debt issued
by banks, as a result of changing attitudes to bank resolution in
some markets. Moody's is yet to determine how this trend
will affect subordinated debt securities issued by Australian banks.
For a full list of Macquarie Group subsidiaries and the ratings affected
by this action, please refer to www.moodys.com.
The methodologies used in this rating were Bank Financial Strength Ratings:
Global Methodology published in February 2007, Incorporation of
Joint-Default Analysis into Moody's Bank Ratings: A Refined
Methodology published in March 2007, and Global Securities Industry
Methodology published in December 2006. Please see the Credit Policy
page on www.moodys.com for a copy of these methodologies.
Macquarie Group Limited is headquartered in Sydney, Australia.
It reported assets of AUD175 billion at end September 2011 (approximately
USD184 billion).
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these ratings.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings is of sufficient quality and from sources
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independent third-party sources. However, Moody's
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validate information received in the rating process.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
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for the last rating action and the rating history.
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Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Patrick Winsbury
Senior Vice President
Financial Institutions Group
Moody's Investors Service Pty. Ltd.
Level 10
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Sydney NSW 2000
Australia
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Stephen Long
MD - Financial Institutions
Financial Institutions Group
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Moody's downgrades Macquarie Bank to A2, Macquarie Group to A3
