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Rating Action:

Moody's downgrades Macquarie Bank to A2, Macquarie Group to A3

Global Credit Research - 16 Mar 2012

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 Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or 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 the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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
1 O'Connell Street
Sydney NSW 2000
Australia
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Pty. Ltd.
Level 10
1 O'Connell Street
Sydney NSW 2000
Australia
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100

Moody's downgrades Macquarie Bank to A2, Macquarie Group to A3
No Related Data.

 

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