KGB: Nicholas Moore

Nicholas Moore tells Business Spectator's Robert Gottliebsen and Stephen Bartholomeusz:

• In light of Macquarie’s result, he’s very happy with the model of the business as it now stands.  
• Why Australia's importance to the group's profits is diminishing amid the strength of its American operations.
• The 7 per cent annual growth in deposits on the balance sheet is expected to continue, and is now funding $30 billion of investment in the Australian mortgage market.
• The group’s mortgage loans total around $17 billion but are still only around 1 per cent of the Australian market, down from around 2 per cent pre-GFC.
• Macquarie sees iron ore and coal prices supported by continuing strong Chinese demand for many years to come.
• Why regulatory and other pressure on European and US banks is not creating arbitrage opportunities for Macquarie.
• What the group's aspirations are for the Australian banking and financial services market.

Stephen Bartholomeusz: Nicholas, thank you for joining us. 

Nicholas Moore: Thank you.

SB: You’ve just posted arguably -- in fact inarguably -- your best result since the financial crisis, with an ROE that’s now sort of firmly in the teens in the second half. And all the businesses improved their profitability. We refer to the Macquarie model. Is the new Macquarie model now complete or does it remain a work in progress?

NM: Well, I think the nature of Macquarie and the nature of the culture at Macquarie means that our people will always be looking for new opportunities. As you know, we historically have been a very much grassroots led organisation. We have very good people and they’re out there looking for opportunities on an ongoing basis. So, all the different businesses we have – there are six different business groups, as you saw in that presentation – there are people within all those groups looking at how they can be growing their business, what new opportunities they might be able to extend their current business to. So it is a dynamic organisation and we think it will continue to be.

SB: But could you foresee further structural change in Macquarie, the sort of change we’ve seen since the crisis, or is the basic skeleton of the business now intact?

NM: Well, maybe express it in a different way. I think we’re very happy with the businesses that we have. We’re pleased to see how they’re operating. As you say, each group has increased its contribution to the whole this year and all of them have very interesting plans afoot. So I think we’re very pleased with where the group sits at the moment.

Robert Gottliebsen: Nick, just picking out a couple of businesses, or one in particular, a significant source of your earnings is coming from the marshalling of bank deposits and then investing those deposits in things like home mortgages via Yellow Brick Road and other places. First of all, what do you think are the growth prospects of getting deposits in this market? And then I’ll take you on to the growth prospects for taking market share from the banks.

NM: Okay. Thanks, Robert. As you know, we entered the Australian mortgage securitisation market many years ago when we set up a vehicle called PUMA that supported people like Aussie Home Loans, developing in the broken network in the market. Now, that business continued to grow well and I think it was in excess of $20 billion dollars in terms of receivables at the time of the financial crisis. Now, at that stage obviously the securitisations markets died globally, including in Australia, and so we stopped writing securitised mortgages at that time.

So, there’s a hiatus for a period of time. And during that period obviously our book ran down and, as you say, with the development of deposits on our balance sheet that took place over that period, that allowed us to effectively re-enter the market and start writing new business again. So, we went from about $20 billion dollars of mortgages down to about $8 billion I think, Patrick, in terms of the low level. And now we’ve stepped that $8 billion up, we’re growing that and we’ve brought that back to $17 billion. Formerly, as I said, it was being funded by securitisation. Now it’s being funded by deposits.  I’ll give you an idea about those deposits. We have in excess of $30 billion dollars of deposits on the balance sheet and they’re what we’re using to fund the growth of that Australian mortgage business.

RG: Given that rates are lower now, do you think there’s opportunity to grow that level of deposits or do you think it’s probably maximised?

NM: Well, we saw growth of 7 per cent over the last twelve months, so it shows that the team are effectively growing it. And a lot of the deposits come out of the rest of the Banking and Financial Services business and so as you grow the rest of the BFS business, whether it be in wealth or insurance and all the other areas they’re operating in, then we see a flow on to deposits. So there will be a rate of growth issue, but given it’s coming out of the underlying business, that 7 per cent we saw last year, you know, if things go well, we should continue to see that growth going forward.

RG: So, you’re at $17 billion now in terms of loans to mortgages.

NM: Yes.

RG: Do you think you can develop that into a significant rival to banks or do you think you’ll always be a niche player?

NM: I think the way Macquarie looks at these things is always one step at a time. You know, obviously we’re about 1 per cent of the market today and in the pre-crisis age we probably would have been approaching 2 per cent of the market I think. So, that’s the range that we’ve been in to date. 

SB: Nicholas, the Fixed Interest, Currencies and Commodities group result was really impressive.

NM: Yes, it was.

SB: You’ve demonstrated at least that there’s been a lot of speculation about your interest in acquisitions to expand that part of the business.

NM: Yes.

SB: Do you have a competitive advantage in those sort of segments?

NM: Well, the competitive advantage comes out of the people we have of course, Stephen, as you know only too well. We have got a good team of people there. We’ve been doing business in the broader fixed base obviously for many years and Andrew is the head of that business -- Andrew Downe -- he’s very experienced. He’s operated across I think virtually all elements of it, starting I think in foreign exchange and doing gold funding, gold bullion trading and obviously playing a really important role in developing and driving the energy business that’s contributed so well for us in this last twelve months -- and in fact did in the previous twelve months as well.

So, the strength of our business is the strength of the people. I think they’ve demonstrated again this year that they are really a first-rate team. I think even something like the MEC business -- that’s lending to small mining companies and small oil and gas producers -- that has been marred in the last three years by impairments on the equity side of the business. Notwithstanding that they’ve demonstrated over many, many years -- probably thirty years of operation -- that they are very, very highly skilled and they know a lot about small mining companies, small oil companies and gas companies. So, again we feel we’ve got a very good team in the energy space, we feel we’ve got a very good team in this MEC space. 

The people in our FICC business, which is fixed income and currency, have done very well as well and the other commodities areas. You know, at Macquarie we try to be very rational about these things and look at the team and look at what they can produce in terms of judging them. And we think they’ve been able to produce not just this year but consistently over many years.

RG: Are you a bull or a bear in terms of iron ore and coal and gas prices?

NM: Well, we rely a lot on the Macquarie research that you’ve probably read, Robert, and I think they’re probably more optimistic than pessimistic about the space. I’d have to check, but I think their medium term forecast for iron ore is something around $100 and coal is in a similar sort of position. So it’s not top of the market, but they certainly believe there’ll be strong demand coming out of the urbanisation of China for many years to come.

SB: With that business, Nicholas, in the US you’ve got the Volcker rule and then I suppose for different reasons in the UK and Europe there’s a lot of pressure on the commercial banks to get out of that sort of commodity trading or physical commodity trading space. Does that create a regulatory arbitrage opportunity? I mean for a non-US, non-European bank?

NM: No, not really. I mean, as we mentioned in the conference, Stephen, the competition is very real across all these markets, whether they’re from regulated people or unregulated people. There are obviously lots of trading companies in the space. There’s no shortage of competition, so there’s no real advantage to us I think.

SB: Does the competition these days -- well, it’s likely to come from trading groups, commodity trading groups and hedge funds rather than traditional banks.

NM: Well, I think it’s been like that for a while. If you look at our gas business, for example, we’re the fourth largest gas trader in the United States. I think one, two and three are all industry players. So, it is, you know, very much the industry players who have dominated and probably will continue to dominate in their various segments; you know, the gas companies in gas and obviously coal companies in coal and oil companies in oil and so on and so forth, so we would expect the incumbents in those areas to continue to be very, very important.

RG: Nick, when you’re a producer of a commodity and you trade, you have your production as your back-up, but you’re in the trading business. As CEO, do you get concerned about the risks your traders are taking?

NM: To operate in this business obviously you have to be very comfortable about the risk management framework you have around the business. And needless to say, we do have a very, very strong risk management framework for all the people who operate in the business. Everyone’s got a personal and very clear limit in terms of what they’re allowed to do. If they breach the limit, it gets notified immediately. And we have limits, all sorts of limits, in terms of looking at what can happen in worst case situations. We have a very heavy compliance role that we play in this business where, you know, there’s regular monitoring of course of all transactions, all trading and all activities of that nature. So, it is…

RG: But if there was a sudden rise or fall of a major nature in a particular area where you were trading, are you vulnerable to loss? Or on the other side of that?

NM: Yeah. That’s a very good question because that’s exactly the way we approach it. We basically try to imagine bad things that can happen out there and you know what, the tradition situation is that we have a major oil shock of some description. And we say if this oil shock will happen, what will the impact be on our business? And we make sure that when we see that impact we see the potential loss of that impact, we size all our exposures on the basis of that event occurring.

So, we are going through this scenario analysis on a constant basis. I can’t remember how many scenarios we run overnight, but literally thousands of scenarios where we try to say what will happen in the event of these macro things, where will our book be placed, and we have to of course be very, very confident that we can not just survive it but actually move through it and move through it well.

RG: In rough terms, what percentage of your profit would come from trading?

NM: It depends what you call trading.  In commodities, we’re not taking principle positions in this business, so we’re not out there saying we think oil is going to go up or down. What happens is we’ll be working in the gas business, for example. We’ll be buying gas from people who produce oil. We’ll be buying capacity from people in pipelines. We’ll be buying storage capacity. And we’ll be entering into contracts at the other end with industrial users and retail users. Our job is to take the oil from the well head or the gas from the well head and deliver it to the wholesale/retail users. 

That’s what we’re seeking to do. So, every position we have in terms of that value chain, we’re trying to take -- whether it’s cents or whatever it is -- out of that particular series of transactions that result in delivering the gas from point A to point B. We don’t want to go out and be long gas or short gas at any particular time. 

Those things will arise just because the natural way of the world is that not every piece of the puzzle will fit together. But it’s not our objective to end up with those pieces; it’s our objective to be able to move things from point A to point B and actually receive a fair margin for doing it.

SB: One of the surprising aspects of the result to me, Nicholas -- and it probably shouldn’t have been a surprise -- was the extent to which you’re now so much more an international business than an Australian business.

NM: Yes.

SB: And the extent to which the Americas are now your major profit centre.

NM: Yes.

SB: Is it inevitable that Australia continues to be a diminishing proportion of the business and, if it is, does that mean you’ve got to look at the way the business is structured and managed?

NM: It is a dynamic issue. Our people in the US and in Asia and Europe all have aspirations for growth, of course, but so do our people in Australia.

We’ve talked about Greg stepping up to take over BFS during the year. Greg has a lot of plans in terms of what he wants to see happening for banking and financial services in Australia. It includes things such as the mortgages that Robert’s talking about. It includes insurance. It includes 'Wrap'. It includes wealth. It includes credit cards. It includes a whole range of retail, financial and business banking; a whole range of retail, financial and business financial products here in Australia.

We’re investing in those opportunities in the expectation that it will go well. Ultimately, the shape of the group will be determined by how successful our respective teams are in the United States, in Europe, in Asia and Australia. And in that regard, our teams have been successful in Australia over the years and we sincerely expect them to continue to be successful going forward.

RG: If you were successful, would you look to get 3 or 4 per cent of the banking market?

NM: We don’t look at it like that. We look at it very much on a product-by-product basis and as I said, unless we can see that we can actually bring something to the market and that there’s real, genuine profitability there, we’re not doing it for the sake of winning market share or some other metric. It’s very much a profit and value-focused approach.

SB: Nicholas, thank you very much for your time and we appreciated how busy today is for you, so thanks again.

NM: Not at all. Thank you, Stephen, and thanks, Robert.

RG:  Thank you.