Macquarie Group Ltd (ASX: MQG) shares were down for most of the afternoon, although it finisher higher after an announcement from APRA.
Macquarie Group is Australia’s largest investment bank with operations spread throughout North America, Europe, Middle East, Asia and Australia. Unlike a traditional ‘retail’ bank, like most investment banks Macquarie makes a large chunk of its profit by operating in the investment markets and managing ‘assets’ for individuals and organisations. As of 2018, Macquarie had reported a profit for 49 years in a row.
How The APRA Annoucement Affects Macquarie
The Australian Prudential Regulation Authority (APRA) announcement relates to intra-group funding provided to Macquarie Bank.
Macquarie raises long term funding and places surplus funds with Macquarie Bank in the form of intra-group loans. Over the past year, these loans have represented around 10% to 15% of Macquarie Bank’s total funding and have been included in the calculation of Macquarie Bank’s liquidity coverage ratio (LCR) according to their contractual tenor.
These loans are documented under a master loan agreement, in place since 2007, which included a material adverse change clause.
However, APRA has clarified that the material adverse change clause in the master loan agreement between Macquarie and Macquarie Bank means that repayment of intra-group funding could be accelerated and therefore fall short of the liquidity coverage ratio horizon of 30 days.
Therefore, Macquarie has removed the material adverse change clause to ensure there will be no impact to the liquidity coverage calculation going forward.
Macquarie said that the recalculated liquidity coverage ratios will show a historical non-compliance with APRA’s requirements, but it would have removed the clause if Macquarie had been aware of APRA’s interpretation of the clause.
Macquarie also noted APRA’s comment that Macquarie Bank is “financially sound and maintains a strong liquidity and funding position.”
Operationally, it sounds like this won’t make a difference to Macquarie Bank so it hopefully won’t change anything. If I had to invest in a large ASX bank it would be Macquarie, but I prefer the idea of investing in the other reliable businesses in the free report instead.
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