Ann: Trading Halt, page-38

"On a more serious note, why raise capital when you have $8bn in surplus capital????"

@SaltyInvestor,

Evidently, you don't fully understand the real funding requirements of this business

That $8bn in surplus capital you reference relates purely to the surplus above regulatory requirements.

But there's a big difference between regulatory capital requirements and the capital requirements to support, and grow, earnings.

The fact is that this is actually a more capital-intensive business than people think.

For context, to generate each dollar of Pre-Expense Operating Income (i.e., Revenue) requires around thirty-five dollars in assets.

The company currently has over $306bn in Assets in order to support the current level of ~$9bn Pre-Expense Operating Income.

At the moment, this asset base has been funded by $90bn in various sorts of Borrowings (debt securities, cash collateralised borrowings, repo agreements and direct borrowings), $92bn in Deposits, $78bn in Derivatives, $30bn of Other liabilities (trading, margin money and settlement liabilities), and just $16bn in Equity.

So, $306bn in Assets supported by a mere $16bn in Equity.
And $290bn of Liabilities, the overwhelming majority being interest bearing.

So it is actually a business model which makes use of very high levels of financial leverage.
No different to a commercial lender.

With this sort of capital structure, to the extent that it has boosted asset values, the decade-long secular decline in interest rates has presented a significant tailwind for MQG's earnings.

The average investor won't appreciate the extent to which this has been the case.

But now, with the cost of borrowings starting to rise globally (the Aussie 10-Year yield has doubled over the past 12 months to a near 3 year-high), it is little wonder that the company's management deems it prudent to shore up the balance sheet.

In fact, some might argue that they aren't going hard enough with this equity raising.

.