Macquarie Group’s Net Interest Income Growth: A Closer Look at the Drivers and Risks

Macquarie Group (ASX: MQG), Australia’s largest investment bank by market capitalization, reported stronger earnings for fiscal year 2025 (FY25), ending March 31, 2025, driven by rising net interest income across key divisions. The results underscore the resilience of Macquarie’s “annuity-style” businesses, particularly its Banking and Financial Services (BFS) division, while also highlighting vulnerabilities tied to margin compression and credit risks. Here’s a breakdown of what investors need to know.

The Numbers: Net Interest Income as a Key Growth Lever

Macquarie’s FY25 net profit rose to $A2.3 billion, up slightly from $A2.2 billion in FY24. The standout performer was the BFS division, which contributed $A1.38 billion to net profit—a 11% year-over-year increase. This growth was fueled by a 4% expansion in home loans to $A123.7 billion and a 5% rise in business banking loans to $A16.6 billion, as of June 30, 2024. Deposit growth also played a role, with BFS deposits climbing 2% to $A145.3 billion, bolstering low-cost funding and supporting lending capacity.

Meanwhile, Macquarie Capital, the corporate advisory and private credit arm, saw its net profit dip slightly to $A1.04 billion, though this division’s private credit portfolio drove higher net interest income. The division’s results were balanced by lower investment-related income and rising funding costs linked to equity portfolio expansion.

The Drivers: Loan Growth vs. Margin Headwinds

The BFS division’s performance hinged on volume-driven lending growth, particularly in residential and commercial mortgages. However, this came with trade-offs. Margin compression—the narrowing gap between interest earned on loans and interest paid on deposits—cut into profitability. While loan volumes grew, the pressure to maintain competitive deposit rates and uncertain macroeconomic conditions likely squeezed net interest margins.

Additionally, the BFS division faced rising credit impairment charges, reflecting caution around borrower repayment risks. The run-off of its car loan portfolio also reduced interest income from this segment. These factors suggest that while Macquarie is growing its loan book, it’s doing so in an environment where pricing power is constrained.

The Risks: A Fragile Margin Environment

The bigger concern lies in the sustainability of margins. Macquarie’s BFS division reported an 11% net profit rise in FY25, but this was partially offset by margin pressures that began emerging in Q1 2025. The group’s CET1 ratio (a measure of capital strength) remained robust at 12.8%, but the 30% jump in net profit from H2 FY25 to H1 FY25 hinted at uneven performance across the fiscal year.

Moreover, broader economic risks—such as potential loan defaults in a slowing economy—could further strain margins. While Macquarie’s $A8.2 billion capital surplus as of June 2024 provides a buffer, the company’s reliance on interest-sensitive income makes it vulnerable to shifts in macro conditions.

The Bigger Picture: Diversification and Resilience

Macquarie’s strength lies in its diversified business model. While BFS and Macquarie Capital faced headwinds, its Macquarie Asset Management (MAM) division delivered solid returns, driven by performance fees and asset sales. The group’s $A177.7 billion in total deposits by March 2025 underscored strong liquidity, enabling it to weather market volatility.

However, the results also revealed a lopsided performance: divisions tied to transactional revenue (e.g., commodities trading) struggled with subdued market activity. This reinforces the importance of Macquarie’s annuity-style businesses, which generate recurring income, but it also highlights reliance on the BFS division’s loan growth.

Conclusion: A Growth Story with Strings Attached

Macquarie’s FY25 results paint a cautiously optimistic picture. The BFS division’s loan growth and deposit stability have been key drivers of net interest income, while its capital position remains strong. Yet, the company is navigating a challenging environment for banks: margin compression, credit risks, and macroeconomic uncertainty.

Investors should monitor two critical metrics: 1. Net interest margins for BFS to see if they stabilize or worsen.2. Credit impairment trends to gauge the health of its loan portfolios.

If Macquarie can maintain loan growth without sacrificing margins, its earnings trajectory could remain positive. However, if margin pressures intensify, the company’s growth story may falter. For now, the stock’s year-to-date performance (up ~12% as of March 2025) reflects optimism, but the path ahead hinges on execution in a tough banking sector.