Back to the boom time? It ain't necessarily so
Despite Friday's share price surge of nearly 10 per cent, analysts are cautioning that the result does not mean the boom times have returned for the nation's biggest investment bank.
Joining Westpac and ANZ Bank in returning capital to shareholders, Macquarie has unveiled a forecast-busting final dividend of $1.25, underpinned by a 17 per cent jump in full-year profits.
Its shares surged above $43, their highest level since mid-2010, as investors welcomed the profit growth and dividend surprise. But the share price is well away from the $90-plus levels it reached during the heady days before the financial crisis.
It's also worth remembering that the high dividend may be an admission that the board sees relatively few growth options in which to invest.
Analysts on Friday quizzed chief executive Nicholas Moore on whether the high payout ratio of nearly 80 per cent of earnings was a sign the company could not find compelling assets to acquire.
UBS analyst Jonathan Mott described the payout ratio of 60 to 80 per cent as "remarkably high" for an investment bank, and asked if this signalled growth opportunities were not as strong as thought.
Moore made it clear Macquarie thought it had surplus capital, and it was becoming "harder and harder" to make transformative acquisitions, such as its purchase of Delaware Funds Management, which it bought for $US428 million in 2009.
"We continue to look, of course, and we always will continue to look, but I think realistically at this stage we're not seeing a Delaware-style acquisition," he said.
Moore also stressed that although Macquarie has benefited from rebounding market confidence, conditions remained soft in its investment banking and stockbroking arms.
After a prolonged slump in deal-making and equity market activity, these parts of Macquarie posted better results in the latest half.
Macquarie Securities, which houses its stockbroking arm, returned to profitability in the second half after bearing the brunt of cost cuts, with $223 million in expenses cut from the division in the past year.
Profits also rose from investment banking and trading in fixed income, commodities and currencies. All up, the earnings from these market-facing businesses jumped 200 per cent on the much weaker previous half.
Against these improvements, trading activity and deal volumes are still low by historical standards, with Moore describing conditions as "subdued".
The managing director of White Funds Management, Angus Gluskie, said the highly cyclical market-facing businesses at Macquarie's core may be on the path to recovery.
But these earnings would no longer be supported by the "Macquarie model", which involved a series of external funds that paid Macquarie a healthy stream of advisory fees. Supported by cheap debt, it was abandoned after the global financial crisis.
"What they were previously able to do was to create and control a certain amount of market activity," Gluskie said. "But they don't have that same ability going forward."
Frequently Asked Questions about this Article…
Macquarie unveiled a forecast‑busting final dividend of $1.25 and reported a 17% jump in full‑year profits. The result prompted a near 10% one‑day share price surge, pushing the stock above $43 — its highest level since mid‑2010, though still well below the $90+ pre‑GFC peaks.
Not necessarily. While investors welcomed the profit growth and dividend surprise, analysts cautioned that the result doesn’t signal a full return to the boom era. Macquarie’s market‑facing businesses are recovering but trading activity and deal volumes remain subdued compared with historical norms.
Macquarie’s payout ratio is running at about 60–80% of earnings (the article notes nearly 80% in comments). UBS analyst Jonathan Mott described that range as “remarkably high.” CEO Nicholas Moore indicated the board believes the bank has surplus capital and that it’s becoming harder to find transformative acquisition opportunities, which helps explain the high dividend return of capital.
Macquarie says it continues to look for acquisitions, but CEO Nicholas Moore warned it’s becoming “harder and harder” to make transformative deals. He referenced the 2009 purchase of Delaware Funds Management (paid US$428 million) as an example of the kind of deal they aren’t seeing at the moment.
Those market‑facing parts have improved from a prolonged slump: investment banking and trading in fixed income, commodities and currencies saw profits rise, and earnings from market‑facing businesses jumped about 200% on a much weaker prior half. Macquarie Securities (the stockbroking arm) returned to profitability after cutting $223 million in expenses over the past year. Still, management describes overall conditions as subdued.
The old “Macquarie model” involved creating and controlling external funds that generated steady advisory fees for the bank, often supported by cheap debt. That approach was abandoned after the global financial crisis, and commentators say Macquarie no longer has the same ability to create market activity the way it once did.
Analysts welcomed the stronger profits and dividend surprise but urged caution. UBS’s Jonathan Mott questioned the implications of the high payout ratio, and other commentators noted that while cyclical market‑facing businesses may be recovering, they are not yet at historical levels and growth options appear more limited.
Investors should weigh the positive signs (strong profit growth, large dividend, and improvements in trading and investment banking) against lingering cautions in the article: subdued trading volumes, a very high payout ratio that may signal limited reinvestment opportunities, and management’s comment that transformative acquisitions are scarce. The one‑day share surge reflected enthusiasm, but the stock remains far below pre‑crisis highs — so it’s wise to consider both the recovery signs and the risks highlighted by analysts.
Call 1300 880 160
Start a chat
Schedule a call
