Macquarie a medium term 'maybe'

While there was a sliver of positive news in today's Macquarie Group result – it appears reasonable to say that Macquarie remains something of an options play.

Macquarie unveiled a first half profit of $361 million today, up 18 per cent on the previous corresponding half, but down 15 per down on the second half of its last financial year.

There were two pieces of positive news in the result.

The biggest was a solid contribution of $219 million from its fixed income, currencies and commodities business, which was $213 million more than it contributed in the same half of 2011-12 but 59 per cent lower than it generated in the second half of the year to March.

The other was a 28 per cent increase in the performance of the banking and financial services division, which was also 42 per cent greater than its March half result. Banking and financial services is a reasonably stable part of Macquarie's portfolio.

The FICC performance was significant despite the drop-off from the March half result because it is one of those market-facing businesses that have been such a massive drag on Macquarie's post-crisis earnings. A big increase in commodities trading income – an area in which Macquarie has considerable resources and expertise – drove the result.

The other two businesses leveraged to markets, and which have borne the brunt of the steep downturn in market activity since the crisis, are Macquarie Securities and Macquarie Capital.

Macquarie Securities lost $64 million in the half compared with a loss of $19 million in the September half last year but which was a major improvement on the $175 million it lost in the March half. Macquarie has been withdrawing from some segments of the division's former activities.

Macquarie Capital contributed a profit of $10 million, up from $8 million a year ago but a fall from the $77 million it generated in the March half.

As is the case with Macquarie's global investment banking peers, those divisions are leveraged to the levels of market activity and need some return of activity volumes if they are to make a material contribution. They represent the option within Macquarie, albeit one that at present is out of the money.

In the meantime, while waiting/hoping for those businesses to recover, Nicholas Moore has had no alternative but to focus on the things he can control, which are costs.

The Macquarie Securities cost base has been cut by 27 per cent and Macquarie Capital's by 10 per cent as part of a wider focus on costs that has seen expenses reduced 9 per cent group-wide relative to the same half last year and 17 per cent compared with the March half. Overall Macquarie's cost base is nearly $250 million lower than it was a year ago.

The twin cores of Macquarie's recent performance, its funds management and asset financing businesses, continue to provide its results some stability, with Macquarie Funds contributing $356 million (down 11 per cent on the same half previously but up 46 per cent on the March half) and corporate and asset financing $335 million (down 6 per cent on the September half and 1 per cent on the March half).

Macquarie's previous full-year guidance for those divisions was that their performance would be broadly flat but it now expects the funds management business to produce an improved result over the full year and remains hopeful that most of the other divisions will also produce better results than they did in 2011-12 – with the usual caveat relating to market conditions.

While Moore continues to trim costs in the three market-facing businesses he hasn't lost faith in their potential if conditions improved, saying that Macquarie remains well positioned to deliver superior returns in the medium term.

It is, of course, possible that today's subdued and risk-averse environment and rising regulatory imposts are the new normal for investment banks, in which the entire sector will have to be far more radically restructured than it has been to date and a lot of capacity withdrawn from the market.

With its three annuity-style business providing base-line stability, a very strong and liquid balance sheet and a proven track record in managing and avoiding the kind of market-related risks that keep popping up within other global investment banks, at least Macquarie has a relatively stable core of businesses and earnings while awaiting that hoped-for rebound in market conditions. It is, however, proving to be quite a long and painful wait.