Macquarie cautious on profit growth
The investment bank dampened market expectations on Tuesday, citing low equity market turnover and a prolonged slump in corporate deal-making in the Asia-Pacific region.
In contrast to analyst expectations of 15 per cent earnings growth this financial year, the bank forecast a more moderate 10 per cent rise in profits. After a sharp rise in Macquarie shares in recent months, the prediction sparked a 4 per cent slump in the stock, which fell by $1.57 to $37.16.
Chief executive Nicholas Moore said profits could well be higher if the recent market bounce was sustained, but he was decidedly cautious in his outlook for the bank.
Although investment banks in the US enjoyed surprisingly strong December quarter results, Mr Moore stressed that conditions remained "subdued" in its investment banking and securities businesses.
Conditions had improved in the last quarter, he said, but the lift had come from a low base and deal-making was soft in the Asia Pacific region.
"Things are better but they are still subdued," Mr Moore told an analyst briefing on Tuesday. "We have not seen the same pick-up in Australia as we've seen in the United States."
Most parts of the Macquarie empire are forecast to post higher profits this year, but the securities division - which houses its stockbroking arm - is expected to continue making losses.
The cautious comments come as Macquarie seeks to find a source of future profit growth to make up for lower turnover on equity markets and weaker merger and acquisition activity.
The bank's star division in this regard has been its annuity-style business, which made almost half the group's profits in the latest half.
The division, which manages global funds worth $334 billion, is forecast to continue growing this year, but could be negatively affected by ructions in the bond market, which has recently been sold off heavily.
Another potential source of growth is the mortgage market, after Macquarie last year teamed up with the Mark Bouris-backed Yellow Brick Road to take on the big four lenders. Macquarie's mortgage book had expanded by 5 per cent in the latest quarter, to $11.1 billion, though Mr Moore said this was still only about 1 per cent of the home loan market in Australia.
An analyst at Bell Potter, T S Lim, said Macquarie was on track to post solid revenue growth, but it might need to embark on further cost cutting to match the performance of investment banks overseas.
"The improvement is still going to come, but it's probably slower for Macquarie than for the other guys," Mr Lim said.
Frequently Asked Questions about this Article…
Macquarie forecast a more moderate 10% rise in profits for the financial year, versus analyst expectations of about 15%. The cautious forecast followed a recent market rally and coincided with a 4% fall in the stock, down $1.57 to $37.16.
The bank cited low equity market turnover and a prolonged slump in corporate deal-making across the Asia‑Pacific region. Macquarie also said conditions in its investment banking and securities businesses remain subdued, limiting near‑term upside.
Macquarie's annuity-style business — which manages global funds — has been a key profit driver and is forecast to keep growing. By contrast, the securities division (including its stockbroking arm) is expected to continue making losses, and deal-related income in Asia‑Pacific remains soft.
The annuity-style division manages global funds worth about $334 billion and contributed nearly half the group's profits in the latest half-year. It could be negatively affected by turbulence in the bond market, which has recently seen heavy selling.
Macquarie has been growing its mortgage book — it expanded 5% to $11.1 billion in the latest quarter after partnering with the Mark Bouris-backed Yellow Brick Road. However, that represents only about 1% of the Australian home loan market, so it’s a growing but still small share.
Nicholas Moore said profits could be higher if the recent market bounce is sustained, but he remained cautious. He noted recent improvements came off a low base and that Australia has not seen the same pick-up as the United States, describing conditions as still subdued.
Macquarie’s stock fell about 4% on the cautious profit outlook. Analysts, like Bell Potter’s T S Lim, said the bank is likely to post solid revenue growth but may need further cost cutting to match the performance of overseas investment banks.
Everyday investors should note that while parts of Macquarie are growing (especially its annuity-style business), headwinds such as low equity turnover, weak Asia‑Pacific deal activity, a loss-making securities division, and bond market volatility create near‑term uncertainty. That mix explains the bank’s conservative 10% profit forecast and the market’s cautious reaction.
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