Macquarie eyes the billion dollar earnings barrier

Don’t expect too much guidance this reporting season on future earnings given the uncertainty and instability on global markets right now.

Macquarie Group chairman Kevin McCann this morning probably went further out on the limb than most would dare when he proffered that the investment bank’s earnings this year “would be up” on 2013.

For Macquarie, that means possibly bursting back through the billion dollar barrier.

It scraped above it in 2010 but the past few years have been tough as Macquarie has restructured, downsized and re-engineered itself after being battered and bruised in the global financial crisis.

The most recent result, at $851 million, was a far cry from the pre-crisis glory days when the now defunct Macquarie Model – where a bunch of infrastructure satellites were loosely attached to the Macquarie mother ship – churned out a whopping $1.88 billion.

There are a number of favourable winds blowing in Macquarie’s direction. Its exposure to a recovering America and its decent chunk of foreign income will deliver heightened revenues from an expected long term drop in the Australian dollar.

After the large staff layoffs of the past two years, resulting in significant redundancy payments, the forecast pick up in traditional investment banking operations such as mergers and acquisitions and equity capital markets should flow through to the bottom line.

That turnaround has been evident in recent weeks as American investment banks have delivered  a series of spectacular earnings lifts. While a direct comparison with Macquarie is difficult, given the Australian based operation no longer holds a major market position in foreign exchange and is geared more to commodities, the overall climate clearly is improving.

Perhaps the biggest change for investors in the Silver Doughnut is that there are smoke signals that they no longer will be classed as second rate when it comes to distributing the wealth.

In the past few years, despite drops in the company’s return on equity, bonus payments have been maintained, pushing them to boom time levels as the board has ignored its own bonus formula.

This year, dividend payout ratios have lifted and as earnings recover – and with costs already taken out – the share of wealth will tip in favour of the company’s real owners, the shareholders.