Macquarie news sparks high hopes
With the usual caveat that it all depended on how the markets travelled, Moore told Macquarie's annual meeting that Macquarie boosted earnings in its first three months to the end of June and remained on track to beat its 2012-13 profit of $851 million in the full year. The market consensus is that earnings will be about 27 per cent higher.
Moore said that the components of the result would be slightly different than previously expected. The group's funds management business is growing faster than expected, picking up more performance fee income than anticipated and getting a boost from the decline in the value of the Australian dollar, so its expected profit contribution has been upgraded. Macquarie's resources project financing arm, on the other hand, will probably contribute less than expected, as the resources sector downturn creates some impairment charges.
Overall it's a wash, but Macquarie's shares fell by $1.07 or 2.3 per cent on Thursday because investors wanted a profit upgrade, sourced basically from the parts of Macquarie's business that were pounded hardest during the financial crisis: Macquarie Equities, and Macquarie Capital, the division that houses the group's corporate advisory business.
Macquarie is not within a country kilometre of the profits it was booking before the global crisis, and key profit catalysts including Macquarie's famous listed infrastructure funds management manufacturing machine have wound down.
There is however room for what Maquarie calls its "market facing" operations to significantly boost their profit contribution if the market recovery continues, and what is still a 25 per cent price gain for Macquarie since mid-April is partially built on the assumption that it is under way.
In its first-quarter update on Thursday, Macquarie confirmed predictions of higher earnings this year for both Macquarie Securities and Macquarie Capital. Both are building off depressed bases, however. In 2007-08, Macquarie lifted net profit by 23 per cent to $1.8 billion. Earnings before corporate expenses were $4.6 billion, and Macquarie Capital contributed $2.9 billion, 63 per cent of it. Equity market earnings were $732 million, 16 per cent of the total.
Within last year's $851 million profit, Macquarie Equities actually lost $50 million on top of a $194 million loss in the previous year. Macquarie Capital contributed $150 million, 17 per cent of the total.
The reduction in market-facing profits is the key to a slump in Macquarie's return on equity since the global crisis erupted.
Its $1.8 billion profit in 2007-08 represented a return on equity of 23.9 per cent, well above an average return of 11 per cent for a peer group of banks, and its 10-year average return was 25.1 per cent, again easily outstripping a peer group average return of 16.3 per cent. The $851 million profit in 2012-13 represented a return on equity of only 7.8 per cent. The three-year average return is 7.8 per cent, and Macquarie's 10-year return on equity now averages 17.3 per cent.
Macquarie remains ahead of its competitors on this important measure. An international peer group that includes Bank of America, Barclays, Credit Suisse, Deutsche Bank, JPMorgan Chase, Morgan Stanley and UBS returned 4 per cent on invested equity in 2012-13, and a 10 per cent return in the past decade.
The crisis has narrowed Macquarie's lead, however, and it is not clear that it will widen again if a bull market develops.
Moore said on Thursday that Macquarie Equities was back in profit in the June quarter, but a market recovery will tend to lift all broking and investment banking boats in that area.
And while measures of takeover activity vary, Macquarie Capital appears to be the third-ranked adviser by deal value in this market since 2011, behind the leader, Goldman Sachs, and UBS. It is also third ranked this year, behind Goldman and Lazard.
That's about as far down the league table as it will want to go. Takeover activity is still in the doldrums: KPMG reported on Thursday that deal numbers declined globally in the year to June and that the total value of deals was back to 2012 levels.
When takeovers take off, however, they are huge profit generators, not just on advice but in debt and equity takeover funding. Corporate advice was one of Macquarie's big edges before the crash. It has to be in the next boom, too, if the group is to outperform.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Macquarie recast its profit outlook modestly and said first‑quarter earnings were up, but investors had hoped for a clearer profit upgrade from the market‑facing parts of the business. The stock fell about $1.07 (2.3%) because traders wanted stronger signs that divisions like Macquarie Equities and Macquarie Capital — the areas that benefit most from a market rally — would deliver bigger upgrades.
Macquarie's funds management business is outperforming expectations, helped by higher performance fees and a weaker Australian dollar. By contrast, its resources project financing arm is likely to contribute less to profits because the resources sector downturn has led to some impairment charges. Market‑facing operations such as Macquarie Securities and Macquarie Capital are improving but are rebuilding off depressed bases.
Before the crisis Macquarie produced very high returns (23.9% ROE in 2007–08 and a 10‑year average of 25.1%). After the crisis its profit and return on equity fell sharply — the 2012–13 profit implied about 7.8% ROE, with a 10‑year average now around 17.3%. ROE matters because it shows how efficiently the bank turns equity into profit and investors use it to compare Macquarie with peers and judge how quickly it can regain pre‑crisis performance.
Quite a bit. The article notes there is significant upside if a market recovery continues because market‑facing operations (broking, investment banking and corporate advisory) can materially lift profit contribution. However, those businesses will also lift competitors, so any gains depend on the strength and sustainability of a broader market recovery.
Macquarie Capital is ranked third by deal value in the market since 2011 (behind Goldman Sachs and UBS) and is also third this year (behind Goldman and Lazard). Takeovers matter because they generate large profits not only from advisory fees but also from debt and equity funding associated with deals — a pickup in takeover activity would be a significant profit catalyst for Macquarie.
Yes. A decline in the Australian dollar helped boost the funds management business by increasing translated performance fee income, which led management to upgrade the expected profit contribution from that division.
The article suggests Macquarie is still a long way from pre‑crisis profit levels and is 'not within a country kilometre' of those results. Returning to pre‑crisis profits would likely require a sustained market recovery and a revival in takeover activity and market‑facing earnings — factors that are uncertain and beyond Macquarie's direct control.
Investors should watch signs of a market recovery (which lifts broking and investment banking revenues), takeover activity and deal values, performance fee trends in funds management, any impairment charges from the resources sector, and currency moves in the Australian dollar. Also monitor quarterly updates for Macquarie Equities, Macquarie Capital and funds management earnings to see where profit contribution is changing.
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