Macquarie Group has joined the rush to reward shareholders with super-sized dividends, as cost cutting and better market conditions drove the investment bank's first rise in full-year profit in three years.
In a move that put a rocket under its share price, Macquarie lifted its final dividend by 66 per cent to $1.25 on Friday and said it would continue to return a higher share of profits to shareholders.
It announced the surprise dividend as it notched up a 17 per cent increase in profits, which hit $851 million in the year to March, well ahead of market expectations.
Investors pushed Macquarie shares to a three-year high, above $43, after the result, which was the first increase in full-year profits since 2010.
The strong earnings performance was helped by a jump in the bank's trading income and signs of recovery in its traditional stronghold of investment banking.
Heavy cost-cutting also boosted the bottom line - with its employment expenses falling by $287 million, or 8 per cent, over the year.
However, the board's decision to raise its dividend payout ratio to near 80 per cent was also a sign the bank was holding excess capital that it could not find a more attractive home for.
Chief executive Nicholas Moore was also cautious in his outlook for the next year, saying the bank expected profit growth if markets did not deteriorate, but current conditions in capital markets were "subdued."
The higher dividend reflected the fact Macquarie was generating excess capital, and it made sense to return the surplus to shareholders.
"We've said to the world for some time now that we've had surplus capital," Mr Moore said.
"So having a lower payout ratio and therefore accumulating more surplus capital on surplus capital, doesn't seem sensible."
Market analysts welcomed the focus on costs - which has seen total staff numbers fall by 1893 in the past two years - and predicted the bank would continue to pay higher dividends.
An analyst at Bell Potter, T. S. Lim, said that although the result was strong, it was clear that conditions remained challenging in its flagship investment banking arm.
"I think it's turning around. The good components of Macquarie are doing pretty well," he said.
The part of Macquarie that tends to produce the most predictable earnings and has been a star performer in recent years, Macquarie Funds, made the biggest contribution to profits of $755 million.
The division - led by Shemara Wikramanayake, who is touted as a potential successor to Mr Moore - has benefited from Macquarie's move to snap up Delaware Funds Management for $US428 million in 2009. But Mr Moore signalled the bank did not see any potential for major acquisitions such as this.
Other divisions that played key support roles in the result included its banking and financial services arm, its corporate and asset finance business, and its fixed-income and currency trading business.
The bank's flagship investment banking division, which has suffered from a paucity of deal-making in recent years, saw profits increase by 76 per cent to $150 million.
Stockbroking arm Macquarie Securities made a full-year loss for the second year in a row, but swung back into profitability in the second half of the year.
During the half Macquarie signed a deal to provide finance to Mark Bouris's Yellow Brick Road mortgage distribution business, but Mr Moore said it still had a relatively small role in the home-loan market.
"Where we sit overall in the market is about 1 per cent," he said.
Despite the improving profits in its divisions that face the capital markets, the bank said it was affected by low activity levels.
"Client activity remained subdued for Macquarie's capital markets facing businesses and affected the performance of some groups," Mr Moore said.