Macquarie's liquid liability

Macquarie Group today refused to discuss its capital raising plans because of regulatory concerns but its annual results reveal it has a pretty good story to tell potential investors.

The story needs to be good because Macquarie's net asset backing slumped 15 per cent to $23.72 in the year to March which makes a share issue at a 10 per cent discount to Thursday's close of $33.48 pretty demanding.

Chief executive Nicholas Moore says 2010 will have an income statement with fewer write-downs and provisions, a return to compensation ratio consistent with the past, higher tax, lower earnings on capital and higher cost of funding.

There is a mix of positive and negatives in that outlook statement but the message is clear: return on equity will be higher in 2010 than the 9.3 per cent in 2009.

That can be gauged from the fact that Macquarie's compensation ratio will rise in 2010 from the 41 per cent in 2010 to more normal levels.

In normal times Macquarie has had a compensation ratio between 45 per cent and 55 per cent. In 2008 the compensation ratio was 47 per cent and return on equity was 23.7 per cent.

However, Moore was quick to hose down suggestions from an analyst that ROE would get back up to 20 per cent in 2010.

The plunge in compensation and ROE were largely due to the $2.5 billion in impairments from deterioration in markets and write down on investments held for "long term investor alignment”.

The controversy over the accounting of specialist funds, particularly Macquarie Infrastructure Group (MIG) and Macquarie Airports (MAP) appears set to continue.

There was no change to the specialist funds accounting treatment, which is based on transactions in the market, discounted cash flows and evidence of recent assets sales rather than market value of the securities.

MAP is in the books at $469 million above market value while MIG is in the books at $231 million. A total of $1.11 billion in unrealised losses from the listed funds were sitting on the books at March 31.

However, Macquarie took a $153 million write down on MIG to recognise movements in the internal rates of return on recent transactions.

The biggest impairment hit was the $663 million charge for other equity investments including Japan Airports and Spirit Finance. This figure included about $200 million of impairments for unlisted funds.

The most commonly asked question at the analysts briefing today was: why raise capital when you have an excess of it?

Moore side stepped that question but he did reject suggestions that the group's growth plans had been or would be capital intensive.

Chief financial officer Greg Ward said Macquarie Bank had lifted its Tier 1 capital from 11 per cent at September 2008 to 11.4 per cent at March.

The group has total eligible capital of $10.2 billion and minimum capital required of $7.1 billion which gives the excess of $3.1 billion.

In keeping with disclosures made in February, Macquarie has liquid assets comprising about 40 per cent of the balance sheet. The non-cash assets in this liquidity basket are able to be put to the Reserve Bank in repurchase agreements.

While the high liquidity is a drag on earnings it is in keeping with the conservatism Macquarie has shown throughout the financial crisis.