Orders are picking up for the Millionaires Factory

Macquarie Group’s decision to distribute $1.4 billion of Sydney Airport securities to its shareholders provides some insight into where the group itself sees itself on the uneven journey it has made since the financial crisis.

The distribution of its Sydney Airport holding to shareholders is a form of capital return and would appear to reflect a level of confidence that the re-orientation of the group from what it was pre-crisis to what it needs to be in the current environment is largely over.

It is worth noting that in the same half of 2007, ahead of the crisis, Macquarie generated a $1.1 billion profit. Today it announced a $501 million profit – and the market was happy.

In that September half of 2007, Macquarie Capital generated 60 per cent of the group’s earnings and its equity markets division 15 per cent. Funds management produced 5per cent of the earnings.

Today Macquarie has happy with a $101 million profit from Macquarie Capital, a big improvement on the $10 million it made in the same half last year, and a $71 million contribution from Macquarie Securities, which lost $64 million in the corresponding period last year.

Macquarie Funds, the focus of much of Macquarie’s post-crisis ambition, contributed $500 million, 40 per cent higher than the previous corresponding period.

The shift into annuity-style businesses – the funds management division, corporate and asset finance and banking and financial services – has been the big strategic call made by Nicholas Moore, improving the quality and lowering the risk of the group’s earnings base. But it has also made it difficult to achieve the kind of turbo-charged returns Macquarie was once renowned for.

The improvement in its markets-facing businesses, which were previously a big, loss-making drag on performance, offers some prospect of upside in a more stable and improving markets environment. Capital market and merger and acquisition activity has been very subdued in recent years, but Moore has held his nerve in the face of calls for Macquarie to exit or heavily scale back those businesses, awaiting an eventual upturn.

While Macquarie is still a long way short of the kind of performances and employee and shareholders rewards that saw it dubbed the ‘’Millionaires Factory’’ in its heyday, its earnings are of higher quality and its returns are improving.

Its return on capital, a meagre 6.6 per cent, was a more respectable (but still not stellar) 8.7 per cent in the latest half. Macquarie’s defensive mindset has meant it has carried substantial excess capital. It says about $3.5 billion more than the minimum required by regulators, which has diluted its returns. The Sydney Airport distribution and a capital consolidation to reflect the transaction ought to help edge the group’s return on capital up a little.

With a sudden and large bulge appearing in the pipeline and the potential for some pick-up in business confidence that might spark some M&A activity, Macquarie is well-positioned to leverage off any lift in market activity levels by retaining its core investment banking capabilities despite some significant cost cutting and job-shedding.

The continuing growth in its funds management business (which now has $380 billion of assets under management and is a global top 50 manager), the relative stability of its corporate and asset finance and banking and financial services businesses, and its conservative balance sheet give it the stable and relatively resilient and defensive base to respond to any new volatility in its environment.

Macquarie believes that, with the usual caveats about market conditions and regulators’ directives, its 2013-14 result will be better than last year’s, with its second half stronger than the first half. In the medium term, its capital markets-facing business, which includes fixed income, currencies and commodities, are well positioned for any upturn.

The Sydney Airport distribution could be interpreted as a measure of the group’s conviction that, at this distance from the crisis and having weathered its difficult aftermath, its portfolio of businesses is now settled, right-sized and stress-tested.