Macquarie Group: Interim result 2017
Recommendation
It was a case of swings and roundabouts in Macquarie Group's interim result on Friday. But while the 4% decline in earnings per share was about 5% ahead of the consensus forecast, the shine was taken off because it was supported by one-off factors and a lower tax rate.
The biggest loser was Macquarie Asset Management, the group's largest division with 37% of profits, which saw profits drop 25% to $857m due to a 73% fall in performance fees from $610m to $165m. That's as expected, though, and the underlying performance was good, with base fees and expenses broadly in line with last year, but increased gains on the sale of investments (such as the partial disposal of Macquarie Atlas Roads).
Key Points
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'Annuity-style' profits fall
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Market-facing profits flat
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Guidance maintained
Corporate and Asset Finance, however, was disappointing, with a profit decline of 15%. The AWAS and Esanda businesses bought in calendar 2015 are performing in line with expectations, but their increased contributions were more than offset by a higher impairment charge and reduced lending income. Chief financial officer Patrick Upfold suggested this was partly a timing issue, so hopefully we'll see an improvement in the second half.
The upshot is that profits from Macquarie's supposedly stable ‘annuity-style' businesses fell 15% even though the (relatively small) Banking and Financial Services division managed a 54% increase. That was boosted by gains on the disposal of Macquarie Life, however, and the underlying result was broadly flat, with increased impairments offsetting business growth. Growth was particularly strong in business banking, where the loan portfolio grew 8% and deposits rose 11%.
Software write-off
The growth contrasts with others in the sector and reflects investments made over the past few years, so hats off for that. But there's a cost to it, and that fact was underlined by the write-off of $40m of previously capitalised software costs due to a 'narrowing of the eligibility criteria for capitalisation in connection with the Core Banking platform'.
Six months to Sept | 2016 | 2015 | /(–) (%) |
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Divisional PBT | |||
MAM | 857 | 1,139 | (25) |
CAF | 521 | 611 | (15) |
Banking & FS | 261 | 170 | 54 |
Mac. Securities | 18 | 240 | (93) |
Mac. Capital | 205 | 170 | 21 |
Commod. & FM | 472 | 282 | 67 |
Total div. PBT | 2,334 | 2,612 | (11) |
Corp. costs | (846) | (1,012) | (16) |
Group PBT | 1,488 | 1,619 | (8) |
Tax | (438) | (530) | (17) |
Net Profit | 1,050 | 1,070 | (2) |
Diluted EPS ($) | 3.12 | 3.25 | (4) |
Interim DPS* ($) | 1.90* | 1.60 | 19 |
*45% franked, ex date 8 Nov |
Among the markets-facing businesses, the big loser was Macquarie Securities, whose profit contribution fell 93% to just $18m partly because last year's ‘very favourable conditions' in Asia were not repeated. That sounds like a weak excuse for such a big fall, but this division is highly volatile – it made losses in 2012 and 2013 – so we'll take what we can get.
Macquarie Capital enjoyed a profit increase over a year ago of 21%, with increased investment income (including profits from associates, gains on disposals and interest and trading income) and a lower impairment charge more than offsetting a fall in fee and commission income.
Brexit boosts forex business
The knock-out performance, though, came from Commodities and Financial Markets, which increased profit by 67%. The more settled conditions in commodity markets led to lower impairments, which more than offset the reduced demand for commodity-related risk management, financing and inventory management products. The financial markets side of the business was helped by volatility around Brexit and US interest rate uncertainty.
Overall, the profit before tax contributed by the various divisions fell 11%. Corporate expenses, though, fell 16%, partly due to reduced impairments on legacy assets held at the group level, and the tax rate dropped from 33% to 29%, so the group net profit fell only 2% to $1.05bn.
Earnings per share, however, fell 4% due to the shares issued to buy Esanda in October 2015, although that was still slightly around 5% higher than the consensus forecast. The dividend was increased by a whopping 19% to $1.90, but the 61% payout ratio remains at the bottom of the 60–80% target range.
Guidance maintained
Management maintained its guidance for a flat full-year net profit, and with the increased share count, that would lead to slightly lower earnings per share, from last year's $6.00 to perhaps $5.80. Given the better than expected first half and management's reputation for caution that's probably on the low side, but it makes sense to tread carefully given the fickle nature of financial markets.
The stock is up 14% since our update on the final result in May, and 37% since we upgraded to Buy in February. That puts it on a forward price-earnings ratio of around 14 and a dividend yield of 5.3% for the past 12 months (42% franked). HOLD.