Macquarie Group: Result 2018

It a well-known fact that Macquarie always beats its profit guidance. But it's taking things to extremes to beat it by 5%, especially when it was last updated only 8 weeks before the year-end.

Instead of the forecast 10% increase in net profit (to about $2,439m), the bank ended up increasing profit by 15% to $2,557m. In fact the second-half profit beat guidance by a whopping 10%, rising 12% to $1,309m.

But if the scale of the ‘guidance beat' was impressive, its composition was less so, with most of it coming from the lumpy factors we talked about when downgrading to Sell six weeks ago. A large chunk of it, in fact, didn't even come from the operating businesses, being investment returns on centrally held capital, primarily due to higher interest rates on the US dollar.

Two lumps or three?

Central costs were also lower due to two other lumpy factors: lower losses from associates and lower impairments. As a result, central costs were flat over the year, when most, including ourselves, had been expecting a large increase.

Tax also produced a positive surprise, with the second half tax rate coming in at 24.9% instead of the 26.4% guidance, giving a tax rate of about 25.5% for the year.

The operating businesses actually saw their combined profits fall 10% in the second half compared to the first half, although for the whole of 2018, they increased profit by 8%.

The highlight was Macquarie Capital, which made a second-half profit of $510m – almost double the $278m made in the same period last year (and also double our expectations). This was largely due to more lumpy profits, with investment income almost trebling to $502m in the second half, mostly due to asset realisations, particularly in renewable energy. The realisations were more than matched by investments, though, so the business continues to expand.

Taking the MIC

Macquarie Asset Management (MAM) disappointed for once, with performance fees tumbling to $58m in the second half after the first-half bonanza of $537m. Just to show that investment income can flow both ways, MAM also took an impairment charge of $177m mostly against its investment in Macquarie Infrastructure Corporation, whose (New York listed) shares crashed 41% in a day in February after revealing contract losses and a shock dividend cut (the announcement is also notable for an extraordinary lack of candour).

That left the division's profit up just 10% over the year – and down 14% if you ignore performance fees. Assets under management rose 3% to $495bn, mostly due to favourable movements in markets and currencies.

Banking and Financial Services (BFS) continued its strong performance of recent years, increasing profits by 9% even though gains on the sale of businesses fell to just $2m, from $192m in the prior year (which included the sale of Macquarie's life insurance business). The mortgage book grew by 14%, while business loans rose 12%. Deposits grew by 3%, while funds on the division's wrap platforms increased 14%. Impressive as these results are, BFS only accounts for just over 10% of profits (excluding central costs).

Positive guidance

The best part of the result is that management guided towards a 2019 profit ‘broadly in line' with the higher than expected result for 2018, when we'd thought there was a fair chance of profit falling compared to the guided figure.

With the benefit of US tax reform to flow through, the 2019 profit figure will again be supported by a lower tax rate (probably around 24.5%), but more of it should also come from underlying business growth. And of course it's a good bet they'll beat the guidance anyway.

We couldn't quite bring ourselves to nudge up our Sell price when we reviewed the stock six weeks ago, but this result gives us enough reason to do so. So it goes up to $110 and the Buy price edges up from $65 to $70 but, with the share price also up, the recommendation itself remains SELL.