A positive thumbs down for the second half outlook from Macquarie Bank, despite it reporting record interim earnings with a 45% rise in profit to top the billion dollar mark for the first time.
Despite higher income from trading income and fees from takeovers and other advisory work, the shares fell $3.01 to $79 on a day when the rest of the banking sector jumped sharply on bargain hunting.
That 4% fall came after Macquarie reported its new structure of a holding company (MQG) and the underlying bank. The interim report was out before trading started and the shares struggled all day as management made clear they saw a solid second half, but nowhere near as strong as the first six months.
Compared to the clouded outlook in the US, investors here saw value in the banks yesterday with the NAB, CBA, Westpac, St George and especially the ANZ all up strongly.
Goldman Sachs JBWere provided some of the spark with an upgrade to buy for the ANZ because its share price had fallen to far so fast after the 2007 profit report and appearance of the new CEO, Mike Smith, at the end of October.
Macquarie said net earnings hit a record $1.06 billion in the six months to September 30, compared to $730 million in the first half of the 2007 year.
Analysts said it was clear the bank had not been hurt by the subprime mortgage mess in the US and the associated failure of credit derivatives linked to those loans and bonds. (But a bank offshoot, Macquarie Fortress has been hurt with huge losses.) CEO, Allan Moss said Macquarie had "no material problem credit exposures''.
Up till yesterday the shares had risen 24% since hitting a low of $64 in the credit crunch in August. The shares were buffeted a bit last week but yesterday's sell down was the strongest negative reaction for some time. They hit a low yesterday of $77.70.
Macquarie will pay a dividend of $1.45 a share, up from $1.25 in the first half of 2006.
That's a 13% rise, well short of the 45% rise in earnings and well short of estimates of around $1.60 to $1.65 from analysts.
Macquarie said in its commentary that "It is too early to provide a definitive forecast for the full year given the difficulty of forecasting market conditions. However, we expect the second-half result to be at least equivalent to the prior corresponding period of $A733 million."
"The second-half result is expected to be lower than the first because equity market conditions may not be as favourable, the impact of asset realisations is expected to be lower, and there are seasonal factors in some businesses."
Mr Moss told analysts that "We don't have a strongly negative view on equity markets.. but you'd just have to say that equity markets have been very strong, particularly in Australia and Asia, in the first half.
"And that just makes us think that there might be some degree of mean reversion.
"And if that were to be the case then a number of our businesses would be affected by that."
As well as a predicted slowdown in equity markets, the outlook was also based on seasonal factors – less deals are done over Christmas and New Year – and an expected decline in assets sales in the second half.
"There might be some modest asset sales, but were not planning substantial asset sales in the second half," Mr Moss said.
"Market conditions are generally volatile and frankly somewhat nervous, so we've built all those considerations into making those sorts of comments."
Investors didn't like that conservative, but prudent view on the next six months and down went the shares.
Overseas earnings, where the bank gets more than half its profit, climbed 70%. Profit in the Asia-Pacific rose 96% as the company started new funds in the region, and as rising stockmarkets in Hong Kong, Singapore and Australia boosted trading income.
"We are particularly pleased with the contribution from the Asia-Pacific region, which was largely unaffected by the credit market disruption,'' Moss said. "All operating groups have experienced continued international growth.''
First half revenue climbed 38% to $4.71 billion in the half while costs fell and the bank's cost-to-income ratio fell to 70.8% from just over 72% in the previous corresponding period.
Included in the bank's advisory work was Wesfarmers' $18.3 billion bid for Coles and its advising Rio Tinto on that takeover approach from BHP Billiton.
It did miss around $200 million of fees and other income when its plans to lead a takeover of Qantas failed.
Macquarie increased assets under management 14% to $224 billion.
Income from fees and commissions jumped a strong 48% to $2.48 billion, while trading income surged 85% to $843 million and interest income rose 57% to $523 million.
