2008 ended up being something of a struggle for Macquarie Group, with factors outside its control conspiring to make conditions in the second half to March 31 pretty tough.
2009 is likely to be even tougher and there’s every chance the aggressive financial group and its new CEO, Nick Moore, will struggle to match the record $1.803 billion earned in the 2008 year (it earned $1.463 billion in 2007).
The bank knows as much, and told investors yesterday it realises there will be a struggle and the market reacted accordingly.
If it happens it will end a couple of very fruitful years for Macquarie that saw revenue and earnings explode, some big deals done, some failed (Qantas) and a change at the top in terms of management and corporate structure.
The bank’s doubts about the 2009 year mirror those from analysts, several of whom have forecast earnings falling in the coming year. Analysts, including those at Morgan Stanley and Goldman Sachs JBWere, have published notes in recent days forecasting that Macquarie’s profits will drop below $1.8 billion in the current financial year, which would represent Macquarie’s first profits fall since 1994-95.
The shares opened lower (the results were out before trading) at $64.51, which was the day’s higher, then fell, came back a touch and then lost more ground in afternoon trading to end more than 7% lower at $61.25, down $4.85 and the day’s low.
But while earnings hit a record and there was the predicted loss of value in some of the held investment in its real estate satellites, Macquarie didn’t fall victim to the subprime induced credit crunch that many had predicted, nor did its basic business model take on water.
Those suspicions have seen Macquarie’s shares hammered 32% this year so far and another 5-6% yesterday.
But life in the markets is going to be very different for the investment bank and it will have to remodel its model to accommodate the new outlook.
While earnings did hit a record $1.8 billion, up 23%, the second half saw them slow to a walk.
They rose by around 2%, compared to the first half’s 45% leap as the easy credit, low interest rate environment peaked and then collapsed as the subprime crunch hit on August 9-10 around the world.
Net income was $743 million in the six months to March 31, compared to the $733 million in the back half of the 2006-07 year.
Second-half profit was worked out by subtracting first-half earnings from full-year profit of A$1.8 billion reported today.
New CEO, Nick Moore admitted that repeating the record full-year profit will be "challenging”, but he added it was could be "achievable".
"Market conditions make short-term forecasting more difficult than usual," he said in a statement to the ASX.
"The current state of financial markets means that it will be challenging to repeat last year’s record performance, but this may be achievable."
Mr Moore said that over the medium term the group continued to be well placed, due to effective risk management, good businesses, committed quality staff, the strength, diversification and global reach of the businesses and a strong capital base.
He said there were no problem trading exposures and no material problem credit exposures.
"We expect to benefit from ongoing organic growth initiatives and continued strong global investor demand for quality assets," Mr Moore said.
"It is also possible there will be opportunities for acquisitions in the current environment due to our strong capital position."
The only visible evidence of a hit from the crunch was the $293 million provision on the value of its real estate trusts and the closure of its Australian non-banking mortgage business late in the March year.
Mr Moore becomes head of Macquarie Group when outgoing chief executive Allan Moss leaves on May 24 with $80 million in benefits and cash and shares.
Macquarie’s full year operating income increased 15% to $8.2 billion, while its earnings per share (EPS) increased 13% to $6.71. At the half year they were up 32% and 34% respectively.
The company said the key drivers of the group’s result for fiscal 2008 included strong performances in its equities-related businesses in Asia, Australia and Europe.
It recorded substantial investment banking deal flow of transactions valued at about $200 billion, record volumes in foreign exchange and commodity related businesses, as well as record performance fees.
Total assets under management increased by 18% to $232 billion.
The group has expanded its capital base to $10 billion, from $7.5 billion over the year.
The Group declared a second half dividend of $2.00 per ordinary share, franked to 100% (and up just 10c a share), taking the total ordinary dividend for the year to $3.45 per share, an increase of 10% on last year’s total ordinary dividend of $3.15 per share. At the halfway mark interim dividend was up 16% (20c), so the more conservative approach in payout can be seen.
The bank’s cost to income ratio over the year averaged 73.3c in the dollar, all but unchanged from the 73.2c in 2007; but return on equity slumped in the second half to just 18.1% compared to the 30.2% in the first half. That left the return on equity for the full year at 23.7% compared to 28.1% in the 2007 year.
If it hadn’t been for a $150 million lift in trading income in the second half, Macquarie would have had a sharp drop in earnings as other areas of income fell faster than Macquarie could cut costs.
