Macquarie Group is still standing nearly a year into the credit crunch and despite repeated assertions that it would be the first cab off the rank among Australian financials to tumble over.
Its share price is battered, earnings are down and its 16 year track record of reporting higher earnings will come to an end unless markets recover their poise and the bank finds a mega deal or two to earn big fees from.
But it is still standing: supported of course by fees and other income from some of its investment funds. But unlike its bigger Wall Street competitors, such as Goldman Sachs, Citigroup and Merrill Lynch, there hasn’t been the hint of write-downs or losses at Macquarie.
Citigroup has had $US55 billion of write-downs and losses, Merrill Lynch almost $US20 billion and overnight Wachovia, a supposedly safe home lender which made the wrong deal and bought a subprime mortgage group, revealed a further $US9 billion in losses.
Shareholders at the Melbourne AGM of Macquarie Group heard how the business was still solid, although first quarter earnings were off last year’s heady pace.
CEO, Nicholas Moore told the meeting that repeating the record $1.8 billion profit of the 2007-08 financial year was becoming increasingly challenging. Moore’s comments came in a statement before the company’s annual meeting in Melbourne.
Earnings in the year to March showed a sharp slowdown as the credit crunch bit and deals disappeared from the market. Macquarie posted its slowest profit growth in two years as it wrote down $293 million after the value of European assets declined.
Many analysts wonder how the bank can keep going, given that it rode the easy credit days with considerable success. Credit Suisse has estimated that the bank and its various funds have around $167 billion of debt, but in that equation, no one mentions that the assets exceed that figure. And even if those assets have lower values, Macquarie still has considerable leeway.
"Macquarie’s businesses are performing relatively well despite market conditions deteriorating since this time last year," Moore said in the statement to the ASX
Macquarie shares rose as much as 11% to more than $52 at the close; but are still well below the all time high of $98.64 in May 2007.
Macquarie’s relative optimism, plus a solid rebound on wall Street helped send our market higher yesterday.
The ASX200 index gained 99.7 points to close at 5105.3 and besides Macquarie’s 11.6% gain (or $5.41) the Commonwealth Bank added 3.7%, or $1.60, to $44.60, the NAB rose 7.05%, or $1.95, to $29.60, Westpac gained 7%, or $1.44, to $22.00 and ANZ added 4.6%, or 83 cents, to $18.90.
In the pre-meeting statement Macquarie said its April-June profit was below the year-ago quarter.
Macquarie said it had liquid assets worth about $20.3 billion at the end of June, nearly three times those in March. It also had about $3.6 billion in excess capital above the regulatory requirement. The company repeated that it has no "problem" trading positions or credit investments
Analysts forecast Macquarie’s net profit will drop 6% to $1.69 billion in the year to March 2009.
Mr Moore said the group had made a solid start to the new year, despite the fall in first quarter earnings.
He said all business groups were operating profitably.
Profit for the three months ended 30 June 2008 was lower than the record result achieved in the June quarter of 2007, when market conditions were very strong.
"Macquarie’s businesses are performing relatively well despite market conditions deteriorating since this time last year," Mr Moore said in a statement.
During the June quarter, the group enjoyed good contributions from its corporate finance and advisory, commodities related trading businesses, foreign exchange, and institutional and retail broking businesses, including equity derivatives.
Macquarie’s expanded capital base provided higher earnings, while remuneration expenses were lower.
Looking ahead, Mr Moore said market conditions continued to make short-term forecasting more difficult than usual.
"Over the medium term, we continue to be well placed due to effective risk management, committed quality staff, and the strength, diversification and global reach of our businesses," he said.
"We also expect to benefit from recent organic growth initiatives, continued strong global investor demand for quality assets and a strong capital base.
"We are very well funded and this will support ongoing business and growth," he said.
Mr Moore and Chairman David Clarke warned that franking rates on dividends will be lowered. That’s because more and more of the bank’s earnings are coming from offshore and a smaller proportion from within Australia.
"As we expect this trend to continue, the franking rate on future dividends is expected to fall to 80% for the interim dividend due to be paid in December," Mr Clarke said.
Mr Clarke said franking beyond the December dividend will depend on the future composition of income and should the trend observed in the 2008 year continue, it was likely that franking levels would be further reduced.
The meeting did hear one significant fact: that each of the company’s listed funds will review its position and whether it should continue to exist on a stand alone basis. The betting all will continue to be listed for some time to come: its the Macquarie model and to abandon it would leave it exposed.
