Macquarie Group shares were hammered yesterday after it revealed that the increased volatility in financial markets since April has had an unquantified impact on its business.
Macquarie’s warning came in a presentation to a Sydney investment conference.
It came out of the blue and the bank joins the likes of Elders, Alesco Corp and Sigma Pharmaceuticals in providing out of left field shocks to market sentiment this year.
As well, refiner, Caltex Australia produced a surprise earnings downgrade Thursday night after trading. It blamed volatile exchange rates for the expected profit fall.
Macquarie is the only financial company in this group, so its sudden discovery of uncertainty should be heeded.
In terms of importance to the market, the statement wasn’t a downgrade, no numbers of estimates were provided.
But investors reacted like it was and pushed the bank’s shares down 5% at one stage, or $2.17 to an 11 month low of $40.50.
The shares ended down 2% at $40.65, also an 11 month closing low.
Other bank shares weakened and finished in the red, with the NAB, Westpac and the all down by 0.75% to more than 1%. The ANZ was only off a few cents.
Macquarie, which earns nearly half its income in Australia, did not specify which divisions were facing the brunt of uncertain markets.
"Market conditions (are) increasingly uncertain making short-term forecasting difficult," the bank said in a presentation made by chief financial officer, Greg Ward.
"These market conditions are adversely impacting some business activity levels.
"Too early to evaluate implications for full year FY11 results," the bullet points in his presentation said.
The comments were in stark contrast to those in the interim profit report in April when CEO, Nicholas Moore said:
"Market conditions continue to improve but continuing uncertainty makes forecasting difficult.
“Subject to market conditions, we currently expect improved operating results for all of our businesses in FY11 compared to FY10.”
Forecasting is still difficult, but the certainty about the 2011 profit has gone.
The question now for investors is whether this is Macquarie specific, or industry specific, with the downturn affecting some of the businesses (trading for example) of the bigger banks which are already facing pressure from a weaker home loan market and lower fee income this year.
But Mr Ward said Macquarie’s medium-term outlook was left largely unchanged.
In the presentation to analysts, he said if economic activity continued in key markets it should see higher revenue and profit.
(Those comments are to be expected, in the medium term most businesses say they will do better).
The problem for Macquarie is that it is now so worried about the short term volatility, it is not game to make any sort of financial forecast for the rest of the year for fear of getting it very wrong, on the downside or the upside.
But its key business segment of Macquarie’s Australian business, its mergers and acquisition division, has been impacted with over 10 floats or IPOs delayed by the market slump since April.
Macquarie has been quitting its managed investment funds model (Macquarie Airports, Macquarie DDR, for example) and moving to grow its funds management business, especially in North America.
They provided reliable management fees, but no longer.
All up Macquarie now manages more than $A320 billion of funds here and offshore.
It has targeted growth in the US in particular with a series of deal in the last year of so.
It has around $A4 billion in surplus capital which has acted as a buffer since the GFC started in late 2007.
That huge capital surplus though has depressed returns and led to some unease among its high fliers.
That has seen a number of key executives leave in the past month because of concern over low bonus payments and other rewards.
Other executives remain concerned about the payments, but are still with the bank.
