Now the annual results of Macquarie Group (MQG) continue to attract attention, with the question now being, is this as good as it will get this time around, or is there something more in the tank?
Investors were left wanting more from the group in the shape of a more upbeat outlook – although some analysis suggested the result was already in the price.
The company earned $1.27 billion for the 12 months ended March 31 which was stronger than expected.
The shares rose yesterday, jumping 3% to $60.46, after their 0.9% gain last Friday and the 2.8% rise for all of last week.
That’s a gain of more than 6% in the past six trading sessions and the $60.46 close was the highest the share have been since June 2010.
Macquarie certainly hauled back on the expectations game in its profit announcement last week, telling investors (if they were listening), not to really over anticipate another big year (and 2013-14 was a big year with earnings up 49%).
Macquarie said the 2015 combined profit contribution from its operating groups would be up on the 2014 year.
But it made the point that after excluding the $288 million gain from the distribution of a holding in Sydney Airport to shareholders, the actual result would be ”broadly in line”.
The statement also said there was ”potential for a better result” if market conditions continued to improve.
That is a familiar refrain from its peers which at the moment are underperforming relative to Macquarie.
All Macquarie’s six business units revealed improved earnings for 2014.
MQG 10Y – Macquarie recovers post GFC
Macquarie Funds Group, the group’s largest profit driver which includes its unlisted infrastructure funds, delivered a profit contribution of $1.1 billion, up 39% rise on the previous year.
That helps explain why Macquarie earned more in the US (where the funds management business has expanded) than from Australia.
What was clear from the result was that Macquarie had a better time in the so-called FICC trading business (Fixed Income, Currencies, Commodities) than many of its bigger Wall Street, Japanese and European peers (such as JPMorgan, Goldman Sachs, Barclays and Deutsche Bank).
A mixture of commodities trading, especially energy which was helped by the very severe US winter, was the standout from Macquarie, at a time when its peers are downsizing or exiting commodities JPMorgan and Deutsche Bank for example.
Weak FICC revenues and profits were a major feature of March quarter results from most of Macquarie’s peers (with the exception of Morgan Stanley). Falls of 10% to 25% in revenues and more in profits were reported with little confidence conditions would improve.
Now that gloom has been confirmed (as it was in January) by JPMorgan Chase in an SEC filing in the US over the weekend looking at its second quarter prospects.
J.P. Morgan Chase said it expects revenue from fixed income and equities trading to fall 20% in the second-quarter, as the environment continues to be challenging with lower client activity levels.
"Based on markets revenue results to date, which reflect a continued challening environment and lower client activity levels, expect 2Q14 Markets revenue to be down approximate 20%+/- versus 2Q13," JPMorgan said in reporting shorthand in its filing.
"The markets revenue actual results will depend heavily on performance throughout the remainder of the quarter, which can be volatile."
The bank also said higher mortgage rates will continue to have a negative impact on volumes (which was also a factor in the first quarter).
First quarter revenues in its fixed income trading business fell 21% to $UD3.8 billion, while equities revenues fell 3%.
JPMorgan said it now expects the sale of its commodities unit to Mercuria Energy Group Limited for approximately $US3.5 billion to be completed in the third quarter, after regulatory approvals. This exit compares with Macquarie’s deepening involvement in this area.
The bank’s exposure to Russia was $US4.7 billion at the end of the first-quarter and it is closely monitoring the situation and impact of the new sanctions related to the situation in Ukraine. Macquarie doesn’t seem to have any exposure to Russia.
Also helping Macquarie was the expansion into funds management
The Financial Times Lex column commented over the weekend.
"Macquarie’s mix of infrastructure and energy with straightforward investment banking makes it an unusual beast. Its infrastructure funds made it a yield-seekers’ darling pre-crisis, and sent it crashing when funding dried up. What has emerged is a group with six business lines.
"Three – fund management, asset financing and general lending – produce steadyish returns. Three are cyclical – investment banking, equities and fixed income, commodities and currency. Each unit did well, notably FICC and funds, where profits rose 29 and 39 per cent, respectively, following the winter and new interest in infrastructure funds.
"The challenge is performing consistently enough to overturn a buy-on-the-rumour-sell-on-the-fact mood. The shares initially dipped on Friday, even after the bank beat expectations. Trading at 15 times expected earnings and 1.4 times book value, Macquarie is not cheap. The likes of Goldman Sachs, Morgan Stanley andCredit Suisse are at 10-12 times profits and hover around book value.
"Credit should be given to Macquarie for providing some of the clearest and most detailed reporting out there. Good reporting creates real value."
All the same, Macquarie has been rated more highly than its peers for most of the past two years and the gap has been growing in the past 12 months.
"That makes it hard to see much upside. Friday’s cautiously optimistic outlook can be summed up as “should be OK, if markets go well and the Aussie dollar stays weak”. Put another way, more right time, right place, please," Lex added.
Perhaps the big takeaway from the Macquarie result is the one identified by Lex – how expensive Macquarie shares now are (not that was noticed by investors yesterday).
At 15 times expected earnings, Macquarie is now an expensive beast – and with results from other banks to continue to be weak (as the JPMorgan filing suggests), their valuations will trail Macquarie’s. That PE ratio of 15% is now around 16%, if yesterday’s share price is maintained above $60.
That’s why there’s probably not much gas left in the tank in the Macquarie earnings (certainly not another 49% surge in earnings).
But the market is quick to pick these up and price Macquarie shares accordingly.
