Macquarie Group shares staged a big rally yesterday off the back of the expected lower profit.
They rose more than 16%, or $3.40 to $24.00, after rallying as high as $26.03.
The global financial turmoil that stopped Macquarie Group’s 15 years of profit growth in its tracks may have also helped underscore the point that it has survived when better rated peers overseas in the US and elsewhere have failed or fled the sector.
Merrill Lynch was sold off to Bank of America, Lehman Brothers failed, Morgan Stanley and Goldman Sachs fled for the safety of being a bank (emulating Macquarie’s model in fact). Big UK and European competitors are bleeding heavily.
The sharp fall in September half year net earnings to $604 million removes a question mark that has been hanging over Macquarie and the market generally.
It hasn’t disappeared; things aren’t going to worsen from here on for the bank (unless there’s catastrophic failure of a much bigger financial group elsewhere in the world). More write-downs lie ahead in this half.
The doom and gloom merchants have been proven wrong: but that doesn’t mean there aren’t a few question left hanging: such as why no write-downs on its investments in Macquarie Infrastructure (MIG) and Macquarie Airports (MAP)?
The 43% drop in net earnings came as the group was hit by lower levels of activity in most of its core markets, including investment banking, underwriting, takeover advice, trading (still a relative standout with over $900 million in earnings) and share broking.
It also took write-downs and provisions of $1.14 billion on a range of assets including its own holdings in Macquarie satellites (but not MAP and MUG). The net impact was $395 million to the P&L for the six months after tax.
MIG and MAP shares are down, like everything else in the worst bear market for several generations, but Macquarie says the reason there’s been no write-down is because the carrying values of its holdings in both are well below prices generated in recent airport and tollway sales around the world.
So as long as those sorts of deals continue, Macquarie will be spared savage cuts in the book values of those investments: although there are another $400 million in write-downs already indicated for the current half.
This half should see earnings around the same level as the first half, so full year profits of some $1.2 billion. That will put it well short of the $1.8 billion earned in 2007-08, which should be the peak for the next year or two.
The headline net profit fell 43% to $604 million, primarily because staff costs almost halved from $2.42 billion in the September half last year, to just $1.265 billion in the latest period.
For example salaries and other related expenses fell to $543 million from $1.016 billion in the same half of 2007. Clearly there are fewer millionaires; or rather the millions will be rather smaller this year at the factory.
Travel costs dropped from $49 million to $26 million: a small but telling indicator of how the bank’s business levels have dropped off. It’s quite clearly, no deals, stay at home.
The tax office is also sharing the pain as Macquarie has only provided for $44 million, compared with $273 million 12 months ago.
Cash reserves rose from $10.5 billion to $25.6 billion over the past 12 months. It’s not quite the $66 billion held by Commonwealth, but it is still a lot of cash. Deposits rose to $16.7 billion over the past six months. That’s up from just over $13 billion.
Capital was $10.3 billion at the end of the half, $3.3 billion higher than minimum requirements.
Its short and long term funding on its balance sheet also exceeds its short-term wholesale borrowings by some $8 billion.
And since it is a bank Macquarie has also gained from the federal government’s deposit guarantee system. That could also help it rein in the much higher costs of raising wholesale funds in international credit markets as the second half progresses.
"Unprecedented market conditions make short term forecasting extremely difficult," Macquarie told investors in its results statement released to the ASX yesterday.
"The final result will however, be subject to a number of significant swing factors, particularly market conditions, the completion rate of transactions, asset realisation and asset prices."
Macquarie’s new chief executive Nicholas Moore warned earlier in the year that the bank would face a challenge in matching the 2008 performance. That was a no brainer, but many in the markets had thought and worried that it would be worse.
Mr Moore said that despite the financial impact suffered by the group, Macquarie had still managed to turn in a "sound" result.
"While the extreme market conditions have led to a number of write-downs and one-off costs in the latest half year, the underlying performance of the business has been solid," he said in the statement to the ASX.
