Macquarie Reports 43% Profits Drop. Stock Still Rockets
Macquarie Group, Australia’s leading investment bank reported half yearly earnings yesterday, and despite first half profits falling 43 per cent to the same level as in 2006. Investors took comfort in the investment bank’s conservative accounting approach and the maintenance of its dividend sending the stock soaring 26% in intraday trade on Tuesday.
The fall in profits was Macquarie’s first profits drop since 1991-1992, when Australia last entered into a recession. Macquarie’s main issue lies in whether capital markets will enable them to finance infrastructure investments, that drive both deal and revenue flow for the investment bank.
The group reported impairment charges and provisions of $1.1 billion for the six months to September 2008. The charges had a net impact of $395 million on earnings, contributing to a 43 per cent fall in interim net profit from $1.06 billion in the September half last year to $604 million in the latest half.
The group declared the same dividend as in the previous corresponding period but only by increasing the dividend payout ratio from 37.1 to 67.4 per cent. Staff had to bear some pain in the form of lower bonuses. The compensation ratio fell from 47.9 per cent in September last year to 40.1 per cent. The only division that performed in line with prior periods was Treasury and Commodities, which made a $285 million contribution to profit.
Investors, bid the stock up as much as 26 per cent during Tuesday’s trading session, with the stock finally closing the day 16.5 per cent firmer. The fact that a company can report a drop in profits of almost a half, and still end the day stronger is a sign of just how risk averse investors have become. Though it must be said that the dividend was the main reason the stock rose 16.5 per cent yesterday.
The company had previously issued guidance, warning in mid-July that its first-half net profit would be 25 to 40 per cent below a year earlier, and its earnings for the full-year to end-March would not beat last year’s, due to difficult market conditions. Its subsequent earnings announcement offered no real surprises which is why the market reacted so positively.
Macquarie suffered $70 million one-off costs on the sale of its Italian Mortgages portfolio, and writedowns on its funds management assets and other co-investments. The group said its balance sheet was strong, holding capital at about 40 per cent above the minimum regulatory requirement.
Chief Executive Nicholas Moore said that market volatility caused by the credit crisis were largely responsible for writedowns and said ““Financial markets have been highly disrupted during the period, with a crisis of confidence in credit markets and systemic falls in global liquidity leading to the stress and failure of major financial institutions, In addition, there has been significant volatility and declines in financial markets.”
Since the collapse of bulge bracket investment bank Lehman Brothers, investors have been questioning the highly leveraged, high risk investment business model most investment banks have been operating under. This has largely been reflected in falling equity market valuations and Macquarie has not been immune. Though the firm has not been directly exposed to the US subprime mortgage meltdown and has avoided the pain of many of its US and European peers, its shares have still fallen 73 per cent this year as part of a global market rout.
Besides its traditional investment banking operations, Macquarie manages about $225 billion worth of infrastructure assets, such as toll roads and airports, which it bundles into listed and unlisted funds, and manages, earning fees in return.
Mr. Moore did indicate during Tuesday’s investor briefing that there would be some job cuts, but refused to commit to exactly how many. “In terms of headcount it’s very much a business by business story. Given that there’s been a fall in activity in some of these businesses, there could well be movement in staff numbers” Mr Moore said.
There was speculation that Macquarie could cut up to 4000 of its 13,000 global workforce, but that estimate has been denied by the bank.
The Australian also reported yesterday that the Macquarie was in the process of selling A$15 billion worth of its struggling business, including its real estate assets in Hong Kong, its Australian mortgage book, and its Italian mortgage book, which has a book value of around A$2.13 billion.
The investment bank has sold $8 billion of those assets so far, with another A$7 billion due to be sold in the next few months. Macquarie is also reportedly selling its margin lending business, which one analyst estimated could be worth up to A$100 million.
The money will be used to pay down wholesale finance costs. “The $15 billion that we have the potential to free up on our balance sheet — that would be going into our banking business. We would look at our ability to redeploy that into business activities. If we did not see an opportunity, we could repay the wholesale funding that we have today.” Mr Moore told The Australian.
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