Macquarie profit in historic slump

Macquarie's income was down 14% to $7.6 billion before the write-downs and other impairments charges were taken into account.

The one-off costs resulted in net revenue dropping by a third to $5.5 billion for the 12 months to the end of March.

Macquarie disclosed in its statement to the ASX this morning that its fall in income was affected by a drop in fees and commissions of 13% to $4 billion, a 35% decrease in trading revenue to $1.2 billion, a slide in net interest income to just under $1 billion and just $900 million from other asset and equity investment sources.

Its investment banking powerhouse, Macquarie Capital, saw its contribution to group profits plummet by 89% albeit it remained profitable at $251 million.

Deal flow was maintained but the division was hit by the massive write-downs on its investments in the Macquarie satellite funds.

The Treasury division dropped by 15% although it was underpinned by its commodities and foreign exchange trading businesses. However, it also saw its impairment charges rise as a result of a fall in the value of its co-investments.

The group's equity trading arm, Macquarie Securities, suffered a 77% in operating profits to $275 million as a direct consequence of the volatility in financial markets.

Banking and Financial Services continued to suffer after the drop at the half way stage, taking a $99 million loss, primarily as a result of its decision to cut adrift its poorly performing mortgage operation in Italy.

Its troubled real estate arm incurred a $356 million loss because of write-downs and equity losses. Corporate and asset finance and its funds business also were well down but in percentage terms but still made contributions to group profits.

Job cuts in key divisions

The fall in group profits was accompanied by a significant slide in employment costs, primarily as a result of the drop in the profit-related payments made to staff as a reward for their contributions to Macquarie's previous success.

Expenses dropped 44% to $1.8 billion and the overall compensation ratio fell from 47% of the total cost base to 41$. The group's number of total staff dropped from 13,000 worldwide to 12,700. Hundreds of jobs have been lost in key divisions although Macquarie has taken on many other people as prepares for what will be an improvement in business in coming months.

Macquarie also emphasised the strength of its balance sheet, although last night it unveiled moves to strengthen its finances with a capital raising of as much as $1.2 billion.

It said this morning that as at March 31 it was carrying capital of $10.2 billion, which was $3.1 billion more than its own minimum regulatory requirements. That is $200 million more than its last update to the market in late February when it ruled out any current plans for a further fund raising exercise.

Macquarie is said to be aiming to issue 40 million new shares to investors at around $30 a share, a 10% discount to its closing price of $33.48 last night when the stock was placed in a trading halt.

Macquarie's satellites performed well, while the general market slipped. Macquarie Airports rose 1.5 cents, or 0.8%, to $1.825, Macquarie Communications added 4 cents, or 1.8%, to $2.29, Macquarie Media was up 10.5 cents, or 8.5%, at $1.345, Macquarie Office Trust was flat at 19.5 cents and Macquarie Countrywide Trust was up 1 cent, or 3.2%, at 32.5 cents.

Macquarie also said today that it had seen its liquid assets grow by $10 billion to $30 billion over the past year while total deposits had risen by $5.6 billion to $18.8 billion primarily driven by retail depositors.

It had also raised term funding of $21.5 billion since last March, much of that as consequence of being able to use the Federal Government's wholesale funding guarantee which supports the banking sector's lending requirements.

The result came in slightly below market expectations with analysts looking for around $880 million. It was also helped by a large cut in the group's overall tax bill.

Analysis of Macquarie's second half through to the end of March showed a continuing slide in performance with operating income down another $400 million on the first six months to just over $2.5 billion.

With total expenses rising slightly to $2.29 billion half on half, that resulted in a fall in operating profit of another fall in pre-tax profit by March down a further $460 million to just $262 million.

The second half position was cushioned by a huge drop in the amount of tax paid by the group. And its effective corporation tax rate fell to just 1.7% for the whole of the latest financial year compared to 15% for the 12 months to March 2008.

In a separate ASX announcement this morning, Macquarie said that the 1.7% of tax paid on its profits was "well down" on the previous year.

This was a direct consequence of the $2.5 billion of write-downs and impairments charges it had taken above the line - at pre-tax operating profit level - which had in turn heavily reduced its bottom line net earings which it ends distributing in part to shareholders through dividends.

And according to the group's annual accounts, which were released at the same time as its profits announcement, Macquarie paid just $15 million in tax on its full-year profits this time as opposed to $317 million on its record level of earnings of $1.8 billion a year.

That represents a 95% fall in its contribution to government's tax coffers.

Mr Moore said today's result had been achieved in the face of a year of "challenging global conditions" which particularly manifested itself in volatile and major declines in financial markets during the second half. The write-downs of $2.5 billion could be directly attributed to those factors he added.

The global conditions also made it difficult to predict how well the group would fare in its 2010 financial year, which started four weeks ago, but Mr Moore stressed that Macquarie remained well capitalised and funded.

He also hinted at a possible recovery in profits by indicating that there would be fewer one-off write-downs over the coming 12 months, a return to the higher levels of compensation paid out out to staff in terms of the ratio overall (47% as opposed to 41% now) and a higher amount of tax to be paid after this year's much lower bill.

That, though, would be offset by lower earnings from the capital held by Macquarie because of the fall in global interest rates and the costs incurred from accessing the Federal Government's funding guarantee, which he estimated might be as high as $200 million.

As for the immediate future, Mr Moore told investors today: "While there were some early signs of markets stabilising in March and April, significant uncertainties remain and it is still too early to make any judgements on sustained market improvements."