Update Macquarie Group, Australia's top investment bank, joined its global peers in warning weak markets mean key businesses will not meet the previous year's results and added a high cash level was a drag.
In a trading update ahead of the group's annual general meeting, Macquarie said earnings in the quarter to June 2010 were slightly ahead of the subdued quarter a year ago but weak markets were hitting the securities, investment banking and trading business that make up more than half its revenue.
The update sent Macquarie's shares down as much as $2.59, or 6.75 per cent, to $35.80 in early trade. The drop was the most since February and brought this year's slide to 25 per cent, compared with the wider market's 7 per cent fall. By the close, Macquarie shares ended down $1.19, or 3.1 per cent, at $37.20.
''M&A activity has been low and it's difficult for businesses like Macquarie to excel,'' said Rob Patterson, who helps oversee $3.6 billion including Macquarie shares at Argo Investments in Adelaide, Australia. ''It's the deal flow. They're probably working on lots, but not much is happening.''
The bank stopped short of giving an indication of where it expected its first half or 2011 earnings to be. A Reuters poll of eight analysts on average forecast Macquarie's first-half profit would rise to $660 million.
''It's very, very difficult for us to make a forecast about where we'll end up at the end of the year,'' Chief Executive Nicholas Moore said. ''There's been a substantial decline in confidence. Europe is making people nervous. The US is making people nervous. There are a lot of reasons for nervousness.''
Without improved returns from its securities business, investment banking unit and its fixed income and commodities business this will make it tough for the investment bank to beat last year's profit of $1.05 billion, Mr Moore said, without providing an estimate for the full-year result.
Mr Moore said securities business in Australian during June was the softest month since 2005.
Today's outlook reverses Macquarie's April forecast that all its businesses were likely to perform better in the year to March 31, 2011.
Weak earnings
In June, it said market conditions were hurting some businesses, marking a more cautious tone from its previous upbeat forecast in April. Macquarie's announcement follows weak earnings from Goldman Sachs and poor investment banking numbers from Citigroup and Bank of America Merrill Lynch.
While Morgan Stanley beat expectations it joined others in saying future earnings could be choppy amid market uncertainty.
"These market conditions are significantly impacting activity levels in Macquarie Securities, Macquarie Capital and Fixed Income, Currencies and Commodities," Macquarie's CEO Mr Moore said.
"Accordingly, unless the market conditions experienced in the June 2010 quarter improve, we do not expect these groups to meet FY10 results in FY11," he said.
Macquarie, which earns nearly half its income in Australia, has suffered from slower Australian mergers-and-acquisitions advisory activity and equity underwriting.
M&A activity targeting the Australasian region fell by 28 per cent to $65.3 billion and equity issuances fell by 80 per cent year to date, according to Thomson Reuters data.
Macquarie, dubbed the "millionaires' factory" for its senior bankers' hefty pay packages, has also suffered from senior banker exits.
Europe is making people nervous. The US is making people nervous. There are a lot of reasons for nervousness
Recently Andrew Low, Macquarie's chief operating officer and the head of its global financial services advisory practice, quit.
Jim Rossman, US equity capital markets chief, and David Baron, head of US financial sponsors coverage, are among others who have left the bank.
Macquarie said this morning it has $3.1 billion in surplus capital, lower than the $4 billion at the end of the last financial year but still significant enough to hurt.
Macquarie is diversifying from the Asia Pacific by acquiring businesses in North America and Europe. Last year it made five North American acquisitions and has hired traders and bankers in the market to more than triple revenue from that region.
But the group was silent on acquisitions in the works.
The 25 per cent fall in Macquarie's share price since its peak in April put it at 9.3 times forward earnings, just ahead of Morgan Stanley and Goldman Sachs which are trading at around 8.5 times, according to StarMine Smart Estimates.
Reuters with Bloomberg News, with Eric Johnston, BusinessDay