By Eric Johnston
Macquarie Group's shares slid after the company predicted full-year profit of more than $1 billion that fell short of the amount analysts had been tipping.
The investment bank today said second-half earnings could be up as much as 10 per cent over the first half as economic conditions around the world continue to trend back to normal.
Macquarie maintained its trademark caution, saying it expects profit for the six months to end-March to be broadly flat on its first-half profit of $479 million after taking into account a number of one-off items, such as acquisition costs and impairment charges, offset by a windfall from the sale of management rights from its listed funds.
The company also cautioned equity and credit market conditions had moderated from the buoyant conditions of the six months to September, even as economic conditions continued the return to normal.
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Deutsche Bank analyst James Freeman said the latest guidance was unlikely to trigger any earnings upgrades among investment analysts, however the medium-term growth outlook for Macquarie remains strong.
The revised forecast is ''slightly below the more bullish analysts,'' Angus Gluskie, who oversees about $330 million at White Funds Management, said. ''Some investors were looking for a greater upgrade, so on a short term basis are happy to close out positions given the softness in the market.''
Macquarie chief executive Nicholas Moore said there was a ‘‘potential’’ for the second-half profit to be about 10 per cent up on the first half, although this remains subject to market conditions, significant swing factors and unexpected one-off items.
Mr Moore said while economic conditions continue to return to normal, the strong market conditions experienced over the September half have since ‘‘moderated’’ in certain areas, including Australian equity capital markets and credit businesses.
His comments come against a backdrop of December quarter equities turnover on the Australian Securities Exchange being down 11 per cent on the previous quarter. However December quarter Australian merger and acquisition activity was up 33 per cent on the September quarter, while credit spreads continued to contract.
Mr Moore said the investment bank’s remuneration costs were again starting to increase, tracking more in line with historic levels. While tax rates were also returning to consistent levels.
Mr Moore said the removal of the Australian government guarantee was anticipated and is not expected to impact on Macquarie’s funding position. This week the Rudd Government said the wholesale funding guarantee would expire on March 31 given conditions in credit markets were improving.
Macquarie, which has raised as much as has much as $15.5 billion using the government guarantee, has not issued debt under the government guarantee since August 2009.
Mr Moore said Macquarie’s balance sheet position remained strong with short-term wholesale issued paper continuing to be a small portion of overall funding sources.
Total retail deposits increased to $14.5 billion at December 2009 from $13.9 billion at September 2009.
Macquarie’s banking arm tier 1 capital ratio, which measures balance sheet strength, fell to 10.4 per cent in December from 11.7 per cent in September 2009. However it still was sitting on some $4.5 billion in surplus capital above minimum regulatory requirements.
"Despite improving trends in a number of major markets, we continue to maintain a conservative approach to funding and capital. Our strong balance sheet, strong team and encouraging market conditions provide opportunities for medium term growth," Mr Moore said.
Elsewhere, the investment bank said it was likely to deliver lower rate of return on equity reflecting lower global interest rates and the higher cost of funding.
It also said its holdings of cash are likely to fall across its balance sheet as funds are deployed across the businesses.
The bank's pro-forma assets under management increased significantly to $342 billion, due to the completion of the takeover of Delaware Investments by Macquarie Funds Group.
But the internalisation of Macquarie Airports Group's management meant $18 billion of assets under management had been taken away from the bank.
Macquarie had expanded significantly in recent months, both organically and through takeovers.
Its Macquarie Securities business made 16 non-acquisition related director level hires in the December quarter, while Macquarie Capital made 13 similar hires and the fixed income, currency and commodities division hired 18 directors.
Macquarie made six takeovers during 2009 including one in February at the height of the turmoil in equity markets, spending more than $800 million to buy a wealth manager, fund manager, investment bank, energy adviser and natural gas trader, all in North America.
The bank then bought Sal Oppenheim's derivatives business late in December, then the the equity trading and research operation last week to expand its presence in Europe.
''There's a fair bit more to come,'' said Hugh Dive, who helps manage more than $3 billion at Investors Mutual.
Mr Moore is performing a ''balancing act'' between buying assets and keeping a capital cushion against volatility, he said.
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