Macquarie Group Ltd. (MQG) scrapped its profit growth forecast for the fixed income, currency and commodities division, which accounted for 70 percent of trading income at Australia’s biggest investment bank last year, as volatile markets sap market confidence.
The unit’s earnings in the year ending March 31, 2012, will be “broadly in line” with the previous fiscal year, Sydney-based Macquarie said today, cutting its April prediction that profit will grow. Total profit for the bank is still expected to improve as long as markets don’t worsen, it said.
Macquarie shares fell close to a two-year low after Chief Executive Officer Nicholas Moore said the bank’s customers “were experiencing a lack of confidence” and that a potential U.S. debt default would be “very bad” for the lender. Moore, 52, is betting on a rebound in global markets after expanding in the Americas, Asia and Europe, even as rivals including UBS AG and Goldman Sachs Group Inc. (GS) slash costs.
“It’s a tougher environment out there,” said Jason Teh, who helps manage about $3 billion at Investors Mutual Ltd. in Sydney. Macquarie is going to “be linked to the volatility associated with capital markets, and I don’t think things are going to change much there. You can’t expect exponential growth” in trading income every year, he said.
Shares of Macquarie fell 4.5 percent to A$28.01 at 12:16 p.m. in Sydney, making them the worst performer on the MSCI Financials Index today. The stock has slumped 24 percent this year, almost five times the decline in the benchmark S&P/ASX 200 Index. Goldman Sachs has tumbled 20 percent and UBS has shed 14 percent.
Moore reiterated today his April prediction that full- year earnings at Macquarie Capital, which advises on takeovers, debt sales and stock issues, will be higher than the previous year, as will profit at Macquarie’s securities business.
The bank’s funds business will see an increased full- year profit, Macquarie forecast today, compared with its prediction three months ago for “in line” earnings.
The overall outlook reiterated Macquarie’s April forecast that profit in the year to March 31, 2012, will top the A$956 million ($1.05 billion) reported for the previous fiscal year. While earnings in the three months to June 30 were ahead of the year-earlier period, they fell from the previous three months, the bank said in a statement to the stock exchange.
Today’s forecast “remains subject to a range of other challenges including movements in foreign exchange rates, increased competition across all markets, the cost of our continued conservative approach to funding and capital, and regulation, including the potential for regulatory changes,” Moore said in the statement today.
Investment banks around the world are struggling to boost earnings as share markets tumble on increased concern about sovereign debt in Europe and the U.S. Last week, Goldman Sachs, the U.S. bank that makes most of its money from trading, said it will cut about 1,000 jobs after a plunge in fixed-income revenue that was bigger than analysts estimated.
UBS, Switzerland’s largest bank, scrapped its profit target for 2014 this week and announced cost cuts after second-quarter profit dropped 49 percent on tumbling earnings at its investment bank.
Asked what a U.S. debt default would mean to Macquarie, Moore said “the implications for the business will be bad.”
“It’ll be a place we’ve never been before, so until we get there, we don’t know” what the full impact would be, Moore told reporters on a call today.
Macquarie’s dependence on earnings outside its home market has increased since the 2008 financial crisis, after it bought brokerages, advisory and asset management businesses in North America, Asia and Europe, which accounted for a record 64 percent of earnings in the six months ended March 31.
Macquarie’s fixed income, currencies and commodities business was the single biggest contributor to total profit in the six months ended March 31 among the eight divisions the bank details in its earnings reports. The unit added A$408 million to earnings in the period, when the bank posted net income of A$553 million.
It also generated A$587 million in trading income, versus the group total of A$762 million.
`Market Facing' Businesses
Moore said the division is among its so-called “market facing” businesses that have suffered in the three months ended June 30 from slumping confidence among clients.
“All the counterparties we deal with basically were experiencing a lack of confidence” during the bank’s fiscal first quarter, Moore told reporters.
Founded in 1969 with three employees, the bank pioneered a business model of buying and pooling assets, listing them on an exchange and charging fees for managing them. It had a 15,556-strong payroll as of March 31, prompting some analysts to question whether the bank is overstaffed given current markets.
The number of employees hasn’t “changed materially” since the end of March, Moore told reporters today, adding that unit managers set headcount according to their needs.
Macquarie needs to cut staff by about 1,000 to restore its returns to industry levels, according to analysts at Citigroup Inc. led by Wes Nason in Melbourne. Nason wrote this month that Macquarie bankers generate 75 percent to 80 percent of the revenue of their peers at other investment banks.
While the number of mergers and acquisitions involving Australian companies has climbed in the first two quarters of this year from the previous year, Macquarie has slipped in rankings of arrangers compiled by Bloomberg. The firm was 14th, with a market share of 7.3 percent. Barclays Plc leads the table with 34.5 percent of the market, according to the data.
Moore said today while the bank’s M&A market share “is fine,” the bigger issue is “underlying activity levels.”
Concern about Macquarie is “overstated,” and the bank’s earnings “should rebound when market conditions improve,” Victor German, a Sydney-based analyst at Nomura Australia Ltd. who rates the shares as “buy,” said this month.
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