Macquarie Group Ltd., Australia’s biggest investment bank, said its three largest units are set to report lower earnings as markets falter and deals dwindle.
The outlook reverses Macquarie’s April forecast that all its businesses were likely to perform better in the year to March 31, 2011. Unless conditions improve, the advisory, securities, fixed income and commodities divisions, accounting for more than two-thirds of group income, won’t match last year’s results, Chief Executive Nicholas Moore said today.
“M&A activity has been low and it’s difficult for businesses like Macquarie to excel,” said Rob Patterson, who helps oversee A$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.”
Macquarie stock fell in Sydney trading, extending this year’s tumble to 23 percent. Macquarie’s plight is not unique: Nomura Holdings Inc., Japan’s biggest brokerage, said today first-quarter net income fell 80 percent on a slump in investment banking and trading.
Market declines worldwide, Europe’s debt crisis and concerns about the strength of the global recovery have sapped deal-making to its lowest level since 2004, Moore said at a Sydney press conference.
“It’s very, very difficult for us to make a forecast about where we’ll end up at the end of the year,” he said. ”There’s been a substantial decline in confidence. Europe is making people nervous. The U.S. is making people nervous. There are a lot of reasons for nervousness.”
Macquarie dropped 3.1 percent to A$37.20 at the 4:10 p.m. local time close. The shares have fallen three times as much as Australia’s benchmark S&P/ASX 200 index this year. The bank’s stock has fallen for only three of the past 13 years.
Moore said Sydney-based Macquarie, with more than 14,600 workers worldwide, is weighing its resources with each unit’s development plans. He declined to say whether the bank plans to cut workers to match the transaction drought.
“We tend to grow in adverse markets,” Moore said. “In Asia, we are growing businesses organically. Acquisitions are much more opportunistic.”
The company had A$11.8 billion ($10.6 billion) of capital as of June 30 -- A$3.1 billion more than the regulatory minimum. Macquarie has no plans to return excess capital to shareholders, Moore said. The bank said its “conservative” approach to funding is weighing on earnings.
“Today’s press release is likely to evoke more downward earnings-forecast revisions,” Johan Vanderlugt, an analyst at Daiwa Capital Markets in Melbourne, said in a research report. Vanderlugt said Macquarie’s funds management business will help offset declines at the larger divisions, and he maintained an “outperform” rating on the stock.
Since the financial crisis, Macquarie has driven deeper into overseas markets, buying brokerages, advisory and asset management businesses in North America. The 41-year-old bank had earlier pioneered a model of buying and pooling assets, listing them on an exchange and charging fees for managing them.
Citigroup Inc. analysts in Australia said last month that high-level resignations will hurt Macquarie’s attempts to win new business.
Last month, Macquarie said Andrew Low, chief operating officer of its investment banking unit, quit for a new business opportunity. Jim Rossman, U.S. equity capital markets chief, and David Baron, head of U.S. financial sponsors coverage, are among others to have left, people familiar with the matter have said.
Moore said on April 30 that market conditions were improving and he expected better performances from all the group’s businesses in the year ending March 2011. Two months later, Chief Financial Officer Greg Ward said it was too early to say how uncertain markets would affect results and some businesses were being hurt.
By the end of the second quarter, when Macquarie previously updated its outlook, the Standard and Poor’s 500 Index and the Australian benchmark had dropped 12 percent in the three-month period, and the FTSE 100 Index 13 percent.
Citigroup’s top executive in Australia, Stephen Roberts, said last week that it was tougher now to get transactions done than in any period he could recall.
Still, Macquarie is among banks hired to arrange the Hong Kong portion of the initial public offering of Agricultural Bank of China Ltd. The Chinese bank yesterday sold more stock in Hong Kong, in addition to raising $19.2 billion in Shanghai and Hong Kong, to take the IPO closer to becoming the world’s largest.
Winning that kind of work is central to Macquarie’s plan to generate more income from Asia, according to James Ellis, an analyst at Credit Suisse Group AG in Sydney. Australia accounted for 48 percent of Macquarie’s income in the year ended March 31, 2010.
“The IPO is an important marquee transaction for Macquarie developing its Asian business and its profile generally, especially given the high growth and low investment banking penetration of these markets,” said Ellis.
Macquarie’s earnings in the three months to June 30, the bank’s fiscal first quarter, were slightly higher than a “subdued” quarter a year earlier, the bank said today.