Macquarie Group Ltd., Australia’s biggest investment bank, said full-year earnings will fall about 25 percent as it cut the outlook for its securities trading and investment banking businesses.
Profit in the year to March 31 will decline to about A$717 million ($767 million), from A$956 million a year earlier, according to calculations based on the company’s forecast. The Sydney-based bank said its securities business will make a “negative contribution” while the performance of its advisory unit will be “significantly lower” than a year earlier.
Chief Executive Officer Nicholas Moore is using cash to pay down debt, reduce the size of Macquarie’s balance sheet, and reverse an expansion in the derivatives businesses in Europe that, “with the benefit of hindsight, is something we wouldn’t have done,” he said today. Macquarie cut staff in the nine months to Dec. 31 by 928 to 14,628, company statements show.
“There are still pressures out there that Macquarie will suffer,” said Paul Xiradis, who manages about $12 billion in assets as chief executive officer of Ausbil Dexia Ltd. in Sydney. “But the projection is that over the next year or two that markets should recover and hence Macquarie, being exposed to that, will also be such that their earnings recover.”
Shares of Macquarie fell 0.8 percent to A$25.90 in Sydney. They have fallen 37 percent in the past 12 months, while the benchmark S&P/ASX 200 index has fallen 12 percent.
“Global economic uncertainty has deepened, resulting in substantially lower levels of client activity in many markets,” Moore said in today’s statement.
While the fixed income, currencies and commodities unit saw “improved conditions” that drove an increase in profit in the December quarter from a year earlier, the securities and advisory businesses “were severely impacted by macroeconomic conditions,” Moore said.
Macquarie funds, banking and financial services, and corporate and asset finance are expected to post a combined 20 percent increase in full-year earnings, the bank said.
The three months to Dec. 31 included the receipt of A$300 million in cash, recorded as income, from MAp Group, which operates Sydney’s airport.
Like rivals on Wall Street and in Europe, Macquarie has been under pressure to trim staff and costs as fee income growth slows. Goldman Sachs Group Inc., the fifth-biggest U.S. bank by assets, posted a 47 percent drop in 2011 earnings to the lowest level since 2008 and eliminated 2,400 jobs after the stock fell 46 percent.
Macquarie’s Moore may need to cut about 1,000 jobs to offset slower trading and corporate advisory income, UBS AG analysts including Jonathan Mott said in September.
The bank’s securities business exited institutional derivatives in the U.S., U.K., Asia and South Africa and listed public derivatives in Germany, Macquarie said in today’s statement. It also shuttered derivatives businesses in Paris, Munich and Zurich, as well as some U.S. operations, it said.
Moore said Macquarie expanded into retail derivatives in Germany after the 2008 financial crisis, something he is now “stepping back from.”
“We were in retail derivatives in Asia very successfully, we thought it could translate into Germany,” he told analysts on today’s call. “That, plainly, with the benefit of hindsight, is something we wouldn’t have done -- we wouldn’t have gone into retail derivatives in Germany just before a European debt crisis.”
The expansion into Germany, which included buying the equity trading and research operations of Sal. Oppenheim Jr. & Cie KGaA two years ago, was “an absolute disaster, but they’re taking the pain and cutting out, which is a plus,” said Dexia’s Xiradis.
Macquarie’s balance sheet is also “pretty strong and they did indicate they’ll be in a position to do a buyback next year,” Xiradis said. “So while their earnings have been weak in a pretty tough environment they’re in good shape and cost pressures are lower, so salaries and bonuses will be a lot lower.”
Macquarie, regulated by Australia’s banking watchdog, is expected to have A$3.7 billion in capital surplus above minimum requirements on March 31, it said today. The capital surplus may allow the bank to start a share buyback of as much as 10 percent of Macquarie shares in the six months after March 31, it said. The buyback was announced Oct. 28.
“It’s clearly on our agenda, we’re not stepping back on that,” Moore said of the buyback today on the analyst’s call.