Macquarie Group Ltd., Australia’s largest investment bank, said it’s relying on cost cuts to revive earnings after a slump in trading income and dealmaking dragged full-year net income to an eight-year low.
Profit at all units in the year to March 2013 will either improve or remain steady as expenses fall, Macquarie forecast today. Earnings in the year ended March 31 dropped 24 percent to A$730 million ($757 million) as economic uncertainty weighed on divisions that trade securities, manage share sales and advise on takeovers, the Sydney-based bank said in a statement.
Chief Executive Officer Nicholas Moore said in an interview there are few signs of a rebound in trading volumes or acquisitions, features of a global economic slowdown that have already weighed on profit at Goldman Sachs Group Inc., JPMorgan Chase & Co. and Deutsche Bank AG. As Moore squeezes his less profitable divisions, the 26-year Macquarie veteran is banking on reliable income from funds management, leasing and financing units until a recovery takes hold.
“If this is as bad as it gets, it’s still a very profitable organization,” said Peter Esho, Sydney-based chief market analyst at City Index Ltd., a London-based provider of trading services in bonds, stocks and commodities. “When things turn around, sure, the earnings will look better, but this is a Macquarie that’s sitting back and its destiny is determined by the market.”
Macquarie today rose 3 percent to A$29.27 at the close in Sydney, extending the year’s advance to 23 percent. That’s better than the 7.5 percent increase on the S&P/ASX 200 index.
Macquarie said earnings contributions from the banking, securities and advisory businesses, as well as the fixed income, currencies and commodities unit, known as FICC, are set to rise this fiscal year, as long as markets don’t deteriorate. The results at Macquarie Funds and Corporate and Asset Finance will “broadly” match those of last fiscal year, when profit jumped 36 percent and 22 percent, respectively, it said.
In a phone interview, Moore described Macquarie Securities, which runs a worldwide equities trading business, and Macquarie Capital, the advisory division, as the bank’s “weakness” in the current market.
“For those businesses to fire, we do need confidence,” he said. “At the moment, we’re not seeing a pickup on the securities side, and on the advisory side, things are quiet. Our cost base is such that if everything is exactly the same from a market viewpoint, we’ll make more money this year than last year. The annuity-style businesses continue to perform well.”
There may already be signs of improvement in some parts of the bank. Profit in the second half of Macquarie’s fiscal year jumped 39 percent to A$425 million from the first six months, driven by the FICC business, Macquarie said in a statement.
‘Signs of Improvement’
Goldman Sachs Chief Financial Officer David A. Viniar said April 17 he was encouraged by “early signs of improvement” in markets, even after a 23 percent drop in first-quarter profit. In the U.S., the world’s largest economy, the Federal Reserve this week released improved estimates for economic growth and unemployment this year. The labor and housing markets have shown signs of improvement, and growth will “pick up gradually,” the Federal Open Market Committee said April 25.
The value of mergers and acquisitions worldwide fell for a third straight quarter to $442 billion in the first three months of 2012, making it the slowest three-month period in 2 1/2 years, according to data compiled by Bloomberg.
In Australia, still Macquarie’s largest market even after an expansion into North America, dealmaking is on course for a second year of declines, the data show. Equity offerings in Australia and New Zealand last year dropped to their lowest level since 2002, according to the data.
Disproportionately high expenses are the “key issue” facing Macquarie at a time when earnings are declining, James Ellis, an analyst in Sydney at Credit Suisse Group AG, said in an April 18 note.
Moore cut operating costs by 8 percent and jobs by 1,354 in the year ended March 31, taking the workforce to 14,202. The profit contribution from Macquarie Capital more than halved to A$85 million while Macquarie Securities swung to a loss of A$194 million. Moore plans to cut the running costs of those units by as much as 25 percent in the two years to March 2013.
According to Esho at City Index, Macquarie may struggle to attract investors unless it improves its return on equity.
That ratio, a measure of how effectively the bank reinvests earnings, dropped to 6.8 percent in the year ended March 31 from 8.8 percent a year earlier. That’s less than half the return delivered by Australia’s three largest commercial banks, Commonwealth Bank of Australia, Westpac Banking Corp. and Australia & New Zealand Banking Group Ltd., according to data compiled by Bloomberg.
Macquarie said in February it had exited institutional derivatives in the U.S., U.K., Asia and South Africa and listed public derivatives in Germany. It also shut derivatives businesses in Paris, Munich and Zurich, as well as some U.S. operations, it said.