Macquarie Group Full-Year Profit Surges 29%

  • Sees lower performance fees, some units face subdued markets
  • Firm may report fiscal 2017 profit of A$2.05 billion: survey

Macquarie Group Ltd.’s reported a record full-year profit and signaled that a four-year streak of boosting earnings may be drawing to an end.

Net income surged 29 percent to A$2.06 billion ($1.54 billion) for the year ended March 31 from A$1.6 billion a year earlier, boosted by contributions from its funds management, lending and equity-trading units, the Sydney-based firm said in a regulatory filing Friday. Macquarie said earnings in the current year will be “broadly in line” with the previous year. Net income for the year ending March 2017 is expected to be A$2.05 billion, according to the mean estimate of nine analysts surveyed by Bloomberg.

Macquarie, the world’s largest infrastructure fund manager, has seen its profit almost treble from A$730 million in 2012. Now, it’s starting to face challenges from market conditions affecting its cyclical businesses such as trading and advisory, as well as a strengthening domestic currency that could weigh on earnings, more than two-thirds of which are from overseas.

While Macquarie said it expects earnings this year to be relatively flat, it has also “highlighted weak factors” impacting the current year, Sydney-based Citigroup Inc. analysts led by Craig Williams wrote in a note to clients. “The subdued profit guidance will challenge current market estimates.”

Analysts from Citigroup, UBS Group AG and Credit Suisse Group AG also pointed to the lower-than-expected tax rate that aided Macquarie’s profit in the year ended March 31. The tax rate fell to 30.7 percent from 35.6 percent a year earlier as the geographic composition of its earnings changed, it said.

Performance Fees

Shares of Macquarie declined 0.1 percent to A$65.21 as of 3:42 p.m. in Sydney, compared with the benchmark index’s 0.1 percent gain. The stock has slumped 21 percent this year.

The firm departed from its practice of forecasting the profit direction for its business units. Instead, it said the asset-management business is expected to post lower performance fees for the first time since Macquarie started declaring the measure in 2011, though it will have higher base fees. Performance fees, which rose to A$693 million in 2016 from A$30 million five years earlier, are levied on investors when returns from the sale of underlying assets exceed previously defined benchmarks.

While Macquarie has gained from Chief Executive Officer Nicholas Moore’s plan to expand stable businesses such as lending, leasing and asset management to shield the firm’s earnings from the cyclical nature of investment banking and trading, its units that rely on market conditions still suffer from the same issues afflicting larger Wall Street firms. Peers including Goldman Sachs Group Inc. and Morgan Stanley have cut costs to counter a drop in revenue from fixed-income and equities trading.

Profit at Macquarie’s funds business, which managed A$477 billion, climbed 13 percent, boosted by higher fees in the 12 months to March 31. Earnings at Macquarie’s corporate lending and leasing unit rose 2 percent, while those of its banking unit expanded 23 percent. The three divisions contributed more than 70 percent of total profit and delivered record earnings, Macquarie said.

Business Mix

Its commodities and currencies business was the biggest drag as it posted a 31 percent decline due to lower trading activity in the fourth quarter, Macquarie said. The advisory and underwriting unit had a 5 percent increase. Profit at its equity-trading business rose to A$268 million from A$64 million a year earlier, it said.

The company got 68 percent of its revenue from overseas. A 10 percent drop in the Australian dollar will boost full-year net income by 7 percent, Macquarie said in a presentation Friday. The Aussie has gained 2.5 percent this year and the median analyst forecast is for it to trade at 73 U.S. cents by year end, though estimates range between 62 and 86 U.S. cents.

Return on equity, a measure of how effectively the firm reinvests earnings, was 14.7 percent, up from 14 percent the previous year, Macquarie said. The firm bought the Esanda car-dealer finance business and a portfolio of planes last year.

“We expect headwinds from lower performance fees and trading gains to be offset by higher quality revenues from the completion of recent leasing acquisitions and continued growth in the domestic mortgage book,” Scott Manning, a Sydney-based analyst at JPMorgan Chase & Co., said in a note to investors.

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