Macquarie Group announces $A871m full year profit

Key points

• Full year net profit after tax $A871m, down 52% on record FY08 profit, in line with February guidance
• Operating income before write-downs, impairments, equity accounted losses and other one-off items¹ down 14% to $A7.6b
• Write-downs of $A2.5b due to continued deterioration of markets and provisions on long-term investments
• Total operating income after one-off items down 33% to $A5.5b
• Cash and liquid assets of $A30.3b at 31 March 2009, up from $A20.8b a year ago
• Capital of $A10.2b, $A3.1b in excess of minimum capital regulatory requirement
• Completion of balance sheet initiatives totalling $A15b
• Return on equity 9.9%, down from 23.7% on pcp
• Final dividend $A0.40 per share (60% franked), total dividend $A1.85 per share
• All groups remain active, market conditions beginning to provide opportunities
• Maintaining cautious stance with a conservative approach to funding and capital

Macquarie Group Limited (ASX:MQG) today announced a net profit after tax attributable to ordinary shareholders for the year to 31 March 2009 of $A871 million following a year of testing global market conditions.

Macquarie Group Managing Director and Chief Executive Officer, Nicholas Moore, said: “Macquarie has remained profitable despite a year of challenging global market conditions. In the second half, there was significant volatility and continued market declines particularly in November 2008 and February 2009.  The year’s result was marked by a significant number of one-off items resulting from these market conditions.”

The year’s net profit was 52% below the record net profit for the previous year of $A1.8b, when market conditions were very strong, and is in line with guidance provided at the February 2009 Operational Briefing.

 “This result, however, shows the Group’s resilience and adaptability,” Mr Moore said.

“Macquarie’s full year profit was achieved despite substantial write-downs, much of which are provisions related to strategic long-term investments in Macquarie-managed funds which align Macquarie’s interests with those of other fund investors.

“Our strong funding and balance sheet position was further strengthened in the second half, with an increase in cash and liquid assets, term funding and strong growth in deposits.

“We have a long-term policy of holding a level of capital to efficiently support our businesses and to grow the capital base ahead of business requirements.

“At 31 March, we remained in a strong capital position with $A3.1b of capital in excess of the Group’s minimum capital regulatory requirement,” Mr Moore said.

The Group declared a total dividend for the year of $A1.85 per share, which includes a final dividend of $A0.40 per ordinary share franked to 60%. The full year dividend represents a 60% payout ratio which is in line with Macquarie’s previously stated policy of a 50-60% payout ratio.  The record date is 15 May 2009 and the dividend payment date is 3 July 2009. A discount of 2.5% has been re-introduced on the Dividend Reinvestment Plan, effective for the upcoming final dividend.

Strong funding and balance sheet position

Mr Moore said: “Macquarie has always been well capitalised and funded.  Over the past three years, we increased our regulatory capital by approximately $A5.4b. This has resulted in Macquarie being well placed to withstand the current market conditions and to capitalise on emerging opportunities.” 

Macquarie entered the 2009 financial year with a strong funding position and this was further strengthened during the year. As at 31 March 2009, Macquarie had:

• Capital of $A10.2b, which is $A3.1b in excess of the Group’s minimum capital regulatory requirement
• Cash and liquid assets of $A30.3b, up from $A20.8b at  March 2008, significantly exceeding short-term wholesale issued paper of $A7.7b ($A19.8b at March 2008)
• A well-matched funded balance sheet
• Total deposits of $A18.8b, up from $A13.2b at March 2008, with retail deposit growth  particularly strong
• Raised term funding of $A21.5b since March 2008
• Completed balance sheet initiatives totalling $A15b, including the sale of the majority of the margin lending business and the Italian mortgages portfolio.

Key drivers of the result

Macquarie Group Chief Financial Officer, Greg Ward, said: “The global market disruption impacted all operating group results but Macquarie’s operating groups and divisions remained profitable, with the exception of the Banking and Financial Services Group and the Real Estate Banking Division.

“There was sound demand for Macquarie’s services and products across a wide range of markets and geographies. For instance, Macquarie Capital advised on 299 deals valued at $A203b over the year, compared with 304 deals valued at $A199b the prior year,” Mr Ward said.

In most categories, however, Macquarie’s operating income declined in 2009 compared with the previous year. Group operating income of $A5.5b was 33% below pcp.

The full year result was achieved despite substantial one-off costs and write-downs which totalled $A2.5b for the year. These comprised:

• One-off costs relating to the sale of the Italian mortgages business
• Impairment  and equity accounted losses of funds management assets and other co-investments
• Loan impairment provisions
• Impairments recognised on trading asset positions.

The result included a gain of $A197m on the financing of the acquisition of Macquarie Income Preferred Securities (MIPS) and an $A274m unrealised gain relating to the fair value adjustment on fixed rate subordinated debt.

Employment expenses were down $A1.8b or 44% and the compensation ratio fell to 41% from 47% in the prior year. Staff numbers were approximately 12,700 at 31 March 2009, compared with approximately 13,000 at 31 March 2008, resulting predominantly from the exit from some businesses and a review of staffing levels by each business.

Return on equity was 9.9% for the year, down from 23.7% for the prior year. 

During the year there were a number of opportunities realised, including:

• the acquisition of Constellation Energy's North American downstream natural gas business
• the expansion of Macquarie’s equity capital markets and third-party advisory businesses in North America
• the continued growth in the Macquarie US and UK securities businesses
• the formation of a strategic partnership with financial advisory and accounting services company, WHK Group Ltd
• the promotion of Macquarie’s environmental financial products and renewable energy businesses in every region.

“In line with its business model, Macquarie responded to the changed operating environment and adapted in a number of ways. These changes included winding back the Australian residential mortgage business and the sale of the majority of the margin lending portfolio and the Italian mortgage portfolio,” Mr Ward said.

Macquarie focuses over the medium term

Mr Moore said Macquarie Group has historically focussed on delivering growth over the medium term by providing products and services to clients.

He said this approach would continue through a combination of incremental growth and evolution.

"A significant portion of profit today comes from businesses that did not exist five years ago.

“In the year to 31 March 2009, 40% of operating income came from businesses that did not exist in 2004. At the same time we evolved new businesses, we exited those that were no longer profitable in the short and medium term." 

Mr Moore said that businesses Macquarie entered between 2004 and 2009 now provided the following full year operating income contributions to Macquarie’s operating groups:

• 73% of Macquarie Securities (including the purchase of the ING Asia cash equities business in 2004)
• 41% of Macquarie Capital (including the acquisition of ING's Asian ECM business in 2004 and Orion Securities and Giuliani Capital Advisors in 2007)
• 43% of Macquarie Funds (including the acquisition of two US fixed income businesses in 2009)
• 30% of Treasury and Commodities (including the purchase of Cook Energy in 2005 and Constellation Energy in 2009)
• 52% of Corporate and Asset Finance (including the establishment of a rolling stock leasing business in 2006 and the acquisition of CIT Systems Leasing in 2008)
• 8% of Banking and Financial Services (launched joint venture with Religare in India in 2007 and a strategic partnership with WHK Group Ltd in 2009).

Mr Moore said that all operating groups were continuing to adapt and evolve and remained busy. All operating groups were looking to grow market share as competitors reduced their activities or exited businesses.

Update on changes to remuneration arrangements

On 31 March, the Board of Directors of Macquarie announced changes to the Group’s remuneration arrangements consistent with global remuneration and regulatory trends.

The proposed changes will be subject to approval by shareholders at the July 2009 AGM.

As part of the proposed changes, it was estimated that approximately $A500m of prior years’ retained profit share would be applied to the grant of fully paid ordinary Macquarie shares in 2009.

The Macquarie equity participation was proposed to be provided via issue of new shares, on-market share purchases or a combination of both at the discretion of the Board.

The Board of Directors of Macquarie has now resolved that the approximately $A500m of Macquarie equity will be provided through the issue of new shares.

The shares are proposed to be priced at the volume weighted average price (VWAP) of Macquarie shares for the period from 4 May to the AGM on 29 July 2009.

Outlook

Mr Moore said market conditions were likely to remain challenging, making short-term forecasting extremely difficult.

“While there were some early signs of markets stabilising in March and April, significant uncertainties remain and it is still too early to make any judgements on sustained market improvements,” he said.

Mr Moore said that 2010 was likely to be characterised by:

• Income statement
  • Fewer one-off items (e.g. write-downs and provisions)
  • Higher compensation ratio, consistent with historic levels
  • Increased effective tax rate, consistent with historic levels
  • Lower earnings on capital reflecting lower global interest rates
  • Higher cost of funding inclusive of $A200m for Australian government guarantee
• Balance sheet
  • Decrease in cash balances as funds deployed across the businesses
  • Maintain equity investments at or below existing levels
  • Lower investment levels in listed funds

Mr Moore said Macquarie continued to maintain a cautious stance with a conservative approach to funding and capital.

“Our strong balance sheet, strong team and market conditions provide opportunities for medium term growth, building upon the strength, diversification and global reach of our businesses and effective risk management. We are well positioned to take advantage of both ongoing growth initiatives and incremental acquisitions,” Mr Moore said.

Full year result overview

Total operating income from ordinary activities for the year decreased 33% on the pcp to $A5.5b.   Operating income before write-downs, impairments, equity accounted losses and other one-off items declined 14% to $A7.6b; fee and commission income decreased 13% to $A4.0b; trading income decreased 35% to $A1.2b; share of net profits of associates increased 200% to $A468m, net interest income increased 15% to $A938m; other asset and equity investment income declined 50% to $A550m and other income increased 61% to $A354m. 

Performance of Macquarie’s operating groups during the year:

• Macquarie Capital Group contributed $A251m to profit, an 89% decline on the record result achieved in the prior year. Macquarie Capital Advisers advised on 299 transactions valued at approximately $A203b. During the year, equity under management declined by 8% from the prior year and assets under management increased by 8% to $A160b. M&A, advisory and underwriting income was the key contributor. For Macquarie Capital Funds unlisted fees contributed a significantly higher proportion of base fee revenue. Equity investments contributed solid returns, however these were offset by significant impairments, including write-downs on co-investment in listed funds and other equity investments.
• Treasury and Commodities Group contributed $A509m, a decrease of 15% on the prior year. Good contribution came from commodities and foreign exchange driven by market volatility and good volumes. Interest rate trading made a good contribution in difficult market conditions. Write-downs, impairment charges and equity accounted losses were recorded for resources equity co-investments and loan impairments. Constellation Energy’s Houston based downstream natural gas trading operations were acquired in March 2009.
• Macquarie Securities Group contributed $A275m to profit, down 77% on the prior year, primarily due to challenging equity market conditions. Equity products income was down 54% on the prior year with the 2nd half especially impacted by a significant decline in demand for listed/structured products; unprecedented volatility during the 2nd half which resulted in trading losses; a substantial decline in Synthetic Products revenues and significantly lower securities borrowing and lending volumes. Brokerage, commission and other fee income was down on the strong prior year.
• Banking and Financial Services Group recorded a loss of $A99m driven by the sale of Italian mortgages. Despite this, most businesses performed well. Retail deposits grew strongly, up 103% on the pcp. Cash was a major focus for the Group in 2009, launching the Cash Management Account and a cash internet product, Cash XL. The Macquarie Pastoral Fund acquired eight new properties during the year, significantly expanding its foothold in Queensland and the Northern Territory. In January 2009, the group sold the majority of its margin lending business. During the year, the group established a partnership with financial planning group, WHK Group Ltd, which will allow the two groups to work together to share resources and expertise to grow their businesses. The group also launched a premium platform service in the UK to support professional financial planners to provide services to their clients, while Private Wealth offices were opened in Singapore and Hong Kong. Based on market share and trading volumes, Macquarie Private Wealth again held the number one position for a full-service Australian retail stockbroking business.
• Macquarie Funds Group contributed $A45m, 85% down on the strong result in the prior year, which included the profit from the sale of the Macquarie-IMM joint venture in Korea. Assets under management, excluding $A5.1b assets under management from Macquarie’s acquisition of the remaining shares in Allegiance Investment Management in January 2009, fell 6% to $A44.6b. Base fees were lower across all asset classes, particularly real estate and infrastructure.
• Corporate and Asset Finance contributed $A66m, down 41% on the prior year. Interest income was up 28% due to growth in the loan and leasing portfolios and higher margins. The year included the first full year impact of CIT Systems Leasing (acquired in Dec 07). Operating lease income was up 70% due to portfolio growth mainly in the electronics business, while other income was down due to reduced asset sales activity in the second half.
• Real Estate Banking Division made a loss of $A356m due to write-downs, equity losses and provisions, including real estate equity investments and real estate loans. Base fees were flat, while performance fees were well down on the prior year. Significant transactions include the close of MGPA Fund III at $US5.2b.

Retirement of Laurie Cox

Executive Voting Director, Laurie Cox, has advised the Board that he will not stand for re-election at this year's Annual General Meeting and that he will also stand down as an Executive Director. Laurie joined the Macquarie Bank Board as a Non-Executive Director and Joint Chairman of Macquarie Corporate Finance in January 1996. He became an Executive Director in March 2004.

Macquarie Acting Chairman Kevin McCann said that Mr Cox’s experience in the securities and investment banking industries has provided a valuable contribution to Macquarie over 13 years.

1. This represents operating income before write-downs, impairment charges, equity accounted losses, provisions and one-off items of income including the profit on the purchase of the MIPS and the fair value adjustment of fixed rate issued debt relating to changes in the market price of Macquarie's credit spreads.