Macquarie flags 35% earnings fall in first half

Challenging global markets will punch a 35 per cent hole in Macquarie Group’s first-half profit.

Macquarie says conditions are too uncertain to provide guidance. Picture: Bloomberg

Challenging global markets will punch a 35 per cent hole in Macquarie Group’s first-half profit, with a blowout in the timing of asset sales and increased provisions in the banking division from support extended to clients through COVID-19.

In a virtual presentation to the Jefferies Asia Forum on Monday, Macquarie said it was unable to give meaningful guidance due to market conditions and the uncertain pace of global recovery due to the pandemic.

However, the investment bank said profit for the September half-year was likely to dip 35 per cent to about $958m from $1.46bn a year ago.

The decline from the preceding March half-year profit of $1.27bn would be 25 per cent.

“Market conditions are likely to remain challenging, especially given the significant and unprecedented uncertainty caused by the worldwide impact of COVID-19 and the uncertain speed of the global economic recovery,” Macquarie said in a presentation slide.

“The extent to which these conditions will adversely impact Macquarie’s overall 2021 profitability is uncertain, making short-term forecasting extremely difficult.”

Shares in the nation’s top investment bank sagged $5.90, or 4.7 per cent, to $120.20 in response to the gloomy outlook.

It was the first time since the 2008 financial crisis that Macquarie has been unable to give short-term guidance.

While the guidance was 3-4 per cent below consensus, Morgan Stanley said in note it was 18 per cent ahead of its own expectations.

“With gains on sale and other factors skewed to the second half, we think this is a good outcome,” the note said.

Morgan Stanley forecast Macquarie’s 2021 profit would fall 19 per cent.

Jefferies said in a note there was no change to its sum-of-the-parts valuation for Macquarie of $147 a share.

However, the broker said COVID-19 had pushed back transaction timelines and a strong dollar would have a negative impact on the group.

It also noted that the emerging banking and financial services division was growing strongly, despite a backdrop of insipid credit growth.

In the first quarter of the new financial year, deposits were up 8 per cent, home loans were 4 per cent higher, business lending gained 2 per cent and funds under administration were up 9 per cent.

Macquarie splits itself into the annuity-style businesses of asset management and banking and financial services, and the markets-facing businesses of Macquarie Capital and commodities and global markets.

In the $568bn asset management operation, which last year accounted for 40 per cent of group profit, Macquarie said base fees were expected to be broadly in line with 2020.

However, net operating income was expected to be “significantly down” due to delays in asset sales.

Support was also increased for some airline clients of Macquarie AirFinance.

The banking and financial services division, which contributed 14 per cent of group profit, was hit for the same reasons as the big commercial banks.

Provisioning continued, with 13 per cent of clients accessing assistance by June.

In personal banking, repayment deferrals were put in place for accounts representing 12.1 per cent of total balances in home lending and credit cards.

The same action was taken for 16.2 per cent of business loans and 14 per cent of the value of vehicle finance.

Macquarie said it would generate higher deposit and loan volumes in 2021, but strong competition would continue to put pressure on margins.

While transaction activity was continuing, challenging markets would reduce the number of successful transactions and extend completion times, and the strong activity in local equity capital markets in the first half of 2021 was not expected to continue.

In addition, investment-related income in the first half of 2021 was much lower than a year ago and was expected to be significantly down for the full year due to fewer large asset realisations in the difficult market conditions.

Finally, in commodities and global markets, which last year accounted for 32 per cent of group profit, the strong client activity in the first quarter of 2021 did not continue into the second quarter, and was not expected to be a strong factor in the second half.

On the upside, the group’s diversity of products and client sectors was expected to provide some support “through uncertain economic conditions” in 2021.

Macquarie continued to be upbeat about the medium term, expressing confidence that it would deliver superior performance.

The annuity-style businesses, it said, were delivering strong returns after years of investment and acquisitions, and the markets-facing businesses were well-placed to benefit from any improvement in conditions.

The investment bank said it had an ongoing program to identify cost savings and efficiency benefits, and a strong and conservative balance sheet with surplus funding and capital to support growth.

Earlier this month DataRoom reported that Macquarie had backed away from buying any AMP assets after having monitored the company for a potential acquisition for some time.

Additional reporting: Samantha Bailey