Macquarie sees upside in ‘benign’ markets, growth in Asia

Macquarie Group has dismissed suggestions growth may be tapping out and flagged opportunities in Asia.

Macquarie chief financial officer Patrick Upfold with chief executive Nicholas Moore. Picture: Hollie Adams

Macquarie Group has dismissed suggestions growth may be tapping out and flagged opportunities for its large asset management arm in Asia and sectors such as agriculture alongside a healthy pipeline of investments to offload.

Handing down a better than expected interim profit of $1.05 billion, Macquarie chief Nicholas Moore claimed weaker lending and more than 500 job cuts were not signalling the group was battening down for more challenging times ahead.

He claimed that aside from its securities business languishing in tough conditions for institutional stockbroking, the group’s five other divisions — including the $491bn asset management arm — had upside as global markets remained “broadly benign”.

“Overall from a medium-term viewpoint there’s a lot of positives, but yes … there is that one book in our lending area which we’ve seen a step down in the last six months, albeit the (asset) realisations we would expect to be at a similar sort of level,” he said.

Bumper gains from sales of investments and businesses, such as life insurance, boosted Macquarie’s first-half operating income 8 per cent to $5.2bn.

Profit to September 30 grew 6 per cent on the prior six months to $1.05bn, beating analyst forecasts on the back of fewer impairments and a lower tax rate. The higher final dividend of $1.90 per share, 45 per cent franked and payable December 14, also positively surprised investors.

While Macquarie typically enjoys a stronger second half, Mr Moore said annual profit would be broadly in line with last year’s $2.06bn as volatility around one-off gains offset optimism on future credit quality and greater commodities trading.

Macquarie shares bucked a weak market to end 1.7 per cent higher at $81.76.

“While the absence of an upgrade to full-year 2017 guidance is disappointing we continue to believe Macquarie’s guidance is conservative,” said CLSA analyst Brian Johnson, noting the group’s history of underpromising and over-delivering.

Mr Moore said the group’s biggest earner, asset management, was receiving good inflows and the important subdivision of infrastructure and real assets had amassed a record $12bn in equity to deploy.

He added the retail banking arm would benefit from prior technology investments while car leasing was improving following the Esanda dealer finance acquisition from ANZ. Despite less lending, he said Corporate and Asset Finance had a good pipeline of assets to realise, similar to the advisory and principal investing arm Macquarie Capital, which would help to offset subdued mergers and acquisitions activity.

The struggling securities arm was strongly leveraged to any pick-up in sentiment across Asia where trading had been weak, he added.

Shemara Wikramanayake, the head of asset management who is touted as a future CEO, said Macquarie’s position as the world’s largest infrastructure manager and solid performance was resulting in “a lot of demand” for various products.

She added that the “low return world” was likely to keep driving investors to “chase superior returns for good risk”, with alternative asset classes winning “a lot of money”.

Alongside “annuity style” operations of retail banking and leasing, asset management is increasingly important for Macquarie as the proportion of investment banking income shrinks.

While asset management performance fees were down from the strong half a year ago, investment realisations were higher after gains from deals such as the selldown in Macquarie Atlas Roads.

Despite global markets being awash with liquidity, Ms Wikramanayake said her business was still managing to invest in major developed markets at “good returns”. “In infrastructure we’ve been growing into upstream energy, into agriculture — which we think is going to be a big area of demand for institutional investors — and also into real estate in niche areas,” she said.

“Then across all our other divisions as well we’re really looking at this point where we’ve got a very good earnings base to be reinvesting it in trying to grow into other products and geographies.

“Asia is a big area of focus. (It’s) a place where we see better risk for return because there’s less competition in investing.”