Macquarie Group: 2012 profit to fall by 25%, shares still expensive

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Macquarie Group Limited (ASX: MQG) today gave an operational briefing to investors and analysts, and expects FY 2012 net profit to be 25% below 2011's result. This is despite recording $A300m in cash from MAp Group (now Sydney Airport Holdings Ltd (ASX: SYD)) as revenue.

Capital markets business groups have been particularly hard hit with their FY2012 net profit contribution expected to be down approximately 80% compared to the previous corresponding period. Profits will have now fallen two years in a row.

What was interesting from the presentation is Macquarie's slide showing that over the last five years Return on Equity (ROE) has averaged 20% for its Annuity style businesses, 40% for its Securities division, 20% for Macquarie Capital and 15% for Fixed Income (Page 17 if you are interested).

What that slide failed to mention was that ROE for FY 2009, FY 2010 and FY 2011 for the Group was less than 10%. Maybe they couldn't fit that onto the slide, it was pretty busy.

Another interesting observation was the statement "A cyclical return to more normal markets may benefit Macquarie". No kidding.

About the company
Macquarie Group is a financial services provider of banking, financial, advisory, investment and funds management services.

The Company's segments include Macquarie Securities Group, Macquarie Capital, Macquarie Funds Group, Fixed Income, Currencies and Commodities, Corporate and Asset Finance, Banking and Financial Services Group, Real Estate Banking Division and Corporate. Its products and services include asset and wealth management, financial markets, capital markets, lending and leasing.

So what: Macquarie is highly reliant on business conditions, which have not been great since 2007/2008. The GFC, Europe and the US have all combined to slam securities markets and slow up business activity. "Normal" conditions that Macquarie experienced for many years prior to the GFC are unlikely to return for some time.

After reviewing the presentation, I got the feeling that Macquarie are hoping for better market conditions to improve their financial performance, and not really focused on adapting to the current conditions. Until the issues in Europe and the US have been resolved, Macquarie appears to be in limbo.

While operating costs have been reduced by 12% from $3,208m down to $2,828m, that's still high, and costs may need to be cut further.

I expect to see similar results from companies such as ASX Limited (ASX: ASX), Computershare Limited (ASX: CPU) and IRESS Market Technology Limited (ASX: IRE) in the coming weeks.

Now what: Unless markets suddenly put their foot to the accelerator pedal, the US and Europe resolve their problems in quick time, I expect Macquarie's share price to drift along around about $25. At current prices, it appears expensive to me, and I won't be touching it.

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Motley Fool contributor Mike King doesn't own shares in Macquarie. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy.

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