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Macquarie sets its sights for improved performance

Macquarie (ASX: MQG) has released a trading update for the 2014 year. Here’s what investors need to know.

Funds group: This division has over $379 billion of assets under management and is the largest contributor to overall operating profit. Income from this division is essentially annuity-based and can be regarded as relatively stable. A recent agreement to acquire ING Investment Management Korea (which has $24 billion under management) is progressing and Macquarie has a significant presence in the North Asian region.

Since the GFC, Macquarie has become the world’s largest alternative asset manager and maintains its reputation as a highly skilled infrastructure manager. This division looks set to continue on a strong growth path.

Corporate and asset finance: Indications are this division will at least match the 2013 performance. The current asset and loan portfolio is in excess of $24.3 billion. Finance and asset management services are involved in the healthcare, energy, aircraft, technology companies, rail, equipment and manufacturing sectors worldwide. Also included in this division is a corporate and real estate lending segment.

Banking and financial services: This division includes retail deposits (now $32 billion+), financial advice, mortgages, insurance, relationship banking, stockbroking and extensive platform services. Macquarie is now the largest Australian full-service stockbroker. Results here are expected to be at least steady through 2013.

Securities group: Catering to institutional investors, this group has a high quality reputation in Asia, Europe and the US for its research into Australian equities. Its other specialties include international financial institutions, resources and utilities.

Capital group: This division operates globally in mergers and acquisitions, capital markets and principal investment. While it has suffered since the GFC, there are now definite signs that merger and acquisitions activity in particular is picking up. Should this occur, it will be a bonus.

Fixed income, currencies and commodities: This division operates a portfolio of businesses across commodity and financial markets. Key specialties include commodities, emerging markets and distressed debt. Macquarie is now the fourth largest physical gas marketer in North America. Resources-related equity markets are still difficult, though any volatility in resource and foreign exchange markets tends to help this division. Its 2014 results are expected to be steady, allowing for some impairment charges.

Macquarie remains in a strong position financially with a conservative balance sheet and a positive medium-term outlook. A program to rationalise business units and costs has been undertaken over the past two years. Term assets are funded by term liabilities and liquidity controls ensure obligations can be met if there is no access to funding markets over a 12-month period. Surplus capital is sufficient to meet any likely APRA or Basel requirements.

Foolish takeaway

With a positive growth outlook, Macquarie is one of the better placed financials listed on the ASX. Over 60% of its income is derived offshore, giving exposure to economies at different points of the cycle than Australia. As usual, Macquarie was coy about projecting 2014 earnings, however I would estimate that income growth in the high teens is obtainable. A 15% increase would indicate a forward price earnings ratio of 18 – not onerous given the medium-term outlook for this company.

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Motley Fool contributor Peter Andersen owns shares in Macquarie Group.

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