Macquarie Group Ltd guides for increased profit in 2016: Should you buy?

Investment bank Macquarie Group Ltd (ASX: MQG) released its quarterly operating update to the market this morning confirming that all was well and it is on track to deliver a Financial Year 2016 (FY16) profit result that was up on last year’s results.

Performance in several segments cooled a little, with the annuity-style businesses Macquarie Asset Management, Corporate and Asset Finance, and Banking and Financial Services reporting a result that was down on the September 2015 quarter, but up on the December 2014 quarter.

Capital Markets businesses Macquarie Securities, Macquarie Capital, and Commodities and Financial Markets experienced lower profit in the current quarter compared to September 2015 as a result of fees from the Freeport LNG transaction received in December. However, this segment’s results were still up on the December 2014 quarter.

Macquarie remains well capitalised with a Common Equity Tier 1 (CET1) loss-absorbing capital ratio of 9.9%, above the regulatory minimum of 8%. Potentially the bank would have to increase its capital somewhat if APRA increases the regulatory minimum to 10% as is widely expected to happen. Management has also flagged additional capital raisings in the future as and when Macquarie makes further acquisitions.

At this stage – subject to currency movements, market conditions and a variety of other factors – Macquarie expects to report a full-year 2016 profit that is up on 2015’s result. Additionally, Macquarie’s second half results should come in below the first half of 2016 ($1.07bn), but above the prior corresponding period in 2015 ($0.926bn). As a result, Macquarie investors could expect profits to be around $2bn for the full year 2016, if not more.

This represents a roughly 25% increase compared to 2015’s $1.6bn Net Profit After Tax (NPAT).

Shares in Macquarie have dropped heavily in the past month as a result of investor pessimism over a variety of factors. Falling markets reduce Macquarie’s funds under management and thus performance fees, while local fears about a falling property market, weakening commodity prices, rising bad debts and so on are also having an impact.

However, further slides in its share price are likely going to get the bargain hunters interested.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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