Macquarie Group Ltd reports: Are the shares a bargain?

This morning investment bank Macquarie Group Ltd (ASX: MQG) posted a net profit of $2.063 billion on revenues of $10.35 billion for the full year ending 31 March 2016. The profit and revenue were up 29% and 9% over the prior corresponding year.

The profit for the six months ending March 31 2016 was down 7% on the first half of the financial year, which is a result that reflects a stronger Australian dollar, lower trading activity, and an uptick in impairments. All of these factors are symptoms of a second half of the financial year dominated by worries over rising US interest rates, currency wars, commodity price falls, and China’s slowdown.

Macquarie’s main earnings driver remains its asset management division that contributed a net profit of $1.64 billion, up 13% over the prior year. The group’s Corporate and Asset Finance business delivered a net profit up 2% over the prior year, while its Banking and Financial Services business posted a profit up 23% over the prior year.

The group’s capital markets facing businesses delivered a combined net profit down 3% on the prior financial year, as the macro outlook darkened as the financial year progressed. The bank’s commodities business was forced to impair a number of loans, while subdued credit and debt capital markets also impacted fee income.

Macquarie Capital and Macquarie Securities both delivered significant profit growth and both continue to enjoy moderate competitive advantages due to the bank’s strong reputation. This is especially true in Australia for example where Macquarie is a big fish in a small investment banking pond able to consistently win capital markets advisory work.

Outside Australia, Macquarie tends to focus on more niche areas in capital markets work to support its competitive advantages as it faces far stronger competition from big-hitting US and European investment banks on their home turf.

The group has a reputation for adaptability as it continues to seek more asset management linked annuity-style earnings in today’s low growth world where central banks commonly maintain interest rates close to zero.

The bank posted $6.19 in earnings per share for the full year with a forecast for FY17 to be roughly in line with the current year. That means it currently trades on just 10.5x earnings when selling for $65.19 this morning.

The full year dividend of $4 also represents a partially franked yield of 6.1%, which should make the business attractive to both growth and income investors.

I would prefer the strong internal culture, overseas exposure, and adaptable nature of Macquarie over the domestically focused, residential property leveraged major banks like Commonwealth Bank of Australia (ASX: CBA) or Westpac Banking Corp (ASX: WBC).

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Motley Fool contributor Tom Richardson owns shares of Macquarie Group Limited.

You can find Tom on Twitter @tommyr345

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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