Shares in asset manager and investment bank Macquarie Group Ltd (ASX: MQG) hit a record high of $110.95 this morning after it handed in its results for the financial year ending March 31, 2018.
Below is a summary of the results, with comparisons to relevant corresponding periods (pcp).
- Financial year (FY) 2018 net profit of $2.557 billion, up 15% on FY 2017
- Net profit of $1.309 billion for six months ending March 31 2018, up 5% on first half and 12% on pcp
- Full year earnings per share of $7.58, up 15% on financial year 2017
- Final dividend per share of $3.20 (45% franked), total full year dividends $5.25, up from $4.70 in FY 2017
- Return on equity 16.8%, up from 15.2% in FY 2017
- Net operating income up 5% to $10.92 billion
- FY 2018 operating expenses up 3% to $7.456 billion
- Assets under management up 3% to $496.7 billion
- Around 67% of total income earned overseas
- Completed the £2.3 billion acquisition of the Green Investment Bank
Recently the group restructured its fee-earning operating divisions with the three operating divisions of Macquarie Asset Management, Banking and Financial Services, and Corporate & Asset Finance under its annuity-style grouping.
While the capital-markets facing business has now been bundled together into two operating entities of Commodities and Global Markets and Macquarie Capital.
The annuity-style asset management and banking services businesses now represent around 70% of total income, with Macquarie Asset Management remaining the core performance driver due to its sheer scale as much as anything else. It represents around a third of group earnings alone, with its net profit contribution up 10% on FY 2017 to $1.685 billion.
Its Corporate and Asset Finance business delivered a flat result, with net profit up 1% to $1.206 billion. This is quite an opaque operation involved in asset leasing, lending, investing and trading across complex financial security classes.
The vanilla banking services business (i.e. credit card / home loan / business lending and deposit taking) still only represents around 11% of group profit, but is growing reasonably well in its core Australian market,.
As I expected it was the return to form of the group's capital-markets facing divisions that have boosted the result over the six months to March 31 2018. This period saw a return to volatility across financial markets, after most of 2017 went down as one of the most eerily calm years for markets in modern history.
Macquarie's Commodities and Global Markets business is essentially its sell side brokerage, research and proprietary trading business that is highly leveraged to trading volumes and investor confidence or activity. While its Macquarie Capital business is essentially its investment-banking advisory business covering M&A, IPOs and debt capital market advisory work. It also benefits from increased investor confidence.
In total the capital-markets businesses grew net profit to $1.042 billion for the six months ending March 31 2018, up 83% on the first half and up 37% on the pcp.
It also noted that every 10% movement in the Australian dollar has a 7% effect on net profit, which means investors are likely to mark the share price higher or lower in line with the local dollar.
Outlook
Looking ahead the group forecast FY 2019 profit to be in roughly "in line" with FY 2018 at the same time as flagging the usual caveats that the result will be heavily dependent on unknown market conditions over the 12 months ahead.
As such, the returns of today's investors buying the stock at $109.50 on 14.4x trailing earnings will be heavily dependent on the general strength of markets over the short-term at least.
The group does offer a healthy yield of 4.8% plus some franking credits, with the payout ratio of 70% meaning the group has capital left over to invest for growth.
Over the long-term then I expect Macquarie will continue to outperform the market thanks to its adaptability and the healthy alignment of staff's interests with the performance of the group. Macquarie does not generally carry passengers, unlike other financial services rivals such as AMP Limited (ASX: AMP) or Perpetual Limited (ASX: PPT), which means it remains a preferred pick of mine in the financial services space.
