Record profits at Macquarie unlikely to be repeated, says Morningstar
Equity analyst Nathan Zaia has doubts about the sustainability of high-profit levels.
Mentioned: Macquarie Group Ltd (MQG)
Australia’s fifth-largest bank delivered another record profit on Friday, but Morningstar analysts warn it’s unlikely to be repeated anytime soon.
In a research note, equity analyst Nathan Zaia said Macquarie (ASX: MQG) benefited from a record number of transactions through fiscal-2022, as well as banking large gains from the partial sale of its industrial and commercial UK Meters portfolio.
The investment bank also gained amid the uncertainty and volatility in global markets with the commodities and global markets division benefiting from strong hedging and trading activity, particularly from oil, gas and precious metals markets.
However, Zaia said the strong pipelines of asset sales highlighted by the bank for fiscal-2023 are unlikely to match last year’s spectacular results.
“We expect narrow-moat Macquarie to continue to generate strong returns on investments, grow its assets under managements, and customer base,” he says.
“We think earnings could ease from current levels before returning to growth in fiscal 2024, but not reaching fiscal 2022 level until fiscal 2027.
He adds that market conditions will be trickier for Macquarie in the coming year citing geopolitical uncertainty, high inflation and rates rising.
“We are cautious demand for services in commodities and global markets could fluctuate materially (currently very high), and current profits being made on asset sales could ease as funding costs for buyers rise.”
Record year
Macquarie wowed the market on Friday, reporting a 56% jump in net profit to $4.7 billion and beating Morningstar estimates by around 20%.
Zaia attributed the significant profit uplift to the group’s market activity-based divisions ‘commodities and global markets’ and ‘Macquarie Capital’. Hawkish central banks, turbulent commodity prices and geopolitical tensions created a perfect storm to lift hedging and trading activity, largely benefiting the division.
Macquarie Capital also benefited from an increase in merger and acquisition activity globally, advising and providing credit financing on several large deals.
The steadier earners, asset management and banking and financial services, are performing well and largely as Morningstar analysts expected. Banking and financial services profit was up 30% on last year, with 34% home loan growth and 13% business loan growth.
Assets under management now stand at $773 billion, up $211 billion over the year, with around 70% of uplift attributed to the acquisition of US asset manager Weddell & Reed.
Macquarie declared a final dividend of $3.50 per share (40% franked) which takes full-year dividends to $6.22 (40% franked) on a 50% payout ratio.
Profit warning
Chief executive Shemara Wikramanayake struck a cautious tone in her outlook, warning that the macroeconomic and geopolitical environment was difficult to navigate.
Investors took the signal as an opportunity to take profits off the table, sending shares down 8% by mid-session on Friday. Shares remain 10% above Morningstar’s fair value estimate, last trading at $179.
Ahead, Zaia believes Macquarie's businesses are well placed to capitalise on growth in global infrastructure and renewable energy investment over the next five years. He also expects the group's expertise in infrastructure and green energy to remain key pillars of earnings growth.
“An inflationary environment is good for the former, and the latter enjoys a structural tailwind as developed economies focus on transitioning to cleaner energy,” he says.
In M&A, Macquarie is guiding to transaction activity being down in fiscal 2023, but projects a solid pipeline of asset sales.
PwC’s global M&A industry trends outlook report argued increased M&A activity in 2021 was due to pent-up deal-making demand. It expects deal making to slow in 2022 as the market cools.
Zaia forecasts a 5% profit decline on less activity and lower asset realisation gains but anticipates earnings will be back at fiscal 2022 levels by fiscal 2026.
In banking and financial services, Zaia applauds the group’s increased investment in technology and headcount to handle loan volume growth. He anticipates margin pressure to remain a feature of the division but says the rising interest rate environment will alleviate some of the strain.
“Quick and consistent application approval times on the back of digital investments have been key to these solid results and we expect Macquarie to continue to take market share,” he says.
“Margin pressure is expected to continue from the competition, but the bank should begin to see some benefit from a rising rate environment as the spread between its lending rates and customer deposit rates widen.”