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Morningstar | Same Story, Different Day as Macquarie Group Delivers Strong 1H19 Result. FVE Unchanged.

Narrow-moat Macquarie Group delivered another impressive first-half result, throwing some icing on the cake with guidance of a 10% earnings uplift on fiscal-year 2018. Continuing to benefit from a globally diversified business, the commodities and global markets business stood out with a 17% increase in operating income and a 32% increase in net profit contribution over the previous corresponding period, or pcp. Management guided to an interim dividend of AUD 2.15 per share, up on the first half dividend of AUD 2.05. We retain our AUD 130 fair value estimate and at current prices, the stock is fairly valued, trading in our 3-star range.

The capital markets facing businesses were the growth drivers, contributing about AUD 1,106 million for the half year, up 95%. Commodities and global markets was the standout, delivering NPAT of AUD 700 million, up 85%. Macquarie Capital delivered NPAT of AUD 406 million for the half, up 114%. Capital markets earnings are inherently volatile, so we don’t expect these trends to continue, although we do maintain confidence the firm can manage incoming global risks in a prudent manner and keep these businesses on a healthy long-term trajectory.

The annuity-style business also recorded a positive contribution when compared with the pcp. These businesses, which comprise Macquarie Asset Management, corporate and asset finance, or CAF, and banking and financial services contributed about AUD 1,495 million to NPAT, representing about 60% of total NPAT (29%, 17% and 11%, respectively). Within these businesses, only banking and asset finance were up in the first half of the year, owing largely to impressive growth in deposits.

Macquarie Group’s funding and liquidity profile remain strong, supported by a strong balance sheet and diverse funding base. Total customer deposits were up 9% in the half to AUD 52.3 billion, while new-term funding raised in the period was AUD 5.9 billion, including a highly successful AUD 1 billion domestic Additional Tier 1 capital note. The increase in deposit funding allowed a reduction in short-term wholesale funding as a proportion of total funding, down from 7% in March 2018 to 5% now. A lower reliance on short-term wholesale funding is a positive as it is often one of the first sources of funding that can dry up in a global risk off event. We expect the competitive landscape for deposits to intensify in coming years, so deposit growth is likely to slow. We expect a low-to-mid-single-digit rate of growth in the near term.

Macquarie Group’s capital position remains well above regulatory requirements, reflected in a group capital surplus of AUD 3.4 billion and capital ratios well above regulatory requirements. The capital surplus was down from AUD 4.2 billion at March 31, 2018, due to a combination of factors including the fiscal-year 2018 final dividend payment and business growth of AUD 1.5 billion. Macquarie Bank Group’s common equity Tier 1 ratio was 10.4% on an APRA basis or 13.0% on a harmonised basis, both comfortably above the 7.0% Basel III minimum requirement. The leverage ratio was 5.6%, or 6.4% harmonised, again well above the Basel III requirement of 3.0%. Management also announced the end of the share buyback program, believing their excess capital had better spent investing in the business.

The result was also significant from the perspective of key executive changes. Shemara Wikramanayake readies to take over from Nicholas Moore as the group CEO later this month while highly regarded Ben Brazil will depart Macquarie Group, although not before he moves to Chairman of CAF Principal Finance until mid-2019. Brazil’s replacement as Group Head of CAF Principal Finance will be Florian Herold, the current co-Head of CAF Principal Finance in EMEA.