Thanks in part to fat fees from those captive funds and betting its own
capital and trading prowess, Macquarie Bank did very nicely thank You.
And there’s bonuses to come on Friday for staff.
Macquarie Bank did well in the year to March thanks to all those nice
fat fees and trading income, but there’s a suspicion from comments on
the outlook, that it will be harder to back up again this year.

But the Macca Bank millionaires have surprised in the past in toughish
times. Nevertheless the conservative tone of some of the comments
suggests even the optimists among Al Moss’s gang are wondering about
the coming year and what it will bring.

Events since balance date would justify the more conservative approach.
The Aussie dollar’s dropping sharply, share markets are in some
confusion, oil prices surging and bond prices bombing, especially in
emerging markets.

Investors didn’t like the tone of the outlook, selling the bank off sharply, down three per cent at one stage.

But despite these concerns, all attention in Macquarie is now on the
end of this week. Friday is really on their mindst. Profit today, a
nice dividend stream to shareholders and then its bonus day on Friday
when everyone at Macquarie gets to know their share of the carve-up.

And a few more, no a lot more millionaires will be created or made even
richer. Will it be enough to halt the drop in Mosman and Eastern
Suburbs home prices in Sydney? Sadly no. Even Macquarie itself is
sanguine about the housing market, but doesn’t expect a repeat of
previous collapses.

Then the next thing to watch for is whether there’s a host of walkings
as talent leave for a spot of ‘gardening leave’ on the way to somewhere
else for even more money, but with bonus cheque banked. It’s a yearly
ritual now in investment banking in Australia.

But the latest result, a 48 per cent rise to $494 million, was pretty
good. But to put it in some context, on an annual basis, St George will
do better but with a different asset base to work with. Macquarie is
one very rich trading machine and last year was the ideal sort of
context for such a bank.

The key figure for Macquarie is top line income. Underneath this it has
so many tax-driven investments and other deals going that nailing down
an accurate idea of just how profitable things are is a bit hard.

So what happened? Total income increased 30% to $2.38 billion, with
over half of that coming from net fee and commission income of $1.318
billion. Trading income rose faster in percentage terms, 40 per cent to
$562 million, interest income up 11 per cent to $304 million and other
income surged from $42 million to $196 million.

It’s clear all those public and unlisted funds that have sprouted from
Macquarie here and overseas underpin much of its growth. Fee and
Commission income is generated from doing business on behalf of the
funds where there are management arrangements, as well as performance
payments when the funds do well.

In the benign markets of the past year (so far as risk was concerned) Macquarie was minting money every where it looked.

So much so that capital was consumed during the year which is another
intriguing point. Tier One capital fell from around 19 per cent to just
over 16 per cent and its eased since balance date to around 13.2 per
cent or so because of post-balance date deals, according to the
briefings. That’s comfortably above the minimum required by regulators
and still makes Macquarie better capitalised than the trading banks.

But they are different animals and the drop in capital is an indication
of how hard Macquarie worked its assets and capital during what must
have been one of the best trading years for a while.

That won’t be repeated this year so the bank will be more conservative as the year goes on.

Equities boomed, as did commodities (but not sugar, the bank points
out). Bonds were mixed, currencies strong, then weak which can make for
good trading opportunities. But not if you are NAB forex options
dealers. And interest costs were low, allowing Macquarie to finance
much of the growth in its balance sheet more cheaply, as its US peers
have done.

Macquarie does say the surge in fees and commission income, its biggest
area of income, was due to higher performance fees from Macquarie
Infrastructure, Macquarie Communications and “direct investment funds”
while the 16% growth in base fees was thanks to ‘Macquarie Airports and
Macquarie Infrastructure fees’. (No mention in the directors comments
about the Westfield move to collapse its trusts into one entity with a
stapled security).

And surprisingly for the Millionaire’s Factory, costs were sort of
controlled, the cost to income ratio falling to 71.2% cent from almost
75%. Well, sort of, that was a function of the surge in income. Total
costs rose 25.8 per cent to $1.695 billion, including a faster, 27.7%
rise in staff costs to $1.235 billion. So why the gloomier outlook?
Well there’s much mention of how markets are changing adversely.

Macquarie says its well placed (it couldn’t say anything else, could
it?), there’s all the usual comment about its spread of risks, good
people and investments, but this phrase stands out “Repeating the
result will be challenging”

“The environment over the next 12 months may not be as favourable
particularly because of international markets and especially
international equity markets.”

In other words the Maccas say the good times are over and its time to knuckle down.

So don’t be too surprised if there are a spate of stories about some
high fliers leaving after bonuses are paid this week. That may be the
smartest thing some of them can do.

Peter Fray

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