Did Macquarie Bank actually make a profit in the year to March, or did it make a profit large enough to avoid suspending the dividend, therefore allowing it to raise half a billion or more in capital at the same time?
Big questions, and they all centre around Macquarie’s miniscule tax rate of 1.7% for the full year.
In dollar terms, just $A15 million was paid in tax, compared with $317 million the previous year (an effective rate of around 15%). It was an amazing figure — the $15 million tax liability incurred in the corporate area was odd in that there was nothing else generating taxable profits (it wasn’t in 2008 either, the $317 million in that year was payable in corporate tax).
Macquarie’s risible tax rate contrasts with the 28.1%, $748 million payment by the ANZ, and 24.7% from the NAB, or $725 million. It seems our Government guarantee of bank deposits has done the right thing by the likes of the NAB and the ANZ in keeping tax-paying corporates in business, but Macquarie?
If it hadn’t been for the fees Macquarie is paying the Federal Government to access the country’s triple-A credit rating (it is a single A), the Australian taxpayer would be getting hardly anything back from keeping Macquarie alive. The guarantee has also meant that any volatility caused by speculation about Macquarie (which could destabilise our markets) has been kept to a minimum.
The shorting ban has also helped Macquarie remain stable. Judging by the commentary and spin in the wake of Friday’s meeting, many in the media and most analysts are now back on board the Macquarie growth train: there was lots of talk about war chests, especially after the $520 million capital raising and then yesterday’s recovery in the share price.
But looking at the profit report and the way some analysts took it apart, it is clear this was a tax-driven, very poor quality profit and one that regulators, led by APRA, have signed off on, hoping that it doesn’t rebound.
We taxpayers are effectively keeping alive a bank that practices active tax minimisation. Nothing wrong in that, but not the best of signals to be sending to the greater populace in these times of high national debt and deficits.
The $871 million in low-taxed earnings was mostly due to trading profits (where the bank risks its own capital): the stand-out entry in all the lines of figures was the 42% rise in “Earnings on capital and other corporate items” to $972 million from $684 million.
Goldman Sachs JBWere described Macquarie as not an investment “for the faint-hearted”. It pointed out that “despite being broadly in line with consensus expectations, composition was also weaker than expectations with one-off gains ($197m financing gain in MIPS and $274m unrealised gain on sub-debt), an effective tax rate of 1.7% and higher than expected writedowns.”
That’s a total of $471 million, out of a profit of $871 million — the result of one-off deals or transactions, not recurring earnings, or not large one off profits from deals. The bank bought back debt in Europe in March which was trading well under 50 cents in the dollar. Macquarie paid around 50 cents in the dollar. That is accounting profit, not operating profit.
Now, if the bank had not been able to access the one-off gains of $471 million — and we believe the other $400 million (from the stated profit of $871 million) tax at 15% (the 2008 rate) would have cut that to $340 million — would APRA have allowed Macquarie to pay a final dividend with the profit so low (net earnings were $1.8 billion a year earlier), or would it have forced Macquarie to suspend dividend and raise new capital, which would have seen a far bigger issue at a much digger discount?
Who knows, but Macquarie’s profit of $871 million suited the bank, APRA and other regulators: it was sufficiently close to guidance to be half convincing, and it allowed the bank to raise capital at a reasonable discount, without creating any tremors.
If that $871 million profit had been close to the 30% rate that grown-up companies pay, Macquarie would have contributed around $260 million to the Federal coffers. Instead it was a miserable $15 — low enough not to cripple the bank.
The bank cut its dividend, but it will still chew up a total of more than $505 million of the profit (the 20 million shares issued at $27 also each get the final dividend, another reason why the bank needed as high a profit figure as possible. The issue was really a bribe to fund managers to get back on board the Macquarie train).
And finally, there’s an amazing coincidence between the Macquarie result (at a crucial time for the bank) and a crucial result from Goldman Sachs. It was only last December that America’s biggest investment bank was struggling, having to report its first quarterly loss in years. Buried in its 4th quarter figures was a tax rate of just 1%, or $14 million US dollars worldwide.
Ain’t that amazing? No direct link or anything else, but imagine two of the world’s premier investment banks having tax payments at difficult times, a million bucks or so apart. Of course, Goldman Sachs’ was for a quarter and Macquarie was for a full year, but you know all about great minds thinking alike, especially when it comes to tax planning.
We must also remember that Goldman Sachs is responsible for that accounting breakthrough called the orphan month, AKA the month of December 2008.
Because Goldman Sachs became a regulated bank it went to calendar-based financial years, from 2009. That meant December and that very nasty $US1.2 billion in losses (Gee, you’d have to reckon the financial wizards marked everything down and loaded into poor old December), appears in none of Goldman’s income statements.
Now, it’s impossible for Macquarie to do that because it already has a financial year (April-March) that Westpac, NAB, ANZ and Bank of Queensland share, so no ‘orphan quarters’ for the lads at Macquarie.
But it’s a thought, isn’t it?