Macquarie Group Ltd. (MQG), Australia’s biggest investment bank, posted its first profit growth in three years on cost cuts and higher fund management fees, sparking the biggest share-price gain since 2009.
Profit for the 12 months ended March 31 rose to A$851 million ($873 million) from an eight-year low of A$730 million a year earlier, beating the A$821 million average estimate of 13 analysts surveyed by Bloomberg. Macquarie’s stock jumped as much as 12 percent as the bank increased its dividend and said it expects profit to rise further this financial year.
The gain in profit at the Sydney-based bank follows a global stock market rally and Chief Executive Officer Nicholas Moore’s shift from deal-making and trading to less volatile businesses such as lending and fund management. The bank has reduced costs by measures such as cutting jobs and closing its institutional derivatives businesses, after a slump in fees from share sales and advising on acquisitions.
“As long as financial market activity continues to develop and come off their lows, there should be several years of upside ahead for Macquarie,” said Angus Gluskie, managing director at Sydney-based White Funds Management, which oversees more than $350 million in assets and owns Macquarie shares.
The bank will post a 24 percent increase in net income to A$1.05 billion in the 2014 financial year, according to the average of 13 analyst estimates compiled by Bloomberg.
Macquarie Group jumped 11 percent to close at A$43.11, the highest level since June 2010, after rising as high as AU$43.64. The benchmark S&P/ASX200 index was little changed.
The bank had surplus capital of A$3.4 billion, and announced a final dividend of A$1.25 a share. That took the total dividend for the year to A$2.00 a share, a 79 percent payout ratio, compared with a new target range of 60 percent to 80 percent. Macquarie paid a total of A$1.40 per share in the previous year. Its payout ratio target was previously 50 percent to 60 percent.
“We can’t see any immediate way of using that capital,” Moore said in an interview today. “We hope organic growth will come through and we will see our books grow, and as our books grow we will need capital.”
Fund management contributed the most to Macquarie Group’s profit, posting a 17 percent rise to A$755 million, and its banking unit registered a 22 percent profit rise.
“There is increased potential of more performance and base fees going forward,” said Mark Nathan, a managing partner at Sydney-based Arnhem Investment Management, which doesn’t disclose its holdings. “We have probably seen most of the cost cuts, so they can maintain the momentum if markets continue to improve.”
Fee and commission income from Macquarie Funds rose 15 percent from a year earlier while the group’s total operating expenses fell 10 percent. Macquarie reduced employees by 3.8 percent to 13,663 and cut other operating costs by 16 percent.
Net income in the six months ended March 31 rose 36 percent to A$490 million, Macquarie said in a statement.
The MSCI ACWI Index of global equities, tracking emerging and developed markets, climbed 8.3 percent this year as investors bet that central banks in Japan and Europe will deploy more measures to boost growth and policy makers in the U.S. and China remain willing to increase stimulus if the recovery wanes.
Macquarie Securities, the bank’s equity trading business, reported a net loss of A$50 million for the year, narrowing from A$194 million the previous year. Macquarie Capital, the advisory and underwriting unit, reported a 76 percent rise in profit.
Client activity remains “subdued” due to fragile investor confidence, Macquarie said. In the year to March 31, 2014, Macquarie expects an increase in profit for its trading and investment banking business while the other units will be “broadly in-line.”
Global deal making slipped in the first quarter. Takeovers fell 0.7 percent from a year earlier and 35 percent from the previous quarter to about $480 billion, according to data compiled by Bloomberg.
In Australia, whose 37 percent contribution to Macquarie’s revenue makes it the bank’s largest market, mergers and acquisitions are headed for a third year of declines, the data show. Equity offerings in Australia and New Zealand last year dropped to their lowest level since at least 2004, according to the data.
The group’s profit rise follows similar increases from global competitors. Goldman Sachs Group Inc. (GS:US) on April 16 said first-quarter revenue from investment banking climbed 36 percent. Nomura Holdings Inc. (8604) said last week that quarterly profit more than tripled to the highest in seven years as investment banking fees and brokerage commissions surged.
Macquarie’s return on equity, a measure of how effectively the bank invests shareholder funds, recovered from a record low to 7.8 percent, still about half the return delivered by Australia’s largest commercial banks.
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