Christmas has come early for the bank’s shareholders with the decision to slightly increase the 2024 dividend – despite a single-digit decline in the net profit and cash earnings.
Beating the market benchmark is never easy, with 72 per cent of Australian actively managed global equity general funds trailing the S&P World Index in the six months to June 30, 2024. Domestic equity funds performed slightly better, albeit against a significantly lower bar set by the S&P/ASX 200 Index.
Macquarie posts large profit, performance fees jump
Macquarie Group has announced a $2.3 billion net profit for the half-year ended September 30, up 13 per cent on the same period last year, after enjoying an income boost from its commodities and asset management arms, including a jump in performance fees despite a big drop in asset markets.
Analysts say Macquarie, which reported an 11 per cent rise in net operating income to $8.6 billion, can continue to grow its performance fees revenue and profits even if share and bond markets fall. The company’s commodities and global markets division earned almost $2 billion in profit, up 15 per cent, helped by higher commodity prices, increased risk management revenue, and increased foreign exchange, interest rate, and credit products income from greater client hedging and financing activity.
Macquarie’s banking and financial services business posted a 20 per cent rise in profit to $580 million, reflecting growth in the loan portfolio and bank deposits, improved margins, and lower credit impairment charges. Macquarie Asset Management raked in a $1.4 billion profit, up 28 per cent on the previous corresponding period and helped on by greater income in the green energy sector and increased performance fees from its private markets managed funds.
Rise in performance fees
While base fees and other asset management fees fell to $1.59 billion in the first half of 2022-2023 from $1.67 billion in second-half 2021-2022, performance fees jumped 9 per cent to $237 million from $217 million in that time. The performance fee total was 33 per cent higher than first-half 2021-2022’s total of $177 million.
Macquarie says performance fees are earned from its managed funds and assets “that have outperformed predefined benchmarks”. Fees this half came from a range of funds including Macquarie Infrastructure Partners III, Macquarie European Infrastructure Fund 4 and other private markets-managed funds and managed accounts.
Base fees alone from Macquarie’s funds management activities amounted to $1.39 billion for the September half, up 1 per cent from $1.37 billion in the prior corresponding period. The increase was mainly generated by fundraising and investments made by private markets-managed funds and mandates, offset by factors including negative market movements and outflows in public investments equity funds.
Morgan Stanley expects performance fees to keep sustaining Macquarie’s profits in the years ahead.
“A multiyear performance fee harvest and recovery in gains on sale support earnings recovery in fiscal year 2024 and 2025,” the investment bank said in a research note. “Macquarie also benefits from short-term price volatility in energy markets.” Morgan Stanley has a $215 price target on the stock.
In a statement announcing the half-year results, Macquarie Group managing director and chief executive officer Shemara Wikramanayake said the business performed well against a backdrop of challenging market conditions, “reflecting the diversity of our activities and ongoing focus on prudent risk management”.
Analysts rate Macquarie a buy
Reflecting the strength of its business, many brokers view Macquarie favourably. Analysts have an average price target on the group of $194 compared to its market price around $170.
Nathan Zaia, senior equity analyst at Morningstar, says Macquarie is a more robust business now than it was at the start of the global financial crisis (GFC), with much more diversified earnings.
“Before the GFC, investment banking made up over 60 per cent of earnings, as opposed to around 50 per cent now despite a bumper result for the market-facing divisions in the first half,” Zaia says. “Banking and wealth earnings have doubled, and success in growing the asset management business via acquisition and focus on infrastructure has seen the group become far less capital intensive.”
Like Morgan Stanley, Zaia thinks Macquarie can continue to keep reaping good performance fee income.
“First, Macquarie is likely holding assets within its funds with unlocked value – in other words, [they] have risen in value but not been marked to market,” he says. “Second, Macquarie has an excellent track record of developing assets to make them more profitable, and as a result, adding value.” Zaia, who says Macquarie is fairly valued at $175, attributes a narrow ‘economic moat’ to the group.
“The large publicly traded asset managers we cover tend to have economic moats, benefiting from switching costs and intangible assets,” Zaia says.
“Although the switching costs might not be explicitly large, the benefits of switching from one asset manager to another are at times so uncertain that many investors take the path of least resistance and stay where they are,” he adds. “As a result, money that flows into asset management firms on the back of investment track record tends to stay there.”
Morgans also likes Macquarie, with a $214 target price. The broker says the company’s first-half result for 2022-23 is “a solid, clean performance, with the company again finding a way to better market expectations, highlighting the strength of the franchise.”
