More to come from Macquarie?

Australia's top investment bank on Friday reported a record annual profit net profit of $2.22 billion for the year ended March 31, up 7.46 per cent, on the back of a strong performance by its annuity-style and commodity businesses.

Revenue grew 2 per cent to $10.4 billion whilst costs grew at the same rate to $7.26 billion.

“The year highlighted the strength of Macquarie's global platform, the benefit of recent acquisitions and its ability to adapt to changing conditions," Macquarie chief executive Nicholas Moore said. “The group remains well positioned with a strong and diverse global platform and deep expertise across a range of products and asset classes."

The company increased the dividend payout, announcing a second half final dividend of $2.80 a share, 45 per cent franked, up from the first half's $1.90.

In a ‘first pass’ note to dealers, Bell Potter banking analyst TS Lim noted that bottom-line earnings boosted by a lower effective tax rate of 28 per cent.

“This was a very good outcome regardless with a higher final dividend (given their strong capital position) and Return-on Equity of 15 per cent. The outlook is for 2018 reported net profit to be broadly in line with 2017, so around $2.2 billion. Nothing to complain about.”
 

Key drivers

The investment bank benefited from annuity-style businesses which account for about 70 per cent of the group’s business and includes the asset management, finance, banking and financial services units, which rose by 4 per cent to $3.25 billion. The contribution from the capital markets-facing businesses, including its capital unit and commodities operations, climbed 12 per cent to $1.45 billion.

Macquarie said the key drivers of the result were a substantial lift in other income from $66 million to $1.1 billion, largely due to gains from the sale of investments and businesses such as a part of its holding in Macquarie Atlas Roads and a 5 per cent increase in lease income.

On the downside, net interest and trading income dropped 9 per cent after being hit by lower activity particularly in Asia and there was an 11 per cent fall in fee and commission. Loan impairments and provisions were down 53 per cent to $271 million mainly due to lower exposure to underperforming commodity-related loans

Analysts on average were expecting a net profit of $2.13 billion for the year. As recently as February, the bank had flagged that its profit would be broadly in line with the year before.

CLSA analyst Brian Johnson had one of the more bullish estimates in the market with a net earnings forecast of $2.20 billion as he was convinced that Macquarie is “riddled with growth".

“The annuities businesses differentiate Macquarie from 'vanilla' investment banks. It has a superior staff incentivisation structure and is uniquely leveraged to global policy pivot from monetary policy to fiscal stimulus. Finally, the acquisition of Green Investment Bank in the UK appears to be a cleverly structured low capital intensive source of further medium term growth."

Macquarie’s assets under management at the end of March 2017 stood at $481.7 billion, compared to $478.6 billion for the previous year.

The share price jumped 3.63 per cent to $95.26 in the immediate aftermath of the profit result announcement.

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