Macquarie posts first profit fall in 17 years

Macquarie Group is forced to make big asset write-downs and raises $396 million from a sale of new shares.

Macquarie Group, Australia's biggest investment bank, reported a 64% fall in second-half profit on May 1 as it was forced to make large asset write-downs. Return-on-equity was 9.9% for the year, down from 23.7% for the prior year. It then announced and completed a A$540 million ($396 million) share placement in order to strengthen its balance sheet.

The drop in net income to A$267 million in the six months ending March 31, from A$743 million in the same period a year ago, was in line with analysts' expectations, but the 52% drop in full-year profit to A$871 million marked the first decline in 17 years. The bank had warned in February that full-year profit would halve to about A$900 million. Macquarie cut total dividends for the year by 46% to A$1.85 a share; 40 cents will be paid out for the second half of the year.

Macquarie said it had experienced significant volatility and continued market declines in the second half, particularly in November and in February.

"While there were some early signs of markets stabilising in March and April, significant uncertainties remain and it is still too early to make any judgments on sustained market improvements," Macquarie chief executive Nicholas Moore said in a statement.

Asset write-downs amounted to A$2.5 billion -- higher than the A$2 billion the group forecast in February. But Moore, who was appointed CEO in May 2008, was upbeat.

"This result...shows the group's resilience and adaptability. Macquarie's full-year profit was achieved despite substantial write-downs, much of which are provisions related to strategic long-term investments in Macquarie-managed funds which align Macquarie's interests with those of other fund investors," he said in the Friday statement.

Macquarie is famous for a pioneering business model that has led to booming profits and tidy bonuses for its senior employees, and is dubbed in Sydney as the "millionaires' factory". Often using borrowed money, the group buys infrastructure assets, such as toll roads, water companies and airports, then puts them into funds that in the past have earned the bank hefty transaction and management fees, which some analysts believe are opaque.

In April 2008, New York-based corporate governance service RiskMetrics Group slammed Macquarie's financially engineered infrastructure model for its high debt levels and exorbitant base fees, for paying distributions out of capital rather than cash flow, overpaying for assets amid related-party transactions, and for booking profits from revaluations.

But Macquarie also has its fans. J.P. Morgan published a long piece last November, saying that it couldn't find a single case where Macquarie over-paid for assets. Furthermore, the analysts argued that the Macquarie funds have separate governance structures and often reject assets presented by Macquarie.

In recent months, as asset values have fallen and refinancing risks for highly leveraged activities have risen, Macquarie spokespeople have been keen to downplay this once defining aspect of the group's business, and have instead focused on more traditional investment banking operations.

This was further emphasised in the comments by the group's chief financial officer, Greg Ward, on Friday. He pointed to the "sound demand for Macquarie's services and products across a wide range of markets and geographies. For instance, Macquarie Capital advised on 299 deals valued at A$203 billion over the year, compared with 304 deals valued at A$199 billion the prior year".

Moore added that a significant portion of profit today comes from businesses that have been developed over the past five years. "In the year to March 31, 2009, 40% of operating income came from businesses that did not exist in 2004. At the same time as we evolved new businesses, we exited those that were no longer profitable in the short and medium term." In particular, he stressed the contribution of the capital markets and securities divisions, even though profit at the latter fell 77% compared with the previous year.

Macquarie reported losses of A$1.47 billion on its real estate, funds management assets and equity co-investments. It also lost A$496 million on loans, A$326 million on trading positions and took a big hit on the sale of its Italian mortgage business.

The new share issue, which was placed with institutional investors after a bookbuild on Friday, was priced at a 19.4% discount to Thursday's closing price of A$33.48 (the shares were suspended from trading on Friday) and at a 13.2% discount to the five-day volume-weighted average price (VWAP). Macquarie sold 20 million new ordinary shares at A$27 each. In addition, it apparently plans to raise about A$500 million in a placement to cover staff bonuses and between A$100 million and A$200 million from a share purchase plan for ordinary investors.

Ward said in a separate statement that the vast majority of the bank's institutional shareholders participated in the placement, but the offering also received strong support from new investors -- both local and international -- and was "significantly oversubscribed".

The offering comes just two months after the bank said it didn't have current plans to raise fresh funds. Macquarie's share price has almost doubled in value since then -- although it is down about 66% from its May 2007 peak.

Macquarie currently has capital of A$10.2 billion, A$3.1 billion more than its regulatory requirement. And the group believes it will have A$4.1 billion of funds in excess of its minimum capital requirements when all its capital raising measures are completed. Meanwhile, it has cash and liquid assets of A$30.3 billion, and only A$7.7 billion of short-term wholesale securities. It has raised A$21.5 billion of funding since March 2008 and increased deposits to A$18.8 billion, it said in Friday's statement.

"Our strong funding and balance sheet position was further strengthened in the second half, with an increase in cash and liquid assets, term funding and strong growth in deposits," said Moore.

¬ Haymarket Media Limited. All rights reserved.