Pedestrians are reflected in a window in front of a board displaying stock prices at the Australian Securities Exchange (ASX) in Sydney, Australia, February 9, 2018. REUTERS/David Gray - RC19ABB37760
There’s not much for Macquarie (MQG.AX) shareholders to complain about. The Australian financial supermarket on Friday reported a record annual profit for the year to March 31 of A$3 billion ($2.3 billion), an impressive feat during a pandemic. It reinforces the impression that Chief Executive Shemara Wikramanayake runs a tight ship. The premium being paid for her performance, however, looks overdone.
The A$57 billion bank is well-balanced. It owns the country’s fifth-largest retail lender, whose deposits grew 26% over the latest financial year. Although the trading business was flattered by U.S. energy price hikes caused by the Texas winter storm in February, its investment banking business performed well overall.
Macquarie also houses inside its money-management business the world’s largest collection of infrastructure funds, with just shy of A$200 billion of assets. The unit generates solid returns and is well-placed to take advantage of the rise in projects needing capital around the world, including in renewable energy.
All this diverse geographical and operational success comes at a hefty price. The shares trade at about 2.6 times estimated book value for the next 12 months, per Refinitiv. Yet Macquarie generated a return on equity of just over 14%, around where it has averaged for more than a decade. Assume a cost of capital of 10%, the typical rule of thumb for banks, and any multiple beyond 1.4 times demands justification.
The strength and stability of the franchise deserves consideration. So does its dividend policy. Despite paying out only 60% of earnings for the second half of its financial year, its upper annual limit of 80% exceeds that of domestic commercial-banking rivals including Westpac (WBC.AX) and ANZ (ANZ.AX).
There are also risks to consider, though. Trading stocks, bonds and commodities is inherently volatile and even the best-managed investment banks slip up. That’s one reason why well-regarded Goldman Sachs (GS.N) trades at 1.6 times book value against an annualised return on equity of 31% in the first quarter.
Macquarie has been more consistent with its profitability, making a valuation of, say, 2 times book value a reasonable proposition. As things stand, Wikramanayake will struggle to live up to the market’s exuberant expectations.
Follow @AntonyMCurrie on Twitter
CONTEXT NEWS
- Macquarie on May 7 reported an 11% rise in annual profit to a record A$3 billion ($2.3 billion) for its financial year ending March 31.
- The Australian bank’s results were slightly above the mean estimate of analysts compiled by Refinitiv. Revenue rose 4% to A$12.8 billion.
- Return on equity was 14.3%, slightly below the previous year’s showing.
- Macquarie increased its dividend for the year to A$3.35 a share from A$1.80 a share.
- The bank also said it is committing to reaching net zero emissions within its operations by 2025 and for its financing activities by 2050. The bank will set science-based emissions targets as part of its push.
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Macquarie will struggle to match market exuberance - Reuters
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