Steady As She Goes

Macquarie Group recently held its AGM where the company reaffirmed its guidance for the FY18 result to be “broadly in line” with FY17. This guidance remains within reach of consensus forecasts, which currently factor in single-digit percentage growth. We maintain our Hold recommendation.

 

For Macquarie Asset Management (MAM), we expect the maturity of its unlisted funds – Macquarie European Infrastructure Fund 2 (MEIF2) at €4.6 billion and Macquarie Infrastructure Partners (MIP) at US$4 billion – will see base fees stall and provide limited opportunities for performance fees given that the funds were raised in 2006. This is consistent with commentary from the AGM, where management noted that in the first quarter of FY18, “base fees in MAM broadly in line, performance fees down on pcp”.

 

Offsetting these pressures, however, we expect Macquarie will sustain relatively high levels of asset realisations over coming periods given current market valuations of some of its assets, which should allow it to realise gains across its portfolio and which would be supportive for transaction fees.

 

In July, the Australian Prudential Regulation Authority announced changes to its capital settings. Unlike some of its peers, Macquarie can already meet these higher requirements, with a common equity tier-one ratio at June 2017 of 10.9% versus a regulatory minimum of 7.0%. Also, we do not expect the federal government’s major bank levy to pose a material headwind to bank earnings.

 

We expect the major banks will reprice for the levy, albeit not explicitly, which should provide Macquarie an opportunity to reprice in sympathy, allowing it to recoup a portion of this, at least in the long run.

 

Given the significant operating leverage in Macquarie – the company runs at a cost-to-income ratio of 70% – a 1.0 percentage point move in the compensation ratio drives a 3% move in earnings.

 

With respect to US corporate tax rates, each 5.0 percentage point reduction would result in a 2.0% uplift to Macquarie group earnings. In terms of quantum, media reports indicate that the Trump administration is looking to lower the corporate rate by 20 percentage points, from 35% to 15%.

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