Sydney, 14 November 2006
Macquarie Bank today announced a $A730 million profit after tax attributable to ordinary shareholders for the half year ended 30 September 2006, an increase of 51 per cent over the $A482 million profit for the half year ended 30 September 2005.
Excluding the realisation of the Bank’s holding in the Macquarie Goodman Group (MGQ), the result was a 32% increase on the prior corresponding period, highlighting the strong growth in underlying earnings.
Earnings per share for the six month period increased 41% to A300.9 cents from A212.9 cents for the prior corresponding period.
Macquarie Bank Chairman, David Clarke, said the Bank will pay an interim dividend of A125 cents per ordinary share franked to 100% for the half year ended 30 September 2006. This is a 39% increase on last year’s interim dividend of A90 cents per ordinary share, franked to 90%.
Mr Clarke noted that, consistent with the Bank’s announced dividend policy, the full year payout ratio is expected to be in the range of 50% to 60% of net earnings. Dividends are expected to be fully franked for the next two years and thereafter at least 80% franked, subject to future composition of income.
“We are pleased to report another record result for our shareholders, with international income a key contributor for the half. International income was up 38% on the prior corresponding period. Outstanding team efforts by Macquarie’s staff in all locations underpinned this interim result,” he said.
International income amounted to 44% of Macquarie’s total operating income (excluding earnings on capital) for the half year to 30 September 2006, which is down slightly from 46% in the prior corresponding period, largely due to the realisation of MGQ. Excluding the income from the MGQ transaction, international income for the half would have represented approximately 49% of total operating income.
“All Groups increased their contribution to total income from international activities. For the Investment Banking, Equity Markets and Treasury and Commodities Groups, income from international activities was more than half of each Group’s total operating income,” Mr Clarke said.
He stated that while the Bank has been very active, its key focus is to continue to carefully manage risks to ensure they are appropriate relative to capital and revenues.
Macquarie Bank Managing Director and Chief Executive Officer, Allan Moss, said all operating Groups made an increased contribution from the prior corresponding period, with continued good international growth across the Bank. Since September 2005, international staff numbers increased 48% from 2,037 to 3,006, broadly in line with the increase in international income from $A954 million to $A1,321 million.
“Equity markets in key regions have held up well, contributing to strong broking revenues, however, Asian equity derivatives were significantly down on a very strong prior corresponding period due to increased competition,” he said.
Mr Moss noted that there was strong demand for commodities and structured commodity products and continuing strong demand for unlisted funds over the six month period.
The interim result also benefited from some major investment banking transactions, notably Dyno Nobel and BAA/Ferrovial; and asset realisations, such as MGQ and a US oil and gas asset.
“While asset realisations are a normal part of the Bank’s business, they are a swing factor,” said Mr Moss.
He added that that the lower tax rate for this period compared to the prior corresponding period was as a result of offshore tax rate differentials.
“The capital we raised in May 2006 has supported continued business growth during the half,” said Mr Moss.
Macquarie Bank Chief Financial Officer, Greg Ward, said total operating income from ordinary activities for the half year was $A3,156 million, up 46% from $A2,160 million for the prior corresponding period. This was driven by profits from the disposal of equity investments and realisations of assets (including the $A302 million profit on sale of the Bank’s investment in MGQ), and favourable market conditions for investment banking activities.
Net fee and commission income increased 16% to $A1,437 million from the prior corresponding period, with significant contributions from mergers and acquisitions, advisory and underwriting income, funds management fees and brokerage and commissions.
Assets under management were up 37% on the prior corresponding period to $A153 billion. There was strong demand for unlisted funds, which constituted 78% of the $A7.2 billion raised over the half year for specialist funds. Base fees were up 18% on the prior corresponding period to $A321 million. However, as foreshadowed, there were no significant performance fees for the period.
The headline contribution from trading income declined 5% on the prior corresponding period to $A456 million, mainly due to accounting impacts of swaps and the revaluation of derivatives. However, the underlying contribution from trading income increased 11% on the prior corresponding period.
Mr Ward added that net interest income rose 12% on the prior corresponding period to $A330 million; however, after adjusting for the swaps classified as trading income for statutory purposes, net income increased 3% on the prior corresponding period.
Income from asset and equity investment realisations and other transactions increased to $A933 million from $A142 million. The main contributions were the sale of the Bank’s stake in MGQ, Dyno Nobel and the US oil and gas asset.
The Bank’s expense to income ratio of 70.1% for the half year to 30 September 2006 remains comparable to the prior corresponding period.
Mr Ward said: “The Bank’s capital management policy is to be conservatively capitalised and to maintain diversified funding sources in order to support business initiatives, particularly specialised funds and offshore expansion, whilst maintaining counterparty and client confidence.”
Capital initiatives undertaken by Macquarie during the half year to 30 September 2006 included a private placement in May 2006, combined with a share purchase plan of ordinary share capital in June 2006, which raised in excess of $A700 million; and the re-introduction of the Dividend Reinvestment Plan discount.
Mr Ward added that, while risk-weighted assets grew by 28% over the period, the Bank’s Tier 1 Capital ratio rose to 13.2%, maintaining a buffer in excess of the Group’s minimum acceptable ratios.
The Bank announced in July 2006 that it was examining a corporate restructuring, most likely involving the establishment of a non-operating holding company (NOHC), as it was outgrowing the conventional banking regulatory model.
Mr Ward said the Bank’s diverse international businesses are now growing faster than its domestic banking business, and a significant portion of the Bank’s businesses are not strictly banking in nature. Existing commercial banking regulations do not readily accommodate this growth in the non-banking businesses.
A NOHC structure potentially provides the Bank with the flexibility it requires to continue pursuing growth in the regions and markets in which it operates.
“The potential restructure, which would see the holding company owning banking and non-banking businesses could be completed in approximately 18 months. However, this is subject to the resolution of key tax, accounting and regulatory issues,” Mr Ward said.
Macquarie is holding ongoing discussions with the Australian Prudential Regulation Authority.
Mr Moss said all six major business Groups made record first half contributions to the result.
Mr Moss said during the half year all regions experienced income growth compared to the prior corresponding period. Income from the Americas more than doubled, whilst the Asia-Pacific region also experienced strong growth, up 40% on the prior corresponding period.
“Income was spread more evenly across the regions, with Asia-Pacific and Europe, Africa and the Middle East regions both contributing 35% of the total and the Americas contributing 30% of international income,” he said.
Income from the Americas increased 121% to $A403 million for the half year. This was mainly the result of favourable market conditions for Treasury and Commodities, in particular the strong result of the metals and energy trading businesses, which were aided by the acquisition of Macquarie Cook Energy in November 2005, and the realisation of a US oil and gas asset.
Some North American highlights included:
The Asia-Pacific region’s contribution to international income increased $A132 million on the prior corresponding period to $A461 million. The main driver of growth in the region was the continued expansion of Macquarie Securities’ Asian institutional stockbroking operations, which experienced very strong income growth on the prior corresponding period. Equity derivative trading conditions were less favourable, and income fell in some key markets, including Hong Kong, Korea and Singapore.
A broadly favourable investment banking environment combined with increased activity of Macquarie-managed funds in the Asia-Pacific region contributed to an increase in funds management and mergers and acquisition revenue for the half.
Some Asia-Pacific highlights included:
EUROPE, AFRICA AND THE MIDDLE EAST
Income from Europe, Africa and the Middle East increased 3% on the prior corresponding period to $A458 million. The drivers were strong cyclical revenues from structured equity derivatives products, gains on the disposal of investments in Brussels Airport and Arqiva, and increased corporate finance income assisted by the BAA/Ferrovial transaction. These revenues made up for an absence of performance fee income from the specialist funds, which was significant in the prior corresponding period.
Some European, African and Middle Eastern highlights included:
While international income continues to grow, the Bank is still experiencing significant growth in Australia, where income was up 52% on the prior corresponding period (including the impact of the MGQ realisation).
Other drivers of income growth included Dyno Nobel and strong mergers and acquisitions activity.
Some Australian highlights included:
Mr Moss said the Bank benefited from asset realisations and generally good market conditions in the six months to 30 September 2006.
“Subject to the continuation of reasonable market conditions we expect the result for the six months to 31 March 2007 to be up on the $A434 million achieved in the prior corresponding period,” he said.
For the remainder of the year, the Bank expects to continue to benefit from staff growth and increased market share and, subject to market conditions, it expects:
Mr Moss said, as foreshadowed, the full year tax rate is expected to be lower than the prior year as a result of offshore tax rate differentials.
The Bank notes that the recent level of growth has been extraordinary, with results benefiting from a number of one-off transactions. This growth may be difficult to repeat in the short term, said Mr Moss.
“However,” Mr Moss added. “Over the medium term, Macquarie is well placed due to good businesses, diversification, committed quality staff and effective prudential controls. Subject to market conditions not deteriorating materially, it is expected the Bank will experience continued growth in revenue and earnings across most businesses over time, as well as continued international growth.”