Press Release

Macquarie announces 45% increase in interim profit, transition to new structure

Sydney, 13 November 2007

Highlights

  • Record half year net profit
  • International income up 70% on prior corresponding period
  • Asia-Pacific income up 96% on prior corresponding period
  • Diversity of operations providing strong broad-based performance in a wide range of markets
  • Strong international growth across all operating groups
  • No unusual provisions or write-downs
  • No problem trading exposures
  • Transition to non-operating holding company structure

Macquarie Group Limited (Macquarie, ASX:MQG) today announced a record $A1.06 billion profit after tax attributable to ordinary shareholders for the half year ended 30 September 2007 for Macquarie Bank Limited (MBL). This is an increase of 45% over the $A730 million profit for the half year ended 30 September 2006.

The 45% profit growth was driven by a 38% increase in total income, of which 55% was derived from international operations. Earnings per share for the six-month period increased 34% to $A4.02 from $A3.01 on the prior corresponding period.

Macquarie Group Managing Director and Chief Executive Officer, Allan Moss, said: “This record half year result underscores the strength and diversity of our global business. The story of our strong growth beyond Australia continues and we are particularly pleased with the outstanding contribution from the Asia-Pacific region, which was largely unaffected by the credit market disruption.”

Mr Moss noted that Macquarie continued to hire quality staff, while maintaining a low expense-to-income ratio.

“All operating groups have experienced continued international growth. For Macquarie Capital (formerly Investment Banking), Equity Markets, Treasury and Commodities, Real Estate and Funds Management Groups income from international activities was more than half of each group’s total operating income,” Mr Moss said.

Mr Moss said Macquarie Group Limited will pay a fully franked interim dividend of $A1.45 per ordinary share for the half year ended 30 September 2007. This is a 16% increase on last year’s Macquarie Bank Limited fully franked interim dividend of $A1.25 per ordinary share. Mr Moss also reaffirmed Macquarie’s dividend policy to target an annual payout ratio of between 50 and 60%.

As previously advised, payment of this year’s interim dividend, which is normally made towards the end of the calendar year, will be deferred until late January to assist Australian shareholders in qualifying to receive the benefit of the applicable franking credits.


Key drivers of the half

Macquarie Group Chief Financial Officer, Greg Ward, said Macquarie’s diversity of operations provided strong broad-based performance in a wide range of markets. Mr Ward noted that while international income was up 70% on the prior corresponding period to $A2.5 billion, international staff numbers increased 22% to 4,264 from 3,501 at March 2007. He noted that employment conditions remain extremely competitive.

Mr Ward also noted that the expense-to-income ratio for the period was down to 70.8% and that the expected costs from the transition to the non-operating holding company structure had been accrued.

“We have experienced strong equity markets globally, which have driven significant revenue increases in our equities-related businesses in major regions. Conditions in Asia have been especially strong. This assisted our Asian broking business to continue its successful expansion,” he said.

Mr Ward noted that commodity market volatility was driving good customer flows and continuing strong demand for retail products in the first half. Other key drivers of the half included:

  • Continued strong investment banking deal flow, with 145 deals valued at more than $A92 billion completed in the half
  • Income from asset realisations including Boart Longyear and Macquarie-IMM Investment Management (Korea), was good but slightly down on the strong prior corresponding period that included the $A302 million profit on sale of the Goodman Group holding
  • Assets under management up 14% to $A224 billion from $A197 billion since March this year and associated base fee growth for the specialist infrastructure and real estate funds
  • Increased capital from capital raising, retained earnings, options exercised
  • No unusual provisions or write-downs
  • No problem trading exposures
  • No material problem credit exposures

Mr Ward added that as normal, Macquarie’s interim financial report had been reviewed by PricewaterhouseCoopers and their Independent Auditor’s Review Report was unqualified.


International commentary and operating highlights

Mr Moss said there was broad growth across all operating groups during the period, supported by Macquarie’s geographic and product diversification and previous investment in the businesses. This growth was also supported by good conditions in markets other than credit markets, although Australia and Asia were largely unaffected by credit market disruption.

“The Asian time zone, including Australasia, contributed two-thirds of total income and continues to be very strong.

Mr Moss continued: “We are also seeing strong investor demand for physical assets such as infrastructure and real estate – asset classes in which Macquarie excels. Although there are more participants in the infrastructure space, there is significant availability of assets and overall we expect more opportunities as the asset class becomes increasingly accepted,” he said.

He added that the specialist funds continued to be well-supported by investors, with strong demand particularly for unlisted funds. A total of $A13.8 billion was raised from investors during the period, of which 79% was from international investors and 79% was for unlisted funds or syndicates.

Mr Moss said there was broad growth across all seven operating groups. Specifically he noted:

  • Macquarie Capital (formerly Investment Banking Group), which contributed the largest overall interim result, was up 55% on the prior corresponding period. There was strong deal flow in mergers and acquisitions and equity capital markets during the half, despite challenging credit market conditions in the second quarter
  • The Equity Markets Group contribution was up 130% on the prior corresponding period. There were strong contributions from all divisions, particularly international equity products
  • The Treasury and Commodities Group result was in line with a very strong prior corresponding period that included a significant oil and gas realisation
  • The Real Estate Group contribution was down 64% on the strong prior corresponding period that included the Goodman Group realisation. Excluding this realisation, the contribution would have been up 170%. Assets under management, including associates, increased by 10% to $A23.5 billion
  • The Financial Services Group contribution was up 50% on the prior corresponding period, reflecting strong retail broking volumes and significant inflows into Macquarie Wrap Solutions and the Cash Management Trust
  • The Funds Management Group contribution was very significantly up on the prior corresponding period due to the one-off contribution from the sale of Macquarie-IMM Investment Management JV in Korea
  • The Banking and Securitisation Group contribution was down 10% on the prior corresponding period due to difficult credit market conditions and continued investment in new businesses


Financial highlights and capital management

Total income from ordinary activities for the half year was up 38% on the prior corresponding period to $A4,710 million; net fee and commission income was up 48% to $A2,478 million; net trading income was up 85% to $A843 million; net interest income was up 57% to $A523 million; and net income from asset and equity investments and other transactions decreased 10% to $A866 million.

Mr Ward said: “Macquarie’s capital management policy is to be conservatively capitalised to ensure a sufficient buffer for growth over the medium term and to maintain the ability to take advantage of opportunities as they arise.”

He added that, consistent with Macquarie’s previously advised strategy, the level of risk-weighted assets grew by only 8% over the period, compared to an increase of 28% in the prior corresponding period. The Tier 1 Capital ratio rose to 17.6%, largely as a result of the May 2007 capital raising of approximately $A830 million.

“Capital demands have eased, both because of Macquarie’s slower risk-weighted assets growth and further clarification around capital rules, and we do not anticipate a need for an ordinary equity raising in calendar 2008.

“Macquarie also has a policy of diversifying its funding sources by investor type, geography, currency, maturity and product. While funding markets experienced a dislocation during the period, we remained and continue to remain well-funded,” Mr Ward said.


Financing strategy

Commenting on the Macquarie Group’s financing strategy, Mr Ward said MQG and MBL will each have dedicated and independent funding, capital management and liquidity management arrangements. He advised that MQG had obtained funding commitments that comprise:

  • An $A8 billion senior unsecured bank debt facility. This is underwritten by 11 major international and Australian financial institutions. As a result of successful syndication to more than 40 banks, the facility has been oversubscribed and is likely to be increased by approximately 10%; and
  • A $A10 billion two-year committed senior bridge facility from MBL to provide transitional funding while MQG’s capital markets issuance programme is established. This will be refinanced via issuance in all significant global capital markets

Mr Ward noted that there would be no increase in Macquarie’s net debt arising from the restructure.


Current-year outlook

Mr Moss said: “Subject to market conditions, we expect the second-half result to be at least in line with the prior year’s second-half result of $A733 million, but down on a very strong first half this year.”

He explained that equity market conditions may not continue to be as favourable, that the first half result had benefited from a high number of asset sales that are unlikely to be repeated in the second half, and that some businesses are likely to be affected by seasonal factors.

Mr Moss noted that it was too early to make a definitive forecast for the full year, especially due to the difficulty in forecasting market conditions. For the remainder of the year, subject to market conditions, Macquarie expects:

  • Continued satisfactory transaction levels
  • Most trading businesses to benefit from geographic and product expansion
  • Substantial equity raisings for unlisted international specialist funds


Medium-term outlook

Commenting on Macquarie’s medium-term outlook, Mr Moss said: “We are well-placed due to effective prudential controls, good and diversified businesses and committed, quality staff. We expect to benefit from the growth in our capital base; our significantly increased global reach and continued strong global investor demand for quality assets.”

Subject to market conditions not deteriorating materially, Mr Moss said he expects continued growth in revenue and earnings across most businesses over time, as well as continued good international growth.


Macquarie Group Limited established

Macquarie Group Limited is now operating under the new non-operating holding company structure. The Group’s shares commenced trading on the Australian Securities Exchange (ASX) on 5 November 2007 under the code “MQG”.


Regional highlights for the half year to 30 September 2007


Asia-Pacific – Income up 96%

Income from the Asia-Pacific region increased by 96% on the prior corresponding period to $A994 million. The region has been largely unaffected by global credit market disruption. Macquarie Capital Securities experienced continued growth in the region, increasing its Indian coverage and expanding its product offering in China. Lead-manager roles in significant mergers and acquisitions (M&A) and equity capital market (ECM) transactions throughout the region were also important contributors.

Some Asia-Pacific highlights included:

  • Establishment of MQ IPO Gateway Fund, providing investors with exposure to China-related, Hong Kong, Singapore and Taiwan IPOs
  • Establishment of Macquarie/Nomura commodity derivatives alliance in Japan
  • A Macquarie-led consortium’s KRW270 billion ($A324 million) acquisition of Megabox, one of Korea’s largest cinema operators
  • Macquarie Office Trust making its first Asian asset acquisitions, consisting of three properties in Tokyo
  • Macquarie Global Property Advisors’ acquisition of a prime development site at Marina Bay in Singapore’s CBD
  • Macquarie Goodman Asia’s acquisition of 50.1% of J-REP, a listed Japanese logistics development and funds management entity
  • Macquarie International Infrastructure Fund’s $S272 million acquisition of a 20% interest in Taiwan Broadband Communications, a $S28 million acquisition of infraVest Wind Power and interests in Taiwanese wind farms


Europe, Middle East and Africa – Income up 55%

 Europe, Africa and the Middle East contributed $A774 million to international income, a 55% increase on the prior corresponding period. Initiatives in the region included the establishment of an institutional European equities sales trading and research business and in Russia, the establishment of a JV with Renaissance Capital and the signing of a cooperation agreement with Vnesheconombank.

Specialist fund initiatives during the half year included:

  • MEIF II, a European unlisted infrastructure fund reached final close in May this year with total commitments of €4.6 billion
  • Establishment of the Macquarie European Infrastructure Fund (MEIF) III, which commenced marketing to institutional investors with first close expected in the first quarter of the 2008 calendar year
  • A specialist commodity derivatives portfolio fund for institutional investors

Other fund-related initiatives included:

  • Macquarie Communications Infrastructure Group (MCG) – Arqiva’s £2.5 billion acquisition of National Grid Wireless, a broadcast transmission services and independent wireless site provider
  • The MCG/MEIF II £1.9 billion acquisition of Airwave, a digital radio communications provider for emergency services
  • Macquarie Real Estate funds:
    • Macquarie CountryWide Trust’s acquisitions in Poland and Germany
    • Macquarie Office Trust’s German acquisition
  • The successful refinancing of specialist fund assets on good terms, including:
    • APRR: €500 million – (Macquarie Infrastructure Group (MIG))
    • Thames Water: £900 million (MEIF I/MEIF II)
  • Rome Airport – interest sold realising 2.6 times the equity invested
  • Birmingham Airport – interest sold realising 2.4 times the equity invested


The Americas – Income up 57%

Income from the Americas increased 57% to $A689 million for the half year. Highlights included the acquisition of Orion Financial in Canada, a resources-focused independent dealer with a range of equities and M&A advisory capabilities with a total of 130 staff, the commencement of trading by Macquarie Cook Power, a Houston-based electricity trading business and the establishment of an institutional US equities sales trading and research business.

Other highlights included:

  • A proposal to acquire Gateway Casinos, a portfolio of nine casinos in western Canada for approximately $C800 million by Macquarie Group and Publishing & Broadcasting Limited
  • A Macquarie Infrastructure Partners/Macquarie Communications Infrastructure Group-led consortium acquisition of Global Tower Partners, a wireless tower operator for $US1.4 billion
  • The Macquarie Infrastructure Company (MIC) acquisition of Mercury Air Centers and airport services locations in Santa Monica, San Jose and New York
  • The successful refinancing of specialist fund assets on good terms:
    • Airport services and district energy businesses: $US1.1 billion (MIC)
    • 407 ETR : $C625m (MIG)
  • The Macquarie Power & Infrastructure Income Fund $C215 million acquisition of Clean Power Income Fund, consisting of hydro, biomass and wind power infrastructure investments


Australia – Income up 9%

While international income grew strongly during the period, Macquarie continued to experience good growth in Australia, with income up 9% on the strong prior corresponding period that included substantial Australian equity investment realisations, including the $A302 million profit on sale of the Goodman Group. During the period, Australia was much less affected by global credit market disruption than the US and Europe. There was a high level of transactions across most businesses, and Macquarie was the top ASX broker by market share in the six months to 30 September 2007 and also the 2007 calendar year to date.

Other Australian highlights included:

  • Macquarie Wrap Solutions up 16% to $A26.9 billion from $A23.2 billion at March 2007
  • Macquarie Cash Management Trust up 28% to $A18.1 billion from $A14.1 billion at March 2007
  • Strong retail product issuance, particularly in reFleXion, Fusion and the MQ specialist funds
  • Record volumes in margin lending with the value of the loan book up 31% to $A6.3 billion from $A4.8 billion at March 2007

 

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