Should you worry that Macquarie will break its 6-year record profit run in FY20


The Macquarie Group Ltd (ASX: MQG) is underperforming its peers this morning after the investment bank confirmed that its six-year run of record profits would come to end this financial year.

The Macquarie share price dipped 0.2% to $129.04 in early trade even as most financial stocks gained ground and helped push the All Ordinaries (Index:^AORD) (ASX:XAO) index higher after it closed at a record level yesterday.

The big banks are helping to support the market with the Westpac Banking Corp (ASX: WBC) share price adding 0.5% to $28.53 while National Australia Bank Ltd. (ASX: NAB) gained 0.3% to $28.40 at the time of writing. Even embattled wealth manager AMP Limited (ASX: AMP) is finding new friends with its stock increasing 1.4% to $1.83.

Should you be worried about the profit drop?

But before you get too worried about the MQG share price, it’s worth pointing out that it has outperformed most other large financial institutions over the past year with a gain of around 3.5%, which is more than 100 basis points ahead of the S&P/ASX 200 Financials (Index:^AXFJ) (ASX:XFJ) index.

Macquarie’s chief executive Shemara Wikramanayake reported at the annual general meeting today that the bank’s 1QFY20 performance was broadly inline with the same time last year and it reiterated its full year guidance for earnings to be “slightly down” on FY19.

“Macquarie’s annuity-style businesses were down on the prior corresponding period. Specifically, and compared with the prior corresponding period, Macquarie Asset Management (MAM) was down mainly due to the timing of performance fees and higher operating expenses following recent platform acquisitions,” she said.

“Corporate and Asset Finance (CAF) was down due to reduced loan volumes and realisations in CAF Principal Finance; and Banking and Financial Services (BFS) was broadly in line.”

Is Macquarie still worth backing in FY20?

It would be interesting to see how its commodities business fares too given some analysts’ predictions that the iron ore price is set to tumble to US$80 a tonne from around US$120 a tonne currently.

Commodities could be a volatile asset class to trade although trading desks at investment banks tend to perform better in such an environment.

Macquarie also put out some good news on the regulatory front to offset APRA’s recent accusation that it was breaching mandatory liquidity standards.

Management pointed out that it comfortably exceeded regulatory minimum requirements (although this relates to surplus capital and not the liquidity issue).

As long as we don’t see a major financial market meltdown, I believe Macquarie’s share price will outperform the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) over the year.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited and Westpac Banking. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019



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