Macquarie Group
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 09 May 2016, 12:45 PM
- Sectors Covered:
- Insurance, Diversified Financials
Key points
- Macquarie Group's (MQG) FY16 result was solid across the board and, in our view, hard to fault.
- We think flat guidance into FY17 is a good outcome, although we still feel earnings risks are tilted to the downside.
- We lift our FY17 and FY18 forecast EPS by between 2-4% respectively.
A solid FY16 result
MQG's FY16 NPAT of A$2.06bn was ~1% above Bloomberg consensus of A$2.04bn. While the result benefitted from a slightly favourable 2H16 tax rate of ~28.5% (1H16: 33.1%), it was solid across the board and hard to fault.
Overall cash NPAT growth was strong, up 29% on the previous corresponding period, driven by positive jaws with revenue growth of 9% outpacing 6% cost growth.
The FY16 dividend of A$4.00 per share was ~3% above consensus expectations of A$3.81 per share. Importantly asset quality improved in 2H16 with the impaired assets to loan ratio of 1.14% versus 2.18% in 1H16.
Flat guidance into FY17 a good outcome but risks to the downside
MQG's FY17 guidance for a flat NPAT outcome on FY16 was better than we expected. While business pressures exist, management expects these to be largely offset by:
- accretion from the AWAS and Esanda Dealer finance acquisitions and organic growth in Corporate and Asset Finance (CAF);
- benefits from strong recent lending and deposit growth in Banking and Financial Services (BFS);
- a solid principal deal pipeline in Macquarie Capital (MC) and;
- lower overall impairments.
Despite guidance, we still feel earnings risks are tilted to the downside with tough market conditions prevailing and management needing to plug numerous earnings holes.
Strong capital position provides options
MQG's capital position was a clear positive in the result with an APRA CET1 ratio of 10.7% up from 9.7% at 31 March 2015. While this capital position did benefit from capital raised last year, net capital generation also added 0.6% to the CET1 over 2H16.
Management appears to have the firepower to seize on acquisition opportunities or to potentially lift the dividend payout ratio from the current level (~65%) closer to the top end of the targeted range (60-80%).
Investment view
We continue to like the Macquarie Group story in the longer term but feel that the current share price is fair value at this point of the cycle. We feel a more attractive entry point may present for MQG and we maintain our Hold recommendation.
More information
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