Macquarie Group: Pretty much as expected

About the author:

Richard Coles
Author name:
By Richard Coles
Job title:
Senior Analyst
Date posted:
06 November 2020, 10:30 AM
Sectors Covered:
Insurance and Diversified Financials

  • Macquarie Group's (ASX:MQG) 1H21 NPAT of A$985m was down 32% on the pcp and slightly better than MQG’s recent guidance (“to be down 35% on pcp”).
  • We saw this result as reasonably clean, with pressures largely reflecting known macro/COVID-19 headwinds.
  • Broad divisional outlook commentary arguably highlights FY21 earnings risks remain to the downside, despite MQG having a seasonally stronger 2H and Nuix potentially being a large asset realisation. However, MQG remains well placed to ride out the COVID-19 (CV19) period and seize opportunities on the other side, in our view.
  • We lift our MQG FY21F/FY22F EPS by 3%-6% on various changes to divisional earnings assumptions. Our PT rises (login to view updated price target) on our earnings changes and a valuation roll forward. ADD maintained with ~10% TSR upside existing.

Result summary

MQG’s 1H21 NPAT of A$985m was down 32% on the pcp and slightly better than MQG’s recent guidance (“to be down 35% on pcp”). The 1H21 earnings decline on pcp being attributable mainly to a combination of higher CV19 impairment charges, and lower deal flow/transaction activity.

The 1H21 dividend of A$1.35 per share was slightly better than Factset consensus (A$1.30 per share). No specific FY21 guidance was given, although divisional outlook commentary remains broadly unchanged pointing to some headwinds in most divisions for the remainder of FY21.

The good

  1. Net operating income was down only 8% on pcp (excluding credit and other impairment charges).
  2. Group surplus capital remains strong at $9.4bn, which is well up on A$7.1bn at April, benefiting from lower business capital requirements/FX movements.
  3. The home loan portfolio grew 10% sequentially to ~A$57bn.
  4. MIRA raised A$8.9bn and invested A$8.4bn of capital in 1H21.
  5. MQG indicated the M&A pipeline is picking up (although completion rates remain uncertain).
  6. Group expenses declined 5% on pcp on things like lower employment expenses (profit-share).
  7. There was no material change in the ECL provision for credit losses tied to CV19 (A$1.6bn vs A$1.5bn at 2H20).

The not so good

  1. Credit and other impairment charges broadly tripled versus pcp (A$447m vs A$139m) on macro factors due to CV19.
  2. Macquarie could not rule out further provisions being required in Macquarie Airfinance with customers facing a tough environment.
  3. CGM’s performance clearly deteriorated in 2Q21 vs 1Q21, with outlook commentary expecting this softer environment to persist in 2H21.
  4. Macquarie Capital had a very soft result (NPAT of -A$189m vs A$221m in pcp) on higher impairments and lower deal flow.
  5. The MAM 1H21 NPAT would have declined closer to -32% vs the -5% reported result, excluding the gain on sale of the European Rail business.

Changes to forecasts and investment view

We lift our MQG FY21F/FY22F EPS by 3%-6% on various changes to divisional earnings assumptions.

Our PT rises (login to view updated price target) on our earnings changes and a valuation roll forward. While FY21 is a more difficult year for MQG, the stock remains comparatively well positioned to ride out the CV19 downturn (versus other financial stocks) and seize opportunities on the other side, in our view. ADD maintained with ~10% TSR upside existing.

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