By Neil Hume in Sydney
Macquarie has underlined the tough conditions facing the investment banking industry by slashing its full-year profits guidance.
The Australian bank on Tuesday said net income would be 25 per cent lower than the previous year – much worse than analysts? expectations – due to weak market conditions and uncertainty caused by the eurozone debt crisis.
Macquarie blamed the profits warning on its two capital markets facing businesses: Macquarie Securities, the bank?s equities and derivatives business, and corporate finance arm Macquarie Capital, where earnings are forecasts to be down 35 and 30 per cent respectively on a year ago.
Nicholas Moore, chief executive, said Macquarie had been severely affected by the macro economic back-drop in the final three months of 2011. ?Global economic uncertainty has deepened resulting in substantially lower levels of client activity in many markets,? he said.
Ahead of Tuesday?s operational review, analysts had forecast a 12 per cent fall in net profit from the $956m Macquarie reported in 2010/11. Based on the new projections, the bank is set to record its lowest earnings since 2004 and the third drop in profits in the past four years.
However, shares in Macquarie pared earlier losses as investors focused on cost-cutting initiatives and plans for a A$900m share buy-back. The bank also flagged a recovery in fixed income, commodities and currencies divisions.
In response to weak market conditions, which have affected many of its peers such as Goldman Sachs and Morgan Stanley, Macquarie reduced its headcount by 460 to 14,600 in the final three months of 2011 and has pulled out of several businesses, including institutional derivatives in the US, UK,
Asia and South Africa. The bank also closed its operations in continental Europe and is planning further cost-cutting measures.
Greg Ward, Macquarie?s deputy chief executive, said the bank was targeting a 15 per cent reduction in costs by 2013, which would be achieved through a range of initiatives including exiting unprofitable businesses, offshoring and consolidating back office functions across its businesses. Over 1,000 staff are now located in regional hubs.
Analysts welcomed the focus on operational efficiencies and the centralisation of functions. ?It?s good to see head office taking control of costs,? said one. Macquarie has sometimes been viewed as a disparate collection of businesses.
The weakness at Macquarie Securities and Macquarie Capital overwhelmed good performances elsewhere in the bank, such as its lending and leasing and funds divisions where net profit is expected to up a fifth a year ago. Macquarie also flagged a turnround in fixed income currencies and commodities business in the final quarter of 2012.
Macquarie said its planned share buy-back of A$900m would start in the first half of its next financial year,
subject to approval by Australian regulators. The bank forecast surplus capital of A$3.7bn at the end of March under Basell III rules, or A$900m when tough new requirements from the Australian Prudent Regulation Authority were included.
During a briefing for analysts and investors in Sydney, Mr Moore refused to comment on possible acquisitions. The bank has been linked with a bid for the fund management business put up for sale by Deutsche Bank, which is valued by analysts at up to ?2.5bn. However, Mr Moore said the best way to deploy surplus capital at the moment was via a share buy-back, suggesting Macquarie is unlikely to make a large acquisition.
Shares in Macquarie, which have fallen 40 per cent in the past year, closed down 0.8 per cent at A$25.90 in Sydney
on Tuesday.
? The Financial Times Limited 2012