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Stock Of The Day - Macquarie Group (EXPENSIVE)

Macquarie Group Ltd (ASX: MQG)  announced a net profit of $ 1.6 billion for FY 2015 a growth of 27% over the previous year. The net profit for 2H 2015 was $ 926 million which was up 37% over the comparable half-year. The combined net profit of the annuity style businesses grew by 33% over the previous year while the business relating to the capital markets was up by 19%. The operating income for the year of $ 9.3 billion grew by 14% over the previous year and international income accounted for 70% of the total income. Operating expenses of $ 6.8 billion rose by 12% and assets under management stood at $ 486.3 billion at the end of the year up 14% over the previous year. APRA Basel III group capital was $ 16.1 billion as at 31 March 2015 which was $ 2.7 billion surplus to the minimum regulatory capital requirements from 1 January 2015. EPS at $ 5.02 per share was up 31% over the previous year and return on equity was 14% (15.4% in the second half of the year) compared to 11.1% in the previous year. The final ordinary dividend (40% franked) was $ 2 per share making a total ordinary dividend of $ 3.30 per share compared to $2.60 per share in the previous year.

 
Financial Highlights (Source - Company Reports)

Overview for the full year
 
The combined net interest and trading income was up 17% to $ 3.8 billion as a result of growth in the loan portfolio (CAF and BFS) and better trading results in CFM and MSG. Fee and commission income rose by 24% to $ 4.8 billion because of the higher base and performance fees from MAM, improved levels of advisory fee income In Macquarie Capital and enhanced levels of activity CFM and debt capital markets. Other operating income and charges decreased by 18% to $ 0.7 billion were offset by higher impairment charges and collective provisions as well as the non-recurrence of certain items appearing in the previous year. The increase in operating expenses was 12% primarily driven by a 11% increase in employee expenses as a result of the better operating performance of the group as well as increased technology costs and the impact of the depreciation of the Australian dollar on overseas expenses. The total head count was 14,085 at the end of the year compared to 13,913 at the end of the previous year.


Growth in assets under management (Source - Company Reports)

Balance sheet and capital management 
 
The balance sheet continues to be conservative and strong and the group continues to diversify its funding sources with a mix of deposit growth and access to other funding markets. Retail deposits grew by 12% to $ 37.3 billion while total deposits increased from $ 36.9 billion to $ 39.7 billion. During the fiscal 2015, funding of $ 21.5 billion was raised from a number of different sources and different types of products.The group continues to be well capitalised with a surplus of $ 2.7 billion surplus to regulatory requirements and the Tier 1 capital ratio of 9.7% as at the end of March 2015 was slightly up on the previous year.


Diversification by region (Source - Company Reports)
 

Operating performance
 
Macquarie Asset Management showed a net profit contribution of $ 1.45 billion 36% over the previous year as a result of strong contribution from fee income from performance and growth in annuity based business. Assets under management grew by 14% to $ 484.4 billion. Macquarie infrastructure and Real Assets raised $ 8.3 billion in fresh equity commitments during the year while Macquarie Investment Management continued its strong investment results. Macquarie Specialised Investment Solutions continues to grow its business and third party investment commitments are now more than $ 3.3 billion.
 
Corporate and asset finance showed a net profit contribution of more than $ 1.11 billion a growth of 35% over the previous year and the asset and loan portfolio at $28.7 billion grew by 13%. The corporate and real estate loans portfolio rose by 24% to $ 11.2 billion while the asset finance portfolio at $ 17.5 billion was up by 6%. Through the year there was continued expansion in motor vehicles and equipment finance as well as the energy asset portfolio.


Loan Portfolio Growth (Source - Company Reports)
 
Commodities and Financial Markets produced a net profit contribution of $ 835 million up 15% over the previous year reflecting an overall improvement in market conditions. Energy was a significant contributor while Metals, Mining and Agriculture also made a better contribution. There was continued growth in origination and securitisation.


Macquarie Capital produced a net profit contribution of $ 430 million up 54% over the previous year. Advice was provided on 470 transactions worth $ 141 billion and the group was ranked number 1 in respect of completed mergers and acquisitions deals in Australia for the calendar year 2014. Among the notable deals during the year was the $ 11 billion equity and debt raising by Freeport LNG.


Macquarie Group Daily Chart (Source - Thomson Reuters)
 
Banking and financial services delivered a net profit contribution of $ 285 million, up 10% over the previous year. The mortgage portfolio grew by 44% to $ 24.5 billion and constitutes just under 2% of the Australian mortgage market. Platform assets under administration grew 19% to $ 48 billion and the business continued to invest in technology to improve its business operations.
 
Macquarie Securities Group delivered a net profit contribution of $ 64 million compared to $ 107 million in the previous year. Brokerage income was relatively flat but activity increases in the equity markets were due to enhanced IPO activity. The group was ranked number 1 for IPOs in Australia and number 2 for Australian equity and equity related deals for the calendar year 2014. It continued to build on its expertise as one of the largest warrant issuers in the Asia-Pacific region.

The shares of the group have been on an upward trajectory having gained an eye-popping 187% since June 2012 and this is not surprising considering that, as the leading Australian investment bank, it is going to do well as long as the global confidence is rising. Moreover, there are a number of positive factors that we observe in favour of the stock. Any further weakening of the Australian dollar will have a positive impact on profits since the group has diversified overseas and almost 70% of its income is generated in there. Moreover, it has diversified into less cyclical businesses and around 69% of its income comes from annuity style businesses such as funds management. Finally, investors are likely to see an increase in dividend and the dividend yield for the next year is expected to be around 4.3%.
 
However, we believe that the stock is expensive at the current price and would review the stock at a later date.