Improving markets: Australia's Macquarie tips

SYDNEY: Macquarie Group , Australia's top investment bank, said market conditions continued to recover from the worst downturn in its trading history, but warned full-year profits may miss market expectations, sending shares in the bank lower.

Macquarie, dubbed the "Millionaire's Factory" for its generous banker pay, said its key equity business remained subdued and gave an outlook that signalled 2011 profits may come in below last year's A$1.05 billion ($1.06 billion).

Analysts said while Macquarie's performance was slightly disappointing, the bank appeared in better shape than global peers such as Goldman Sachs and Morgan Stanley , which posted lower-than expected quarterly earnings.

"Most analysts had their numbers down but it's still about 2-3 percent below where consensus was," said Angus Gluskie, portfolio manager at White Funds Management.

"The pace of recovery within that particular time frame wasn't as fast as people would have liked," he added.

Shares in Macquarie, which made three profit warnings last year as it grappled with the fallout from the global financial crisis, initially fell 2 percent on the mixed third quarter trading update.

The shares were trading down about 1 percent by late morning, underperforming a 0.25 percent gain in the broader market .

Still, Macquarie shares remain near last week's 7-month highs as investors count on a general recovery from subdued market conditions following the financial crisis.

Analysts said Tuesday's outlook suggested full-year earnings would slightly miss consensus forecasts already factored into the stock's performance.

Macquarie, which has shed its managed listed funds model and infrastructure focus, is moving towards a traditional investment banking advisory and trading model in the aftermath of the economic downturn.

The transition and global volatility has hurt Macquarie, which has reported a decline in earnings in the last three out of four half-year reporting periods. Its shares fell 22 percent in 2010, marking only its fourth annual market fall in 14 years.     

POSITIVE SIGNS

Macquarie said on Tuesday that market conditions were improving and that it had A$3.2 billion in excess capital as of Dec. 31.

The bank is focused on expanding its fixed income currencies and commodities business into Asia. Australian banks are also under pressure to stay well capitalised to meet new global regulations on capital requirements.

Macquarie forecast second-half earnings to be 5 percent below the same period a year ago and 35 percent up on the first half.

Investors calculated this would mean a full-year profit of about A$947 million. The bank had previously said it expected earnings to be "broadly" in line with last year's A$1.05 billion.

Thomson Reuters I/B/E/S estimates show a net profit consensus of A$969 million on revenue of A$7.61 billion for 2010/11, indicating the market had expected Macquarie to miss its forecast.

"Market conditions continue to trend back to more normal levels, with the exception of equity markets where volumes remain subdued," said Macquarie Chief Executive Nicholas Moore, a former dealmaker who spearheaded the growth of the bank's now famous infrastructure asset management business.

While it did not give specific profit numbers for the December quarter, the bank said the result for all divisions except for its securities business was significantly higher than the two previous subdued quarters.

Investors are drawing positives from a strong revival in mergers and acquisitions, an emerging equity underwriting pipeline and the ability of Macquarie to at least maintain its position in coveted league tables.

Thomson Reuters data shows while Macquarie has managed to hold on to its No.2 position in its biggest market Australia, where it gets nearly half its revenue, it has also pushed into the top 20 global advisers list.

The data also shows the value of announced M&A deals in Australia for 2010 totalled $164.4 billion, surging from $69.1 billion in 2009, which more than offset the 51 percent drop in equity underwriting volumes.

Data shows Macquarie was involved in 10 equity raisings worth a combined $1.3 billion and four M&A deals worth $670 million in December, making it the third best month for equity underwriting and second best month for M&A in 2010/11.

Macquarie, which fended off rumours and calls for job cuts in the wake of waning profits, said it had 15,400 employees down slightly from 15,533 it announced in October lastReuters

It said fixed income, currency and commodities operating income continues to expand its Asian business out of Singapore.

The bank's Tier-1 capital ratio was 10.6 percent, it said.

Macquarie shares had risen about 11 percent so far this year at Monday's close, compared with a 2 percent rise for the benchmark index .($1 = 0.987 Australian Dollars)