Macquarie profit hits record high on market volatility and boom in mergers and acquisitions

Australia’s largest investment bank, Macquarie Group, has benefited from global commodity market volatility and record deals that boosted full-year net profit 56% from a year earlier to a record 4,700 million Australian dollars ($3.3 billion).

But Chief Executive Officer Shemara Wikramanayake warned on Friday that Macquarie’s raw materials revenue was expected to fall in what was likely to be a “very uncertain” current financial year.

The Australian group’s global markets and commodities division was the biggest contributor to earnings in the year to March 31, with higher volatility driving demand for its trading and hedging services higher. Earnings before corporate costs and taxes in that division rose 50 per cent year-on-year to A$3.9bn.

The group’s investment banking arm, Macquarie Capital, also generated record profits, advising on deals valued at A$457bn globally, while making A$2.56bn in investment income mainly through the sale of stakes in existing assets.

Wikramanayake said the post-lockdown energy supply crisis, followed by volatility in energy and commodity markets due to Russia’s invasion of Ukraine, had fueled the strong performance in the commodities business.

“Our raw material revenues are expected to decline significantly following a very strong fiscal 2022 result, although volatility may create opportunities. We have a very uncertain year ahead of us,” he said.

Despite continued tension over Russian oil and gas supplies to Europe, Wikramanayake said Macquarie had already seen volatility “decrease a lot” in European gas and energy markets in recent weeks.

Macquarie also forecast reduced profits from its green investment arm, Green Investment Group, which it bought from the UK government in 2017 for £2.3bn.

The dovish outlook led Citigroup analysts to speculate that the Australian bank, which has been one of the country’s best-performing large-cap financial stocks, may have reached the peak of the current earnings cycle. Macquarie’s profits rose from A$730 million in 2012 to a record A$4.7 billion in 2022. Its share price closed down 7.8% at A$186.90.

Raw materials division chief Nick O’Kane received a total pay of A$36.2m for the year, most of it tied to performance. That was higher than Wikramanayake’s total annual compensation of A$25.8 million.

Macquarie reported record results in three of his four divisions. Profits from its investment banking arm nearly quadrupled to A$2.4bn, buoyed by record deals and asset realizations in the green energy, technology and business services sectors.

Profit from its retail banking division grew 30 percent to A$1.001 billion, while investment management arm Macquarie Asset Management rose 4 percent to A$2.15 billion.

Citi analyst Brendan Sproules called the result “extraordinary,” adding that the “key surprise” was Macquarie Capital’s performance, which was 30 percent higher than analysts had expected.

“Macquarie’s earnings power continues to impress and this result should be well received by the market,” he said.

“The short-term guidance of lower earnings in FY23 will have many investors questioning whether we have reached the peak of this long cycle of earnings growth.”

Wikramanayake said that M&A activity in the United States has slowed “a little bit.” “But with half a percent of that market, we’re not as exposed to the total, we’re exposed to our small secondary stake and how that plays out,” he said.

He was optimistic that record M&A activity in Australia would continue. “There’s a lot of liquidity in the Australian market, so let’s see how it goes,” he said.

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