Veteran CSLA analyst Brian Johnson has a reputation for making bank CEOs squirm with his probing questions and slightly gruff manner.
But when he took the microphone and addressed Macquarie Group chief executive Nicholas Moore at Friday’s half-year results investor discussion, he was note perfect.
“I think it’s pretty rare in this environment that we are congratulating a financial services chief executive,” Johnson said.
Johnson is right. And it’s little wonder investors and analysts gave Moore a thunderous round of applause as he wrapped up his final briefing after delivering another stellar profit result that demonstrated how Macquarie’s business model can deliver regardless of the external environment.
Moore has also left the perfect platform for successor Shemara Wikramanayake, who will officially take the top job on December 1, after a 30-year career at Macquarie.
As Macquarie has done in each of the past eight years except one, Moore upgraded full-year profit guidance on Friday, announcing earnings are now expected to be 10 per cent ahead of the 2018 numbers, having earlier forecast earnings in the 2019 financial year would be in line with the previous period.
While the upgrade will surprise exactly no one, it puts Macquarie on track for yet another record full-year profit, after delivering a $2.56 billion earnings bonanza for the 2018 financial year. The final number will likely be even bigger, given Macquarie’s guidance doesn’t include any proceeds from the sale of Quadrant Energy, which will complete in the second half.
Macquarie shares, which had fallen 9 per cent since late August, jumped 3.5 per cent on Friday.
As Moore told investors, the first half saw Macquarie deliver a “great performance, and a great business-building performance”, with group earnings rising 5 per cent during the six months ended September 30, to $1.3 billion. Operating income in the first half was up 8 per cent on last year, at $5.4 billion.
Unusually, the asset management division that Wikramanayake led before her promotion to the CEO role was not the star of the first half, with earnings down 36 per cent to $762 million due to a widely expected and well-flagged fall in performance fees; the first half of 2018 was exceptionally strong, and performance fees are traditionally lumpy.
Still, base fees were up 11 per cent in the period, and it is this annuity-like income that underpins the asset management division and, to no small extent, Macquarie Group.
Instead, it was the capital markets facing businesses that surged in the first half, with earnings rising 95 per cent on the prior year.
The commodities and global markets division saw earnings surge 85 per cent to $700 million, buoyed by good results out of the United States energy market business and higher fees and commission as client activity increased – volatility isn’t all bad.
Similarly, more activity in debt capital markets, equity capital markets, and mergers and acquisitions helped Macquarie Capital’s earnings surged 114 per cent during the half. Macquarie’s handling of Transurban’s acquisition of the WestConnex road from the NSW government – and the subsequent $4.2 billion capital raising – provided a big boost.
“These [markets facing] businesses usually have a bias to the second half, so it was very pleasing to see a strong first-half result,” Moore told investors on Friday.
Overall, it’s a result that shows the magic of the all-weather Macquarie model.
The annuity-style businesses help insulate the group from external conditions. In times of volatility, those market-facing businesses benefit as client activity rises. And when markets are calm and rising, and rates are low, the annuity-style business – asset management and asset finance – will deliver out-performance.
The geographic spread of the business, with just over two-thirds of earnings coming from overseas, adds to that diversification, and allows the company to catch tailwinds from a weaker Australian dollar, as it did in the last half.
“As time goes on, the mix of what the world needs does change,” Moore told Chanticleer, stressing that with businesses like asset management and asset finance, “in any six-month period and indeed in any 12-month period there is a degree of lumpiness”.
During the investor call, Wikramanayake went pleasingly off script – and had Moore squirming – when she praised her boss’s leadership over 32 years at the business.
She said Moore had changed Macquarie in nearly every decade – seizing on the opportunity created by retreating foreign banks in the 1990s, launching Macquarie’s infrastructure franchise in the 1990s with the Hills Motorway deal, and then building up investment banking in the 2000s.
But Wikramanayake paid special tribute to Moore’s ability to manage risk and grab opportunities when others were hunkering down, such as when he approved Macquarie’s acquisition of Philadelphia-based Delaware Investments in the United States in 2009. The deal delivered more than $US125 billion in assets under management and more than 500 employees.
“That [focus on risk management] was something that when the financial crisis happened, Nicholas really had control of and has driven ever since in his time as CEO,” she said.
“That was reflected particularly in that conservative balance sheet and having us positioned with funding and capital to respond as we did with the Delaware acquisition and many other things that really drove our business in the period since.”
Which raises a fascinating question, given the world appears to be headed into a time of what Moore would describe as “dislocation” in global markets, with rising interest rates, increased volatility and particularly heightened political risk.
Is Wikramanayake scanning for a big game-changing deal like Delaware?
After all, after a week of hearing about how Australia’s big four financial services giants are becoming smaller businesses, it was notable that Macquarie’s wage bill jumped $193 million or 9 per cent to $2.4 billion in the half, as staff numbers rose by 400 to 14,869 over the September half.
The bulk of the new headcount was in the asset management business, where the group bought a real estate management platform called GLL Real Estate, and in the banking and financial services division, where Macquarie is seeing growth of around 5 per cent and an opportunity to capitalise where the majors are retreating.
Wikramanayake has learnt at the feet of the master when it comes to playing a straight bat to the question of what Macquarie might buy.
“I think we are looking for opportunity throughout the cycle, but that is driven by our people on the ground,” she told Chanticleer, emphasising that the Macquarie model was for individuals across the group to bring growth ideas back to the centre for appraisal.
Moore also played a straight bat to the question of whether Macquarie was running its eye over AMP, saying Macquarie did not comment on speculation in any way.
The jungle drums from within Macquarie suggest there is nothing more than the group casting a curious but casual eye over a business that looks, at least on some measures, relatively undervalued. But to say there’s anything even resembling preliminary discussions is wrong.
Another clue as to Macquarie’s ultimate view on AMP might be taken from Moore’s comment that conduct risk “has become the most important in the financial services sector”.
It’s hard to imagine AMP passing the Macquarie risk framework on that front, given its royal commission record. As Brian Johnson has said, surely some sort of cherry picking of specific AMP assets is the most likely outcome.
Wikramanayake’s initial changes to the business were on display on Friday too.
The London-based Martin Stanley, who has been running the Macquarie Infrastructure and Real Assets division under Wikramanayake, will take over responsibility for the entire asset management division.
Ben “Brains” Brazil, a mainstay of Macquarie for so many years, will “step down” from his post as head of the Corporate Asset Finance business, to be replaced by the European head of that business Florian Herold.
Brazil leaves the Macquarie executive committee, but will remain the chairman of the asset finance division until the middle of next calendar year.
There will also be an internal business unit reorganisation, but Moore said there was no link to Brazil’s decision to depart and changes to how the CAF division will report in the future.
After “building a business from nothing” and spending 10 years on the road, Brazil simply wanted to step back from running a business day-to-day, Moore said.