Business

Published: Tuesday February 7, 2012 MYT 11:35:00 AM

Australia's Macquarie warns of 25% profit tumble


SYDNEY, Feb 7 (Reuters) Macquarie Group, Australia's top investment bank, warned investors its fullyear profit would fall 25 percent, double the analyst expectation, as grim financial markets hurt its trading and investment banking businesses.

A 25 percent fall would send Macquarie's net profit for the year to March 2012 to A$717 million ($769 million), its lowest annual earnings in eight years.

The forecast, which knocked Macquarie shares down as much as 5 percent in early trade, is set to force analysts to cut their annual earnings forecast for the third time in 2011/12 and reflects clients' reluctance to invest or pull the trigger on transactions as the European debt crisis raged.

"The stock is likely dead money in a riskoff environment," Credit Suisse analyst James Ellis said.

"Overall a worse than expected outcome with Macquarie securities (trading business) the key low light."

The stock trimmed losses to trade 0.5 percent lower at 0200 GMT as investors focussed on cost cuts and put its struggles in perspective to the global environment.

Macquarie, famous for its nickname "Millionaire's Factory", is not alone in struggling with tough conditions.

Global peers such as Goldman Sachs and Morgan Stanley managed to beat market expectations with heavy costcutting, but they have clearly struggled.

While Morgan Stanley posted a loss, Goldman Sachs saw its weakest year since 2008.

The lull in business, as well as the prospect of reduced profitability amid tighter regulation, has forced major banks to cut more than 100,000 jobs globally and slash bonus pools.

"I think everyone in this room sat here this time last year and thought the market was in a relatively poor state and would probably on balance get better in the year to come, now that didn't eventuate" said Chief Executive Nicholas Moore.

Moore is trying to engineer a turnaround at the bank which a few years ago consistently beat market expectations.

In one bright spot, Macquarie said operating income at its lending, leasing and funds business would rise by a fifth in the year to March, but this would not be able to offset a more than 30 percent fall for its marketsfacing business.

COST CUTS

In April last year, Macquarie flagged 2011/12 earnings higher than the A$956 million it reported a year ago, but has gradually cut back its outlook blaming weak markets. A 2012 profit fall would mark the third profit drop for Macquarie in four years..

Before Tuesday's profit warning, Thomson Reuters I/B/E/S estimates showed a consensus net profit forecast of A$840 million or a fall of 12 percent for 2011/12.

Macquarie, whose share price has fallen nearly 70 percent since 2007, has been under pressure to reshape its business and, cut staff to respond to the impact of the global financial crisis.

It has moved away from riskier banking products and towards unlisted funds, retail banking, leasing and lending businesses.

Macquarie said it was focussing on cost cuts, and forecast a 10 percent fall in operating expense for its markets business, and 5 percent fall in other areas. It saw further programs generating 15 percent savings by the end of next financial year.

It continued to shed staff, putting total employees at 14,628 in December, 460 lower than in September.

Macquarie also said it had surplus capital of A$3.5 billion and expected to start a previously announced $900 million share buyback in the first half of 2012/13, despite some media speculation that the regulator would not allow the buyback. The company is still awaiting regulatory approval.

While Macquarie managed to hold on to its market share in trading and advisory, volumes have dropped across the industry. Australian equity offerings fell nearly a fourth in 2011 while M&A business rose 12 percent, Thomson Reuters data showed.

The group said its fixed income currency and commodities trading business had turned around in the December quarter.

Macquarie shares have risen about 9.2 percent for the year, compared with a 6.3 percent rise for the benchmark index , as investors found some value in the battered stock. ($1 = 0.9322 Australian dollars)

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