Macquarie Group announces 23% increase in profit

20 May 2008

Highlights

• Record full year net profit after tax of $A1.8b, up 23% on prior year
• International income of $A4.3b, contributing 57% of total operating income; Asia-Pacific income up 71%
• Record specialist fund raisings of over $A22b
• Assets under management of $A232b, an 18% increase on prior year
• Return on equity of 23.7%
• No unusual trading exposures or concerns with credit quality, reflecting Macquarie’s robust risk management

Macquarie Group Limited (ASX:MQG) today announced a record $A1.8 billion net profit after tax attributable to ordinary shareholders for the year to 31 March 2008, a 23% increase on the prior year.

Macquarie Group Managing Director and Chief Executive Officer, Allan Moss, said: "Operating income increased 15% to $A8.2 billion from $A7.2 billion and earnings per share increased 13% to $A6.71 from $A5.92 in the prior year."

The Group declared a second half dividend of $A2.00 per ordinary share, franked to 100%, taking the total ordinary dividend for the year to $A3.45 per share, an increase of 10% on last year’s total ordinary dividend of $A3.15 per share.

Mr Moss noted that, over the years, the Group had consistently grown capital ahead of business requirements to allow for future growth. The Group achieved a return on equity of 23.7% over the year.

Mr Moss said: "Macquarie remains very profitable, well capitalised and well funded. We have no unusual trading exposures and no unusual concerns with credit quality, reflecting our strong commitment to risk management. Despite market conditions, our global business platform has never been stronger."

Key drivers of the result
Macquarie Group Chief Financial Officer, Greg Ward, said: "Key drivers of the result included a strong performance from equities-related businesses in Asia, Australia and Europe, especially during the first half; substantial investment banking deal flow of transactions valued at approximately $A200 billion; record volumes in foreign exchange and commodity related businesses; and record performance fees. Total assets under management increased by 18% to $A232 billion. The Group has expanded its capital base, increasing it from $A7.5 billion at 31 March 2007 to $A10 billion at 31 March 2008."

"We are continuing to invest in new businesses and new staff. Around 40% of our approximately 13,000 staff is located outside Australia," he said.

Mr Ward said that asset realisations were lower than the prior year and the result was achieved after a write-down – previously foreshadowed – of $A293 million (approximately $A90 million on a net-profit after-tax basis) on holdings in Macquarie-managed and associated listed real estate investments. He noted that the $A3.6 billion of strategic investments in Macquarie-managed funds and listed fund managers form an important part of the specialist funds management business and align Macquarie’s interests with those of other fund investors.

He noted that the Group had no significant trading or credit write-downs.

Financial highlights
Total income from ordinary activities for the year increased 15% on the prior year to $A8.2 billion; net fee and commission income increased 31% to $A4.6 billion; assets under management increased 18% to $A232 billion; base fees increased 22% to $A958 million; net trading income increased 75% to $A1.8 billion; net interest income increased 12% to $A817 million; income from asset and equity investment realisations and other transactions decreased 49% to $A951 million including the write-down on holdings in Macquarie-managed and associated listed real estate investments.

Mr Ward noted that the record result was achieved despite tougher market conditions in debt and equity markets during the second half, reduced income from asset sales and the write-down of holdings in Macquarie-managed and associated listed real estate investments. Business operations in the Asia-Pacific held up well, however Europe and especially the US were impacted by credit market deterioration. As expected, the result included lower income from asset and equity investment realisations.

"During the year Macquarie raised $A22.4 billion for specialist funds, which was a record. A total of 75% of the funds were from international investors and 85% was invested in unlisted funds or syndicates," Mr Ward said.

Funding, liquidity and capital
Mr Ward said Macquarie is well funded. He noted that at 31 March 2008, the Group had liquid assets of $A18.3 billion, a level which is approximately three times the level of a year ago. Since August 2007, the Group has raised significant term funding of $A17 billion and increased deposits by 30% to $A13.2 billion.

"Access to public bond markets has been challenging since August 2007. Although there have been some signs of improvement, if this is not sustained over the medium term and other existing avenues of term funding become unavailable, there may be a need to consider a reduction in term assets," Mr Ward said.

He noted that debt programmes are in place for Macquarie Group and Macquarie Bank to access the key capital markets in Australia, Europe, Asia and the US in order to meet opportunities as they arise.

At 31 March 2008, the Group maintained a buffer of approximately $A3 billion of capital in excess of its minimum capital requirements.

Result overview
Macquarie Group Managing Director and Chief Executive Officer designate, Nicholas Moore, said: "The Group achieved strong broad-based growth driven by continued diversification of product and geography and benefited from previous business investment. There continues to be strong demand for Macquarie products. We remain focussed on longer term prospects and we continue to grow staff numbers.

"Our results show that Macquarie’s robust risk management has proven to be effective in this environment," Mr Moore said.

Mr Moore noted that while there were good contributions from most operating groups, market conditions since August 2007 had been challenging for some businesses. As a result of the sharp fall in listed real estate markets globally, the Real Estate Group contribution was, as previously advised, affected by a write-down on holdings of Macquarie-managed and associated listed real estate investments. The contribution from the mortgages business was affected by the effective closure of mortgage securitisation markets.

Mr Moore noted that the Group had no unusual trading exposures. The Group’s main business focus is making returns by providing services to clients rather than by principal trading.

Mr Moore commented on the performance of each of Macquarie’s operating groups during the financial year. Specifically, he noted that:

• Macquarie Capital achieved a good result. All divisions were up on the prior year despite mixed market conditions and profit increased by 13% on the prior year. International operations contributed 67% of net income supported by strong growth in the Asia-Pacific. The group advised on over 300 transactions worth around $A200 billion, approximately 25% above record 2007 volumes.
• The Equity Markets Group result increased 76% on the prior year. There were good contributions from all divisions, but the second half of the year was well down on the first half due to reduced transaction volumes resulting from the flow-through of credit market disruption to equity markets and some seasonal factors.
• The Treasury and Commodities Group result benefited from very good operating conditions in the foreign exchange, energy and commodities markets. Debt markets were impacted by credit market disruption.
• The Real Estate Group reported a net loss during the year due to the write-down of holdings in Macquarie-managed and associated listed real estate investments. During the period, assets under management (including associates) increased 37%. The group anticipates a return to profitability during the 2009 financial year.
• The contribution from the Financial Services Group increased 33% on the prior year, reflecting strong retail broking income despite lower volumes during the second half. The newly merged Banking and Financial Services Group was formed to enhance the product range, provide better client service and achieve cost economies.
• The Banking and Securitisation Group contribution was substantially lower during the year due to a negative contribution from the mortgages business.
• The Funds Management Group result was very substantially up on the prior year due to the one-off contribution from the sale of the Macquarie-IMM Investment Management joint venture in Korea and good performance fees from equities funds, which achieved top quartile rankings.

Global market conditions
In commenting on current global market conditions, Mr Moore noted that in credit markets, investors are cautious but sentiment continues to improve, with normal access to short term funding markets returning. While international term credit market activity is increasing, it is still below historical levels and there is only limited securitisation market activity and funding costs remain at significantly higher levels than before August 2007. In cash equity markets, volumes are reasonable having dropped off from the very high levels of mid-2007, but equity derivatives volumes are lower in Australia and Asia as a result of general market uncertainty and reduced demand for equities.

Outlook
In commenting on the Group’s outlook, Mr Moore said: "Market conditions make short-term forecasting more difficult than usual. The current state of financial markets means that it will be challenging to repeat last year’s record performance, but this may be achievable."

Mr Moore noted that over the medium term, the Group continues to be well placed due to effective risk management, good businesses, committed quality staff, the strength, diversification and global reach of the businesses and a strong capital base. He said there were no problem trading exposures and no material problem credit exposures.

"We expect to benefit from ongoing organic growth initiatives and continued strong global investor demand for quality assets. It is also possible there will be opportunities for acquisitions in the current environment due to our strong capital position," Mr Moore said.

Managing Director & CEO transition
As previously announced, Macquarie Group Chairman, David Clarke, noted that Mr Moore, who has already been appointed to the Board of Macquarie Group Limited, will become Managing Director and Chief Executive Officer of Macquarie Group Limited effective from Mr Moss’ retirement on 24 May 2008.

Mr Clarke said: "For much of his 22 years with the Group, Nicholas has spearheaded the successful development of the Macquarie Capital business, which now provides more than 60% of the Group’s profits. The business comprises Macquarie’s corporate advisory services, institutional stockbroking, specialised funds, equity capital markets, specialised leasing and a number of other businesses.

"Nicholas has been a member of the Executive Committee for more than 10 years. He is globally recognised as a financial services leader and is ideally qualified to take Macquarie’s global businesses to the next stage. The Board regards Nicholas as a person of remarkable vision, energy and acumen. There are no plans to change Macquarie’s longstanding strategy following Nicholas’ appointment."

In commenting on Mr Moss’ retirement, Mr Clarke said: "Allan has been an extraordinarily successful Chief Executive. Under Allan’s leadership, Macquarie has gone from an almost entirely domestic business to one earning a majority of its income outside Australia. Staff numbers have grown almost ten-fold and profits have grown over thirty-fold during Allan’s term as CEO. On behalf of shareholders, staff and the Board, I thank Allan for his contribution."

Mr Moss said: "Being part of the Macquarie team for more than 30 years has been a wonderful privilege. I have enjoyed it immensely so the decision to retire was enormously difficult. However, I feel sure that, after nearly 15 years as CEO, this is the right time to hand over. We have an outstanding successor in Nicholas Moore.

Although some markets are challenging, those challenges are creating many opportunities for Macquarie. Nicholas is the ideal leader to capture those opportunities. I would like to thank our clients, staff, shareholders and the Board for all the support which they have given me and my senior colleagues."

Contacts:

Richard Nelson
Investor Relations
Macquarie Group
Tel: (612) 8232 5008
Email: richard.nelson@macquarie.com

Paula Hannaford
Corporate Communications
Macquarie Group
Tel: (61 2) 8232 4102
Mobile: (61 4) 1394 0180
Email: paula.hannaford@macquarie.com