Macquarie posts positive first quarter, softer conditions ahead: Infrastructure assets are robust against rising rates

Macquarie Group (ASX: MQG) continued to its mid-June led (albeit mild) share price recovery at the open after announcing an increased net profit in the June quarter.

Macquarie’s share price was up 2.76% this morning following revelations that the asset management and investment banking giant’s business divisions posted a stronger first quarter.

Macquarie’s ‘near-Clayton’s update’ this morning was light when it came to specific numbers, and no earnings guidance was forthcoming.

Wait and see

CEO Shemara Wikramanayake notes the bank’s decision to lift its headline deposit rate on transaction and savings accounts as it sees an “opportunity to bring a product offering to depositors.”

While investment bank is taking a “wait and see” approach to global inflationary pressures, Wikramanayake expects transaction activity levels to be down due to uncertainty in markets from rising inflation and central bank responses with interest rates.

“That will impact revenue in Macquarie Capital, but again, even in that business that’s only a portion of what Macquarie Capital does,” she noted.

“Given the huge diversification of our businesses, they’re all exposed to very different risks so there tends not to be one single risk that can really drive our results in one direction or the other.”

Highlights with the quarterly announcement included:

• Group capital surplus of $10.1bn at 30 June 2022, down from $10.7bn at 31 March 2022

• Bank CET1 Level 2 ratio 12.3%

• Macquarie’s APRA leverage ratio slipped to 5.1% as at June 2022, versus 5.9% as at September 2020

• The harmonised Basell III ratio slipped to 5.7% versus 6.5% as at September 2020

• $3.4bn growth in capital requirements across all four operating groups since 30 September 2021

• MAM had $773.9bn in assets under management at 30 June 2022, broadly in line with 31 March 2022

• BFS total deposits of $106.4bn at 30 June 2022 were up 9% on 31 March 2022

• The home loan portfolio grew 8% to $96.9bn

• The private markets business increased assets 11% from a year ago

In typical Macquarie fashion, today’s announcement included the group’s predictable overtures to maintaining a cautious stance, and conservative approach to capital, funding and liquidity.

Management was also quick to flag the impacts of global inflation, interest rates, and geopolitical events on the short-term outlook.

Don’t underestimate infrastructure

However, a footnote by Wikramanayake that could have easily been overlooked today was a reminder that she doesn’t expect infrastructure asset valuations and transactions to take as much of a hit - well, compared to other asset classes that is - from the rising rates environment.

Wikramanayake belaboured the point that infrastructure assets have historically performed stronger than other asset classes in a rising rate environment through its nominal rates.

“Some of the reasoning behind that is these assets have very good inflation protection in them, whether they’re regulated utilities or they are toll roads. Typically they’re able to capture the inflation aspects in the revenue line,” she noted.

“Despite discount rates going up in a rising rate environment and all asset prices being brought down, infrastructure-like assets have proven more resilient.”

Core businesses performed well

Meantime, management told investors that its annuity-style businesses, Macquarie Asset Management (MAM) and Banking and Financial Services (BFS), delivered a combined first quarter net profit contribution that was “significantly” up on the prior corresponding period.

Much of this outcome is being attributed to income from Green Investment Group (GIG) asset realisations in MAM, which went some way to mitigating Macquarie Infrastructure Corporation disposition fee from last year.

Then there were the Commodities and Global Markets (CGM) and Macquarie Capital, which management notes delivered a combined first quarter net profit contribution “slightly up” on the previous period.

Contributing strongly to this result was the impact of timing of income recognition on gas transport and storage contracts and higher investment–related income in Macquarie Capital.

This strong result helped to lessen the impact of having offloaded the CGM UK commercial and industrial smart meters portfolio a year earlier.

Well positioned amid softer trading conditions

Wikramanayake notes favourable trading conditions saw Macquarie’s operating groups deliver a net profit contribution that was up on the first quarter of its 2022 financial year, even as “trading conditions did soften during the quarter”.

"[Macquarie] remains well-positioned to deliver superior performance in the medium term", due to "deep expertise in major markets; strength in business and geographic diversity and ability to adapt the portfolio mix to changing market conditions; an ongoing program to identify cost saving initiatives and efficiency; a strong and conservative balance sheet; and a proven risk management framework and culture,” management noted.

Macquarie Group's share price has been under pressure since the start of the year.