Write-downs manageable for Macquarie

Macquarie Group yesterday reported its share of the burden created by the extended credit crunch, and now global recession. And while key profit measures and asset quality measures are the worst in a very long term they are not dire.

The most significant issue for the group is whether or not they can get set in the capital market for themselves (or their satellite funds) to finance their bright ideas, mainly infrastructure.

If so, the reduction in profit in the first half (to a level about the same as reported in 2006) might be as bad as it gets. If not, the deal flow and revenue flow will continue to slide, and some optimistic asset valuations used to avoid write-downs on some assets will have to be reviewed.

The group reported impairment charges and provisions of $1.1 billion for the six months to September 2008. The charges had a net impact of $395 million on earnings, contributing to a 43 per cent fall in interim net profit from $1.06 billion in the September half last year to $604 million in the latest half.

Among the charges was $226 million of loan impairment and other costs related to the sale of the Italian mortgage business, $684 million of write-downs of Macquarie-managed listed fund valuations, $145 million of loan impairment provisions and $88 million on trading asset positions.

The write-down on the listed assets could have been more. Macquarie Infrastructure Group was listed with a book value of $854 million, despite having a market value of $733 million at September 30 - a difference of $121 million.

Macquarie Group chief executive Nicholas Moore said the MIG valuation was based on multiples achieved in recent toll road sales.

The result left Macquarie in unfamiliar territory. Return on equity dropped from 30.2 per cent in the previous corresponding period to 13.9 per cent. The cost to income ratio jumped from 70.8 to 75.5 per cent.

The group declared the same dividend as in the previous corresponding period but only by increasing the dividend payout ratio from 37.1 to 67.4 per cent.

Staff had to bear some pain in the form of lower bonuses. The compensation ratio fell from 47.9 per cent in September last year to 40.1 per cent.

Trading conditions were weak across the board. Macquarie Capital's mergers and acquisitions, advisory and underwriting income was down 33 per cent on the previous corresponding period. The division wrote down $27 million in relation to a holding in BrisConnections. Equity investment income was down 42 per cent.

Macquarie Securities was down 37 per cent on the previous period, due to big falls in Australian and Asian equity market turnover. Macquarie Funds was down 83 per cent and the Banking and Financial Services Group was down 36 per cent.

The shocker was the real estate division, which made a loss of $132 million for the half, a result that was driven by impairment charges.

The only division that performed in line with prior periods was Treasury and Commodities, which made a $285 million contribution to profit. That result was 11 per cent below the March half result but one per cent above the September quarter last year.