What: Macquarie Group Ltd (ASX: MQG) today announced that it expects its FY15 result to be slightly up on FY14 thanks partly to improved performance from the group's dominant Macquarie Funds Group (MFG).
The group said it expects increased performance fees in MFG from its listed and unlisted funds to support the improved result.
What now: Macquarie is continuing its transformation from the pre-GFC investment banking focused entity to a diversified financial services business relying more heavily on annuity style income streams.
Indeed, the old Macquarie style trading, dealing and market-making businesses have taken a back seat since the GFC as the bank cuts its cloth by assessing risk relative to earnings.
The bank's capital market-facing businesses now only account for just over a quarter of income as the group delivers on its reputation for adapting as necessary.
This strategy is beginning to pay dividends with MFG's relative dominance of net profit contribution meaning small changes within its outlook can affect the group's overall result.
With MFG performing strongly and the move into more traditional banking and financial services for retail and corporate clients also delivering relatively low risk income streams the group's medium-term outlook is now less leveraged to the volatility of capital markets. This allows it to compete more directly with operations like Colonial First State, the funds management arm of Commonwealth Bank of Australia (ASX: CBA).
As the bank changes strategy the amount of capital it is required to hold as a percentage of risk weighted assets varies, which also means the all-important return on equity may follow suit. Generally speaking high capital adequacy requirements enforced on bankers by the regulator are not popular as they impact a bank's ability to generate higher returns on equity.
What of the outlook: As if to reinforce the point over the group's evolution, Macquarie has forecast the performance of the capital-market facing businesses will be down on both the prior corresponding period (1Q14) and prior quarter (4Q14).
However, given the growing dominance of the annuity style businesses, the bank's evolution and an excellent dividend, the shares represent good value at under $60 in my opinion.
