Australia's leading investment bank Macquarie Group Ltd (ASX: MQG) this morning announced to the market that it expects full-year profit to be up 10-20% over the prior year.
The stock is up 4.87% to $57.98 on the news suggesting the market was already expecting Macquarie to post a full year result stronger than previous guidance in October for a "slight improvement" on the prior year.
The star performer amongst Macquarie's operating divisions in recent times has been Macquarie Funds Group (MFG), the asset management business of the bank. The division has particular strength in the alternative asset markets such as infrastructure, agriculture, real estate and energy.
MFG contributed 43% of total profit for the half-year ending September 2014, and also offers more traditional asset management services to institutional and retail clients mainly in the US, Europe and Australia. MFG's success is also likely strengthening the case of its leader, Shemera Wikramanayake, to succeed Nicholas Moore as chief executive.
Indeed MFG's emergence as a growth driver for Macquarie reflects the bank's transition away from the high-octane world of trading and investment banking to more traditional merchant and retail banking services, alongside the renewed focus on asset management services.
The group is delivering on its reputation for adapting as necessary as its annuity style income streams continue to grow, while the capital-markets facing businesses take a back seat for now at least.
Macquarie said the short-term outlook remains subject to market conditions, the impact of foreign exchange, the cost of funding, tax issues and potential regulatory hurdles.
The group's return on equity may be sensitive to what proportion of capital it's required to carry as a percentage of risk weighted assets. This is relevant now post Murray Inquiry and in accordance with the ever-changing Basel banking supervisory committee requirements.
Given the bank's evolution if it's able to deliver earnings growth towards the top end of its estimated 20% range the stock would appear undervalued at today's price of $57.98 in my opinion.
