Macquarie Group Ltd (ASX: MQG) has undergone a transformation in the years since the GFC. Now the bank/asset manager focusses on generating more 'annuity-style' earnings – such as from managing investor funds – that repeat over time rather than one-off windfalls in the form of underwriting.
According to recent calculations done by analysts at UBS, Macquarie derived 23% of its earnings in 2015 from traditional 'investment bank'- type earnings, i.e., investment banking (issuing and underwriting securities, etc), equities, treasuries (sovereign bonds) and fixed income assets.
The remaining 77% came from non-investment bank activities like property development, residential mortgages, and fund management.
To break down its revenue another way, Macquarie generated revenue from the following segments in 2015:
| Percentage of revenue* | Description | |
|---|---|---|
| Asset + Wealth Management | 22% ($3, 052m) | distribution/ manufacture of funds management products |
| Financial Markets | 27% ($3, 731m) | fixed income, equities, currency, commodities + derivative products |
| Capital Markets | 15% ($2, 032m) | corporate + structured finance, advisory, underwriting, facilitation, broking, real estate/ property development |
| Lending | 37% ($5, 128m) | banking activities, mortgages and leasing |
| Total | $13, 943m |
*fractions are rounded, so totals don't sum to 100%. Source: Macquarie Group 2015 report
Asset and Wealth Management has been the fastest growing segment in recent years, which is in line with Macquarie's stated strategy of increasing annuity-style earnings. An unintended side-effect of this strategy has been to propel Macquarie Group into the top 50 asset managers worldwide, with total Assets Under Management of US$370 billion, according to research reported in Fairfax media earlier this morning.
Commonwealth Bank of Australia (ASX: CBA), through subsidiary Colonial First State, is in the top 100 managers globally and second largest in Australia, with US$156 billion. So what does all this mean for investors?
Firstly, it goes to show just how much Macquarie Group is likely benefiting from 'economies of scale', where profits scale up faster than costs as the size of a company's activities increase. Secondly, and perhaps more importantly, it goes to show just how many pies Macquarie has a finger in globally.
While this diversification does not make the business immune to earnings weakness, it does provide a wide variety of growth opportunities that make Macquarie my favourite of Australia's big banks. As I have written before, the stock is no bargain at current prices but investors could do a lot worse than continue to hold shares in Macquarie Group Ltd.
