Macquarie Group Ltd (ASX: MQG) was once known as the millionaires' factory due to its high margins, strong profit generation and exorbitant executive bonuses. Prior to the onset of the Global Financial Crisis (GFC), Macquarie's shares were flying high with its share price trading over $100 per share in 2007 – a feat still to be achieved by any of the big four banks.
The investment bank lost over 80% of its value from peak to trough during the GFC, as the group sustained heavy trading losses in its financial markets division (as global markets sold off). This turned many away from the bank's business model. With the group set to deliver its 2016 full year results on 6 May, I believe Macquarie Group is a different beast today (compared to its pre-GFC days) and thus has the potential to reclaim its title as the millionaires' factory.
Diverse operations
Unlike its big four peers Australia and New Zealand Banking Corporation (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC), Macquarie has diverse operations.
The bank has truly global operations, with almost 72% of its income being derived from places other than Australia and New Zealand. This is in stark contrast to the big four banks which generate the majority of their earnings through Australian operations. This insulates Macquarie from domestic housing risks, which plague the likes of ANZ and CBA.
Importantly, Macquarie has a broad mix of trading, financial services and capital market facing businesses, providing the bank with a solid combination of annuity-style and growth operations. In its most recent results, Macquarie reported 74% of its earnings came from annuity-style revenue, indicating a dramatic shift from its pre-GFC days where capital markets facing businesses (which are more volatile) contributed approximately 68% to net profit.
In my mind, the annuity style cash flows provides greater predictability of earnings, making Macquarie akin to Challenger Ltd (ASX: CGF) instead of traditional fund managers like BT Investment Management Ltd (ASX: BTT) and Perpetual Limited (ASX: PPT). This makes it a more stable investment.
Financial position
Macquarie is well placed to deliver strong growth going forward. As at 31 December 2015, the group's APRA Basel III CET1 ratio — the amount of capital required to be set aside as a safety net by APRA — sat at a robust 9.9%.
Funds under management in the group's asset management division during the December quarter were down 3% (on prior quarter), due to foreign exchange movements. Financial market sentiment has also improved during the quarter, implying favourable results should flow to its annuity business.
Management reiterated full-year guidance stating 2016 net profit should be up materially on its 2015 full year results. It should follow that its dividend from last year will be maintained, implying a sound yield of 5.5% partially franked.
Foolish takeaway
Whilst concerns remain around the banking sector, specifically for domestic lending, Macquarie appears well placed to benefit from its breadth of operations. With management reiterating full-year guidance in early April, there shouldn't be many surprises in its upcoming results.
Nevertheless, its shares have enjoyed a good run in the last few weeks, meaning the downside risk is increasing going into results. Accordingly, Macquarie should be a stock to watch at current prices with any weakness being an opportunity to buy a stake in the millionaires' factory.
