The prospect of stricter capital requirements and a tightening credit cycle makes the outlook for Australia's banking sector by and large pretty uninspiring.
With some analysts suggesting that bank dividends could be under pressure given their high pay-out rates and the potential for a decline in earnings, shareholders in bank stocks have a number of reasons to be concerned.
While Macquarie Group Ltd (ASX: MQG) isn't immune to the headwinds facing its traditional banking peers, it's important to remember that its business model is significantly different to its peer group.
For example, the group has a strong global footprint, with close to 70% of the group's total revenues coming from its international operations
The company's 2016 financial year (FY) results highlight the group's strong performance compared with the rest of the ASX-listed banks:
- Operating revenues increased 9% to $10.1 billion
- Profits soared 29% to $2.1 billion
- Earnings per share leapt 23% to $6.19 per share
- Dividends were increased 21% to $4 a share
- Return on equity increased 5% to 14.7%
In comparison, Commonwealth Bank of Australia (ASX: CBA) – a good proxy for the domestic banking sector – reported results for FY 2016 that showed muted growth rates of just 3% in cash profits and a flat dividend.
Driving Macquarie's profits higher was a resurgent Securities division which recorded a significant rise in profit to $268 million and continued growth from the group's increasingly dominant "annuity-style" businesses.
Those annuity-style earnings now account for over 70% of group profits and should help boost investor confidence in forecasting earnings. Here are a few of the key numbers investors need to know about Macquarie's annuity businesses.
- Asset Management's assets under management grew to $477 billion and it achieved a 13% increase in profit to $1.6 billion.
- The Corporate Asset Finance division which incorporates Macquarie's motor vehicle and aircraft leasing portfolios now boasts $39 billion in assets and loans
- The banking and financial services division which includes the group's personal banking, wealth management and business banking operations contributed $350 million in profits to the group, a rise of 23%.
Outlook
Management has provided FY 2017 guidance for "combined net profit contribution from operating groups expected to be broadly in line with FY16".
Based on this guidance it would appear reasonable to use FY 2016 earnings per share and dividends as a guide for analysing the stock's pricing. With the share price at around $82, the implied price-to-earnings multiple and yield are 13.2 times and 4.9% respectively.
With management's medium term outlook stating that the group is well positioned to deliver superior performance and to continue to adapt its portfolio mix to changing market conditions, in my opinion, right now appears an attractive entry point into this high-quality company.
