MACQUARIE Group bankers stand likely to reap higher bonuses after the spin-off of its $ 1.4 billion stake in Sydney Airport to shareholders, as the investment bank powers to its best year since 2010.
Macquarie yesterday posted a $ 501 million first-half profit, in line with expectations and up 39 per cent on the previous corresponding period, and 2 per cent on the previous six months.
The result, again driven by its annuity-style funds management and traditional banking businesses, put Macquarie on course to post its first annual profit of more than $ 1bn since 2010.
In a boost for shareholders, Macquarie’s investment banking units of securities and capital — its jewels before the global financial crisis — made profits after being in the red in recent years after trading and deals collapsed.
Karl Siegling, managing director of Cadence Capital, a Macquarie shareholder, said if the capital markets-facing businesses “go from making nothing to bucketloads of money” the group could again make double-digit returns.
The group’s return on equity, which was above 23 per cent in 2008, rose to 8.7 per cent from 6.6 per cent last year.
Macquarie chief Nicholas Moore said equity capital markets activity was stronger but mergers and acquisitions activity had been subdued. Macquarie is working on several notable floats, including Nine Entertainment, boding well for the full year.
“From a medium-term viewpoint we feel positive about those businesses,” Mr Moore told The Weekend Australian. “If they perform as they have done historically it could add to that return materially (being generated by the annuity businesses).”
Macquarie maintained full-year guidance to “improve” on last year, subject to markets but not including gains from Sydney Airport.
After fielding interest from buyers in recent years, Macquarie opted to give shareholders its stake in the listed Sydney Airport via an in-specie distribution on a one-for-one basis.
Companies use in-specie distributions to spin out assets. Macquarie said it was the most equitable option as shareholders could take part in the frenzy surrounding infrastructure assets.
Macquarie owns about 20 per cent of Sydney Airport, a legacy of its so-called satellite fund model set up in the bull market that dissolved after the global financial crisis.
While the deal is subject to shareholder approval, Mr Moore confirmed the sale proceeds would probably flow through to the bank’s bonus pool.
The proceeds won’t be known until January, but Macquarie would make a $ 377m revenue gain based on Sydney Airport’s price of $ 4.17. Sydney Airport’s shares would have to fall below its book value of $ 3.06 for Macquarie not to make a gain, according to analysts.
“When we make money, (it’s) a fundamental understanding with Macquarie that the staff actually share in the profits of the organisation,” Mr Moore told analysts. “The precise amount of that will be determined by the board as they normally do at year end, but you would expect . . . there will be profit share. That would be the normal expectation.”
Ownership Matters co-founder Dean Paatsch said investors in Macquarie should go in “with their eyes wide open”.
“Basically shareholders need to be aware that assets held at their holding price on Macquarie’s balance sheet won’t be worth their market price, because you have to take into account the effect of paying for the bonus pool,” he said.
Brian Johnson, an analyst at CLSA, said investors were getting Sydney Airport shares they already owned through holding Macquarie, but were being hit with tax Macquarie would pay on the gains and the bonus pool taking a “slice”.
Macquarie’s bonus pool is based on profit and earnings above its cost of capital, and has in recent years included a large amount of deferred shares that vest over time. But its board has in recent years overridden its profit-sharing formula to retain key bankers, boosting the compensation ratio despite returns on equity below its cost of capital.