Macquarie Group, Australia's top investment bank, said it had a solid start to the 2009 fiscal year, allaying worries about its business model and driving its shares up 11 percent in their biggest one-day rise in nearly four months.
Macquarie, which manages about A$232 billion (US$225 billion) in infrastructure and real estate assets globally, added a note of caution saying it would struggle to repeat last year's record performance, placing it on course for a first profit drop in 17 years.
Macquarie, like other global investment banks, has suffered from slower deal flows amid a global credit crunch, while volatile equity markets have forced many businesses to shelve capital raising plans, denting Macquarie's revenue growth.
Macquarie shares rose almost 12 percent to A$51.90 -- but are still well below a life high of A$98.64 in May 2007.
"They are still doing better than all their peers ... the longer term investment proposition in Macquarie hasn't changed," said Donald Williams, a fund manager with Platypus Asset Management, which manages A$1.6 billion, including Macquarie shares. "They are still performing exceptionally well given the environment relative to other investment banks," he added.
In a statement ahead of its annual shareholders meeting on Wednesday, Macquarie said its April-June profit was below the year-ago quarter.
Macquarie had liquid assets worth about A$20.3 billion at the end of June, nearly three times those in March, to benefit from any opportunities arising from the challenging environment. It also had about A$3.6 billion in excess capital, above the regulatory requirement.
Macquarie scooped up distressed assets in the wake of the last financial crisis that hit Asia in the late 1990s, buying ING's Asian equities business in 2004 and BT Australia in 1999.
Analysts forecast Macquarie's net profit will drop 6 percent to A$1.69 billion in the year to March 2009.
Still, it has fared relatively well compared to the hefty losses announced by several Wall Street banks due to their exposure to subprime mortgages.
"You don't want to be particularly optimistic on the earnings outlook for the next 12 months. But the stock is very, very cheap," Williams said.
Macquarie shares trade at a forward price-to-earnings multiple of 8.4 at the day's peak of A$49.89. This compares with a global sector average of 14.7.
"From a 5-year view, I think you would make a lot of money by buying Macquarie at 8-9 times earnings. But you have to be patient," Williams added.
Shares in Macquarie's smaller local rivals Babcock & Brown and Allco Finance Group have been hit hard by concerns about high debt levels. Both Babcock and Allco have been forced to sell assets to lower their gearing.
Macquarie's AGM is the first under new CEO Nicholas Moore, who took charge in May replacing Allan Moss, who had led the company for 15 years.
Despite Wednesday's gains, Macquarie shares are down about 34 percent so far this year, exceeding a 20 percent fall in the benchmark index.
"Macquarie's businesses are performing relatively well despite market conditions deteriorating since this time last year," Moore said in the statement.
Apart from advising on corporate takeovers, Macquarie earns revenue from equity and commodity trading. It also buys infrastructure assets such as toll roads and airports and bundles them into listed and unlisted funds, earning fees in return for managing the assets.
Macquarie reiterated it had no problem trading exposures and no material problem credit exposures.
Moore said credit markets had been extremely difficult and the cost of funding had increased. In equity markets, volumes had dropped off from the very high levels of the second half of calendar 2007 and there had been a sharp decline in listed real estate markets globally.
"In addition, activity levels in mergers and acquisitions and equity capital markets have fallen in most parts of the world," Moore said. "However, the pipeline remains reasonable and there has been a good level of activity in Australia and, to a lesser extent, Asia," he added.