Views diverge on Macquarie Group earnings despite tax impost

Mr Moore told a Senate Committee there were "no current plans" to relocate, but he outlined the impost of the levy on Macquarie's banking and financial services unit. The company has a less than 2.5 per cent share of the domestic deposit market and accounts for less than 2 per cent of mortgages.

Macquarie spends about $400 million annually on compliance-related costs including regulatory levies, tax and financial reporting and compliance with anti-money laundering regimes.

Citigroup analysts led by Craig Williams say the major banks and Macquarie need to work on fixing their strained relations with regulators and governments, which would go some way to restoring investor confidence.

"In the lead up to the new tax announcements the banking industry has been poor in providing leadership and accountability on key issues," Mr Williams said. "The government and regulators felt the need to step in, and now the industry's profitability is being socialised."

Not helping Macquarie's reputation as a corporate citizen were revelations last week that its securities unit had paid one of the largest ever fines issued by the broking industry's Markets Disciplinary Panel. That came after the firm didn't adequately monitor trading activities and engaged in "reckless" conduct three years ago.

Macquarie has also joined the big banks in being hit by a regulatory enforceable undertaking due to inadequacies within its wholesale foreign exchange unit.

Interestingly, Macquarie would be a big beneficiary of US tax cuts if the Trump administration succeeds in reducing the tax rate there. Macquarie generates about 63 per cent of its income from outside Australia.

Morgan Stanley analysts have estimated that every 5 percentage point cut in US corporate tax rates would add about 2 per cent to Macquarie's earnings.

But fund managers and analysts are also assessing Macquarie's ability to continue to grow earnings after Mr Moore again presented a record profit in 2017 and pointed to a flat earnings trajectory in 2018.

Macquarie reported a 7.5 per cent rise in net profit to $2.22 billion for the year ended March 31, buoyed by advisory income and acquisitions in its corporate and asset finance arm.

According to Bloomberg, analysts expect Macquarie's 2018 profit to come in at $2.3 billion. The next event on the Macquarie calendar is the company's annual general meeting on July 27.

Mr Siegling sees plenty of upside for Macquarie, particularly as it has focused growing more stable income earning businesses such as asset management and corporate and asset finance.

"Macquarie has been growing earnings per share by more than 20 per cent for more than 40 years," he said. "Macquarie is no longer an Australian only investment bank but an emerging global financial institution, and in particular, a global powerhouse in infrastructure.

"Macquarie will continue to grow annuity style revenues. As this trend continues MQG will continue to be re-rated as a stock with global and diversified and repeatable earnings. This should result in a valuation expansion over time."

But Citigroup has a far more bearish view with a "sell" recommendation on Macquarie and a target price of $72.

Mr Williams sees "downside risks" to Macquarie's profit outlook as global interest rates rise and he remains mindful of the impact they and periods of equity market volatility can have on asset prices and the company's deal flow.

In its earnings estimates, Citigroup has Macquarie's earnings peaking in 2017, given changing market conditions and headwinds including higher loan impairments and the "relative absence" of performance fees or gains on asset sales.

Macquarie buys and sells assets and companies via its unlisted funds and uses its balance sheet. This year, it is looking to divest gas supplier Quadrant Energy in a deal that may be worth up to $4 billion.

Brookfield and Macquarie bought the business in 2015, and Macquarie later sold part of its holding to investors including Wesfarmers and AMB Holdings.

Macquarie is also said to be assessing an exit of its stake in technology outfit Nuix, while it was part of a consortium that agreed to acquire a 50.4 per cent holding in NSW power distributor Endeavour Energy. That deal was announced by the state government last month.