Macquarie will struggle to match market exuberance

Pedestrians are reflected in a window in front of a board displaying stock prices at the Australian Securities Exchange in Sydney, Australia, February 9, 2018. REUTERS/David Gray - RC19ABB37760shareholders to complain about. The Australian financial supermarket on Friday reported a record annual profit for the year to March 31 of A$3 billion , an impressive feat during a pandemic. It reinforces the impression that Chief Executive Shemara Wikramanayake runs a tight ship.

The A$57 billion bank is well-balanced. It owns the country’s fifth-largest retail lender, whose deposits grew 26% over the latest financial year. Although the trading business was flattered by U.S. energy price hikes caused by the Texas winter storm in February, its investment banking business performed well overall.

Macquarie also houses inside its money-management business the world’s largest collection of infrastructure funds, with just shy of A$200 billion of assets. The unit generates solid returns and is well-placed to take advantage of the rise in projects needing capital around the world, including in renewable energy.

All this diverse geographical and operational success comes at a hefty price. The shares trade at about 2.6 times estimated book value for the next 12 months, per Refinitiv. Yet Macquarie generated a return on equity of just over 14%, around where it has averaged for more than a decade. Assume a cost of capital of 10%, the typical rule of thumb for banks, and any multiple beyond 1.4 times demands justification.

The strength and stability of the franchise deserves consideration. So does its dividend policy. Despite paying out only 60% of earnings for the second half of its financial year, its upper annual limit of 80% exceeds that of domestic commercial-banking rivals including Westpac

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