What was once considered “safe investments” don’t look to be so secure now. To say that the banking industry is going through a challenging period would be an understatement. Profit plunges, dividend cuts, and frozen loan payments have all been the fallout of the Coronavirus pandemic.
Since COVID-19 began infecting the markets, the Big Four banks have taken an average 37% hit.
|Stock||Trading Price||Fall since Market Peak on February 20|
|Commonwealth Bank of Australia (ASX: CBA)||$59.60||-32.2%|
|Westpac Banking Corporation (ASX: WBC)||$15.51||-39.6%|
|Australia and New Zealand Banking Group Limited (ASX: ANZ)||$15.73||-41.8%|
|National Australia Bank Limited (ASX: NAB)||$16.08||-41.3%|
Article outline 1. MQG's year-ending 2020 financials. 2. The market's reaction to MQG's earnings. 3. Whether MQG is worth the investment at its current price?
Year-Ending 2020 Financials
- Full-year profits are down 8% YTD = $2.7 billion.
- Dividends to be cut by 50% = $1.80
- Impairment charges rose sharply by 81.2% = $1 billion.
- Funds management & retail banking saw a 13% increase in profits.
- Commodities trading and M&A profitability fell by 35%.
Apart from seeing a slight increase in profitability in its funds management and retail banking divisions, MQG saw falls in profitability across the board. The plunge in MQG’s commodities profits is largely due to the current oil crisis. The oil crisis is outside of MQG’s control. However, Macquarie successfully avoided larger profit losses by preparing for a bearish 2020. Thus, commodity and M&A losses are not too concerning.
MQG’s CEO Shemara Wikramanayake stated that “Macquarie’s full-year result has also been subject to the effects of this crisis and was impacted by a material increase in credit and other impairment charges.”
Moreover, the bank said that it expects market conditions to remain challenging in the coming months. In turn, investors should expect similar if not worse financials come June 2020.
What was the Market’s Reaction
Macquarie Group’s shares rose by 5.7% to finish the day at $105.19. While MQG did see an 8% decrease in profits, this fell in-line with what many analysts were predicting. Moreover, this deterioration in profits pails in comparison when compared to Westpac’s 62% plunge in profitability.
The minimal fall in profitability can be attributed to the very diverse nature of MQG’s investment portfolio. Hence, it should come as no surprise why investors boarded the MQG express.
Overall, Macquarie is suffering significantly less, in comparison to its retail peers. Making it the favoured ASX bank in the eyes of investors.
Is MQG Worth the Investment?
Before I start, I am obliged to remind our viewers that this is not advice, only general commentary from my extensive research in this area.
Short answer: Yes (opinion not advice).
Personally, I see MQG as a quality blue-chip stock to invest in during these uncertain times. Before the outbreak of the COVID-19 pandemic, MQG continued to post astounding financial results. The company saw an 18.3% increase in revenues in 2019 when compared to the prior year. Revenue growth was reflected in MQG’s outstanding EPS value of 11.65 (2x CBA’s EPS).
Furthermore, the bank posted a ludicrous net profitability ratio of 54%. This was accompanied by a 1.3% increase in its ROI ratio to 16.8%. Also, the bank reported a P/E ratio of 11.65. When compared to the average P/E ratio of 106.7 of the Big Four banks, the stock is currently trading at a heavily discounted price. When combined with a D/E ratio of 1040.6% (473.6% less than ANZ’s), this stock exposes investors to lower risk (when compared to the Big Four banks).
To add the cherry on top, MQG’s dividend yield remains at 5% (despite the 50% cut in dividend payouts). When compared to the likes of NAB & ANZ (who suspended interim dividends), MQG enables investors to generate cash flow from their shares.
It is for these reasons why I can’t think of a better stock to invest in during these unprecedented times.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Sergeo Domtchenko, Associate of YIG.