Is Macquarie Group Ltd (ASX: MQG) the best ASX bank to buy at the current share price? The global investment bank could be one to watch.
Why Macquarie is a very good business
Macquarie is Australia’s largest investment bank with a market capitalisation of over $43 billion. Whilst it generates plenty of earnings in Australia, it actually makes around two thirds of its money internationally. It did extremely well in the 2010s after the GFC.
When you look at the operations of other ASX banks like National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group Ltd (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC), you’ll see that most of that earnings come from loans to Australians (and New Zealanders). That isn’t very diversified and puts them at risk when there’s a recession (like this one caused by COVID-19) or when interest rates become a problem (like the current ultra low rates).
Macquarie has four pillars with its business. It recently announced how FY21 is going. The investment bank has ‘annuity style’ businesses called Macquarie Asset Management (MAM) with $568 billion of assets under management and banking & financial services (BFS) which includes Macquarie Bank. This half of the business saw its combined profit contribution rise compared to FY20 Q1 primarily due to the sale of the rail operating lease business in MAM, partially offset by lower profit in BFS which includes higher credit provisions due to COVID-19.
Macquarie also has its market-facing businesses which are called ‘commodities and global markets’ (CGM) and Macquarie Capital. This business saw its net profit contribution fall due to significantly lower investment-related profit in Macquarie Capital, though this was offset by stronger profit in CGM.
Macquarie had a go at estimating profit for the first half of FY21. It’s expecting profit to be down 35% compared to the first half of FY20 and down 25% on the second half of FY20.
Is Macquarie the best ASX bank to buy today?
The Macquarie share price is still down more than 20% compared to the pre-COVID-19 crash price. Considering how well managed and strong of a business it is, today’s price is fairly attractive. However, as Macquarie has warned, short term profit is expected to be heavily impacted. Market activity is lower and COVID-19 bank provisions are rising.
Barrenjoey, the new investment bank being backed by Magellan Financial Group Ltd (ASX: MFG) and Barclays, could also hamper future profit once it’s set up. But Macquarie has plenty of long term growth potential in overseas markets, particularly when it comes to infrastructure and renewable energy investments – two areas that Macquarie specialises in and also two areas that many governments may look to help get out of this COVID-19 recession.
Looking at the current Macquarie share price, it is valued at 16 times the 2022 estimated earnings. I’d prefer Macquarie to other big ASX bank shares, however there are other ASX dividend shares I’d rather buy first like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) which I outlined here.
