By Harish Sridharan
(Reuters) - Australian investment bank Macquarie Group (ASX:MQG) (OTC:MQBKY) on Thursday flagged a "substantial" fall in April-June profit, as weaker trading conditions hurt its crucial commodities business.
Its shares fell after the announcement by 5.2% to A$173.55 - its biggest intraday percentage drop since mid-June last year.
"Weaker trading conditions saw Macquarie's Operating Groups deliver 1Q24 net profit contribution that was substantially down on the first quarter" a year prior, said CEO Shemara Wikramanayake.
Macquarie's Commodities and Global Markets (CGM) unit, its biggest earner, has for several years cashed in on increasing hedging activity amid volatility in oil and gas markets. That had driven the Sydney-based firm's annual earnings to a record A$5.18 billion ($3.53 billion) in fiscal 2023 ended March.
But hedging demand has diminished compared to last year as prices of oil, gas and other commodities settled into relatively steady ranges.
Macquarie's other businesses also took a hit in the quarter. Its asset management arm struggled due to lower income from green energy investments, while Macquarie Capital, which runs capital-raising exercises for other companies, was also weaker.
"While early in the year, it is clear that observable lower commodity volatility and deal flow are weighing on earnings," Citi Research analysts said in a client note.
"We believe it is too early to be definitive on how commodity volatility will evolve in the coming Northern Hemisphere winter, but it is clear that higher cash rates globally is slowing economic activity."
Macquarie's banking and financial services arm was an outlier, with its contribution to overall earnings rising on the back of growth in its loan portfolio.
While Macquarie did not disclose a profit figure in its quarterly update, Citi Research had expected first-quarter earnings of around A$1 billion ($680.90 million). The analysts noted, however, that Macquarie's earnings may have come in below that.
At the end of the quarter, Macquarie's capital surplus stood at A$10.8 billion.
($1 = 1.4686 Australian dollars)
(This story has been refiled to remove the repeated word "profit" from the headline)