Australia's largest investment bank Macquarie Group Ltd (ASX:MQG) said market conditions continued to recover from the worst downturn in its trading history, but warned second-half profit could fall by 5 per cent from the year before.

CEO Nicholas Moore said that at the result announcement for the first half of the 2011 financial year, it was foreshadowed that subject to market conditions returning to more normal levels during the second half, it was anticipated that the 2011 full-year result would be broadly in line with the 2010 full-year result.

“Our December quarter result reflected improved market conditions across all groups except Macquarie Securities Group, where equity market volumes remain subdued.

“Subject to market conditions continuing to return to more normal levels, as well as other factors including the timing of completion on transactions and normal year end procedures, we currently anticipate the second half result to be approximately 35 per cent up on the subdued first half and the second half result to be approximately 5 per cent down on the previous corresponding period,” he said.

“We expect FY11 trading will still be characterised by fewer one-off items, the compensation ratio being consistent with historical levels and the continued higher cost of funding, reflecting market conditions and high liquidity levels.

“Excess funding levels on the balance sheet are expected to continue to be deployed across the businesses,” Mr Moore said.

Investors initially reacted to the news by selling Macquarie shares down by as much as 2.5 per cent. By late afternoon, the stock was down 1.07 per cent, shedding 44 cents to $40.79. But it has now recovered to be trading down by 0.3 per cent. The benchmark S&P/ASX 200 index was about 0.4 per cent higher at the same time.