There is nothing intrinsically wrong with Macquarie, except that it is now just another investment bank that has run out of bright ideas, swimming at the back of a pack of larger, hungrier sharks.
If you had to have an outlandish bet, punt on Macquarie being forced to find its own advisers in the event of a takeover approach from one of the global white pointers. They all eat their own, eventually. The way global business levels are going, they will get hungrier and smaller fry like Macquarie might make an easy dish.
Macquarie only has itself to blame for the latest feeding frenzy from the wild animals among the commentariat and analysts (at other banks and brokers) in the wake of its earnings downgrade. Hubris, a sin at all times, but especially when time are tough, has made Macquarie and its senior managers, led by the unloved Nick Moore (the man who was savaged on Sydney radio by Alan Jones over fee gouging and overcharging at Sydney Airport), an easy target.
And so it is now with the 25% earnings downgrade and Macquarie’s refusal to see that what caused the slump is not going away. A flood of critical comments appeared this morning as columnists and analysts lined up to take a ping at the bank once dubbed The Millionaires Factory.
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Job cuts have been denied and (as some writers pointed out) the staff numbers in yesterday’s presentation still showed the level at March 31, when the 2010 financial year ended. That’s denial, despite some acknowledged departures of senior executives in June.
But Macquarie should be seen as a big, pudgy, slow moving canary for the rest of the investment banking sector around the world. Its problems are going to be shared in around a month’s time when the likes of Goldman Sachs, Morgan Stanley, Barclays, Deutsche Bank, Citigroup and all those other groups that brought us the boom we had to have and the GFC and credit crunch, produce third quarter earnings.
Their second quarter reports were not solid, indeed some were a bit dodgy. In fact some of these financial giants will report very tatty results indeed as they are compared with the low interest rate powered trading boom of a year ago.
The Financial Times Lex column had the best comment on Macquarie’s downgrade: “Australia’s largest investment bank is not alone in lamenting falling fees. But it is time that Macquarie started preparing for the possibility that the more subdued activity of the second quarter — the weakest in six years for combined investment banking revenues globally, according to Dealogic — will become a permanent feature.”
If, as Macquarie claimed yesterday, it can still earn around $1.3 billion in the year to next March and produce a solid result, it will have to earn around $800 to $900 million in the current half year to get close, or over twice what it will have earned in the six months to September 30. Apart from making a profit of around $150 million and freeing up capital from selling its 18% stake in Intoll to a Canadian bidder, there are no signs of where the extra loot will come from.
Macquarie quite rightly pointed out yesterday that it has $3.1 billion of surplus capital and around $9 billion of cash on its balance sheet, but this comfort cushion is also depressing returns because of the lower rates being paid by central banks and others for cash, and the slump in yields on government and other high grade debt as fears of deflation and a double dip slump in the US force global long-term rates lower. (And other banks will feel a similar squeeze once the new capital rules take effect in the next couple of years).
Rates have perked up in recent days as US investors no longer see (for the moment) as much doom and gloom ahead, but the change is not nearly enough to help Macquarie. (Incidentally, Macquarie’s problems from low returns from cash and bonds was seen in the 40% slump in half-year earnings by QBE, the big insurer/reinsurer last month.)
And if things return to the ‘old normal’ as Macquarie still thinks, that will likely see an outbreak of more concerns about the Eurozone and the financial stability of Greece, Span, Italy, Ireland and Portugal. If that happens, hit the action replay button as Macquarie’s ‘old normal’ disappears and is replaced by a repeat of the tensions and worries in the June quarter, which have continued in the current quarter. If that happens, watch Macquarie’s results tank, again.
There is a massive deleveraging still happening across the globe in all sorts of markets. Retail investors in the UK and the US have gone right off shares. They are still buying exposure in indexed share funds, but in actively managed funds or directly they are selling up and heading for bonds. US trading volumes last month were on some days the lowest for August since 1999 (when the tech and net booms were starting to sour).
That’s another reason why Macquarie’s outlook for the rest of the year isn’t sustainable, on present indications.
And no one has mentioned the greater irony here. As the Australian economy sees increasing growth — better profits than many investors would have thought a year ago — and signs of more to come this financial year, the country’s premier investment bank can’t see a way to really capitalise on the country’s good fortune. For all their cleverness in wanting to take on the world, it hasn’t helped them closer to home after they decided to exit their fleet of investment funds, like Intoll, Macquarie Airports and the like (under pressure from analysts and investors, it must be said, to do so).
Its equities (shares) business is doing badly because of the slump in volumes, especially in the US and London. Takeover deals are few and far between, so fees are down, while the easy income pipeline from those listed Australian funds is all but empty.