Macquarie's foundations still strong despite slide

Sydney Morning Herald

Wednesday February 10, 2010

MALCOLM MAIDEN

INVESTORS knocked 6.1 per cent, or $3.07, off Macquarie Group's share price yesterday, but to get that in perspective, you need to go back a year.The slide came after Macquarie gave profit guidance that was below expectations, but it is subdued earnings momentum we are talking about here, not some perceived existential crisis, which was what Macquarie was dealing with in February 2009.Yesterday's selling pushed Macquarie's shares down from $50.35 to $47.12. A year ago, they were under siege at just over $23, and heading into their final slide to a low of just $15.75 three weeks later, on March 3.The descent pushed Macquarie to levels last seen in 1999, and came amid a welter of rumours that the group was being forced into an emergency capital raising to shore up its balance sheet - something Macquarie officially denied in a statement to the stock exchange at the end of February, saying it continued to hold capital "well in excess" of the minimum enforced by the banking regulator, APRA.The concerns that flattened Macquarie's shares a year ago centred on two things: speculation about its capital adequacy, not helped by the slow-motion implosion of the Macquarie "mini-me", Babcock & Brown, and beyond that, speculation that the crisis had fatally undermined a jewel in its crown - the promulgation of investment trusts that created multiple-fee tolling points for the group, as asset acquirer and arranger, financier, float arranger and operational manager.Fast forward a year and the first concern is gone. Macquarie has been deploying capital on incremental overseas expansion, of its fixed-interest and equities operations mainly, and the disclosure yesterday that its Tier One capital adequacy ratio had declined from 11.7 per cent at September 30 to 10.4 per cent was another factor in the share price slide.But the group's foundations are still solid. At September 30 last year there was $4.5 billion of capital on the books in excess of APRA's minimum requirement, and Macquarie said yesterday that in early January this year the capital base was still $4 billion above the minimum requirement of $7.5 billion after the deployment of $500 million for the Delaware funds management business in the United States.Retail deposits rose from $13.9 billion to $14.5 billion in the December quarter, and in December short-term funding was only only 7 per cent of total funding.The group was a big user of the government's borrowing guarantee, raising over $15 billion, but has not relied on it since August last year, and has raised $2.5 billion without it since then. Its chief executive, Nicholas Moore, said yesterday that capital requirements would be tougher post-crisis, but on any of the scenarios being discussed around the world, Macquarie is comfortable.As for the theory that the crisis has turned Macquarie into just another investment bank, the jury is still out.The group has substantially disentangled itself from its stable of listed funds, with a series of deals including the devolution of Macquarie Infrastructure Group into a "mature" low-geared and independently managed fund and a much more highly geared "active" one still managed by Macquarie, the privatisation of Macquarie Communications, and the replacement of Macquarie as manager at Macquarie Airports, Macquarie Media and Macquarie Leisure.It has been dragging forward future management fee streams in the form of exit payments that peaked with Macquarie Airports' $345 million payout to unlock its management handcuff. But that process is drawing to a close, and Macquarie probably needs to find at least $500 million a year of new high-yielding income to fill the hole.One of its responses has been to selectively expand its securities broking business in the US and Europe with the aim of becoming a top-tier operation, offering full service broking in Australia and Asia, (where it has a strong base after taking over ING's cash equities business in 2004) and focusing on specialist equity asset sectors in the US and Europe - property, infrastructure, resources and commodities, energy and quantitative-driven trading, which between them account for 42 per cent of the MSCI global share index.Macquarie Securities' boss, Roy Laidlaw, says since the expansion began the group has boosted its research coverage from 1747 companies to 2500 companies, putting it in eighth position worldwide, behind Bank of America-Merrill Lynch (almost 4000 companies), UBS, Goldman Sachs, Credit Suisse, Citigroup and Deutsche (just over 3000 companies), but ahead of names including Morgan Stanley, Nomura, HSBC and Barclays.The plan is that broking commission income from investors and equity capital markets income, including book-running income from companies Macquarie covers, will follow, and Laidlaw says the total global broking commission pool was $US25 billion last year.The No. 5 broker raked in an estimated $US2 billion, the No. 10 broker booked $US800 million,and the No. 15 firm took about $US400 million. Laidlaw puts Macquarie somewhere between 10th and 15th place - a pretty good start - but it remains to be seenhow the business builds, and how profitable it is.