Ditch twin millstones, competitor advises Macquarie
Closing the units, which were responsible for Macquarie's 2012 profit falling to an eight-year low, or moving to a capital-light advisory model excluding capital markets underwriting would boost profits and returns to shareholders, UBS said.
The report by UBS analysts Jonathan Mott and Chris Williams highlights how investment banks need to adapt to the broader downturn hitting the industry.
In boom times, Macquarie's securities business can generate earnings in excess of $1 billion annually but it is being squeezed as investors pull money out of equities to invest in the relative safe haven of bonds or pay down debt.
Like most investment banks worldwide, Macquarie has been facing a deeply unfriendly environment for mergers and acquisitions.
Revenue has been under pressure as markets have been racked with uncertainty on the back of European debt crisis, tougher regulations and questions over the outlook for Chinese growth.
Macquarie has cut jobs to save on costs as trading and mergers and acquisitions activity dwindle.
Ongoing losses after bonuses "across its equities and investment banking businesses will inevitably force Macquarie's management and board to reassess its strategy", the UBS analysts said. They expect the two units to lose $306 million in the year to end-March and not return to profit in the foreseeable future.
The report argues Macquarie's global equities and investment banking business is "sub-scale" , adding it "lacks the products, capability and balance sheet to compete in an industry suffering significant structural headwinds".
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UBS analysts argued Macquarie's investment banking and loss-making securities units have been dragging on profits and are unlikely to return to profitability soon. They said closing or selling these units — or shifting to a capital‑light advisory model excluding capital markets underwriting — would boost Macquarie’s profits and returns to shareholders.
According to the UBS report, moving to a capital‑light advisory model (excluding capital markets underwriting) would reduce the need for balance‑sheet capital and risky trading exposure, which could improve profit margins and shareholder returns compared with keeping loss-making, capital‑intensive securities and investment banking operations.
The article says Macquarie’s securities and investment banking units were responsible for the drop in profit in 2012. Those businesses were squeezed by weaker markets and generated losses that contributed to the eight‑year low.
UBS noted that in boom times Macquarie’s securities business can generate earnings in excess of US$1 billion annually, but it is being squeezed as investors pull money out of equities into safer assets like bonds or use funds to pay down debt — reducing fee and trading income.
The UBS analysts expect Macquarie’s equities and investment banking businesses to lose about US$306 million in the year to end‑March and believe they will not return to profit in the foreseeable future.
UBS says 'sub‑scale' means the business lacks the products, capability and balance sheet needed to compete effectively. In UBS’s view, that limited scale makes it harder for Macquarie to withstand the significant structural headwinds facing the industry.
The article points to several pressures: a downturn in mergers and acquisitions activity, uncertainty from the European debt crisis, tougher regulations and concerns about the outlook for Chinese growth. These factors have reduced market activity and revenue for Macquarie’s trading and corporate advisory businesses.
Macquarie has cut jobs to save on costs as trading and mergers and acquisitions activity have dwindled, according to the report. UBS also said ongoing losses after bonuses will likely force Macquarie’s management and board to reassess strategy for those units.
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