Macquarie Bank investors are unlikely to find comfort in the latest batch of earnings results from the big US banks, even though they confirm that the Australian group isn’t the only outfit struggling to generate bumper profits in the current environment.
Last month, investors dumped Macquarie shares plunged after the investment bank warned investors that its first half profit was likely to be around 25 per cent lower than last year because of weak conditions in equity, fixed income and foreign exchange markets. Niggling worries about Macquarie’s ability to generate the spectacular profits it made in the past mean that the investment bank’s share price is trading only slightly above its 52-week low.
But Macquarie isn’t the only investment bank finding that current market conditions are testing. Overnight, JP Morgan Chase – considered one of the world’s top investment banks – revealed that its investment banking division suffered a 33 per cent drop in net income in the third quarter. The division’s profitability was hurt by a drop in investment banking fees, combined with lower revenues from trading.
However, stronger performances in other divisions, combined with a steep drop in provisions for problem loans allowed the giant US bank to report a 23 per cent increase in net income in the quarter (JP Morgan’s house of cards, October 14).
Still, investors are unlikely to be satisfied that Macquarie is currently suffering from the same malaise that’s afflicting every other investment bank. They’re still waiting for Macquarie to rustle up some of the earnings magic that it demonstrated in the past.
Of course, one of the reasons that Macquarie has lost its capacity to dazzle investors is the demise of the listed infrastructure fund model.
The model – which Macquarie invented and expanded to its furthest extreme – allowed the investment bank to generate spectacular profits from managing its various funds, in addition to advising the funds on equity and debt raisings for new acquisitions.
Of course, Macquarie is still managing huge unlisted wholesale infrastructure funds. But so too are many of its big global competitors, who were quick to latch onto the profit-generating potential of the Macquarie model, but decided it was too risky to apply in the listed arena. As a result, Macquarie is increasingly bumping into the big global investment banks, such as Goldman Sachs, when it comes to raising wholesale infrastructure funds, and acquiring global infrastructure assets.
And here Macquarie is increasingly finding itself at an disadvantage. In many cases, it’s moving into markets where it has far fewer contacts than its competitors. Now, contacts are the most important asset of investment bankers. They need access to the people who’ll give them big mandates, or who’ll agree to invest billions of dollars in their funds.
In Australia, Macquarie’s network of contacts is unparalleled. There’s scarcely a business leader or politician in the country that senior Macquarie executives could not access. But overseas, it’s much trickier situation. And, to make matters worse, Macquarie often finds itself competing head to head with the big global investment banking franchises.
The obvious solution is for Macquarie to develop a new product or business lines to differentiate itself from the big global investment banks. But this is no easy task. After all, the big global investment banks are full of extremely intelligent, ambitious people who are themselves trying to do exactly the same thing.
And Macquarie faces the additional problem that the smartest person in the bank – Nicholas Moore – happens to be the managing director.
Now, if anyone in Macquarie has the brain-power to come up with a new business line capable of generating lucrative fees it’s Moore. He was, after all, one of the architects of the original listed infrastructure model.
But because Moore is the managing director, the bulk of his time is taken up more routine matters, such as dealing with investors and settling turf wars between various areas of the bank, and deliberating on the all-important issue of bonuses for senior Macquarie executives. This leaves him with very little free time to develop innovative new approaches to investment banking.
Macquarie's size makes matters worse. It’s relatively easy in an investment bank with, say, 500 people to create a dynamic culture centred on some highly talented individuals. When staff levels climb past 14,000 – as Macquarie’s have now – it’s near impossible to maintain that same culture. Inevitably the institution becomes much more bureaucratic. Instead of developing creative new ways of doing things, management becomes concerned with ensuring that all employees are under control.
As a result, it could be quite some time before Macquarie rediscovers the magic it needs to again enthral investors.