Macquarie the magnificent

A league table of global investment banks and their performance across a range of key measures prepared for Macquarie Group's remuneration report provides insights into how this elite group of institutions fared during the global financial crisis.

In several key performance segments, the Macquarie peer group had to be adjusted to take account of the collapse of Lehman Bros, the demise of Bear Stearns and the disappearance of Babcock & Brown.

In the comparison charts and tables, each member of the peer group is labelled as "competitor”. But the identity of each institution and its performance is obvious because the banks are named in footnotes in the same order as they appear in the charts and tables.

Macquarie emerges from the analysis, which includes data going back over 10 years, as one of the most consistent performers in investment banking in the world.

Macquarie admits that appropriate comparisons are difficult because Macquarie is a hybrid of investment banking and private equity. But investment banks are the best available benchmark. It has been publishing the analysis for more than five years using publicly available data.

The peer group is: Babcock & Brown, Credit Suisse, Deutche Bank, Goldman Sachs, Lehman Bros (until its collapse on September 15, 2008), Merrill Lynch, Morgan Stanley and UBS. JPMorgan Chase was included after it took over Bear Stearns.

Goldman Sachs is the only investment bank that comes anywhere near matching Macquarie for consistent return on equity (ROE) in the period 1999-2009.

Goldman had ROE about half the level of Macquarie for one year, with 4.7 per cent; just pipped Macquarie over three years with 22.7 per cent; and lagged Macquarie over five years and 10 years with 21.9 per cent and 20.5 per cent, respectively.

Goldman fared badly when measured against the benchmark of 10-year compound annual growth rate in net profit after tax. It came in at less than 1 per cent, compared to Macquarie's 18 per cent.

Goldman also looked far too generous in terms of employee payments when measured on the basis of its compensation to expense ratio. Its compensation ratio in 2008 was about 80 per cent, almost double the 41 per cent at Macquarie.

JPMorgan Chase comes out of the peer group comparison better than most. Its 10-year compound growth rate in net profit was 2 per cent but its ROE was half the level of Macquarie over one, three, five and 10 years.

Its compensation ratio was very high at 60 per cent.

Macquarie's arch rival in the domestic market, UBS, emerges from the analysis with its reputation for protecting shareholder funds in tatters.

It has the highest compensation ratio of any bank in the peer group, at more than 1,350 per cent, and its massive 2008 losses smashed its ROE measures over one and three years.

UBS has since changed its compensation arrangements to include the ability to claw back bonuses if profits fall.

The compensation ratio comparison highlights the dramatic differences when bonuses are tied to profit rather than revenue, as occurred at many of the peer group banks.

Babcock & Brown is not included in the ROE comparison, but the previous year's annual report shows that it was on a much steeper upward trajectory than Macquarie. In 2008, its ROE for one year was 34 per cent and three years 32.6 per cent.

Macquarie's average ROE has averaged 23.2 per cent over 10 years, although it fell to 9.9 per cent in 2008.

Analysts have raised doubts about whether Macquarie will be able to return to the heady days of 2007 when its ROE hit 28 per cent.

But the latest comparison of its performance shows that if it maintains its consistency in risk management and profit generation, it will beat its peers over the long-term.