MARKETS SPECTATOR: Macquarie is no Goldman

Despite a rally in its share price, Macquarie Group's full-year earnings suggest it is certainly not comparable to Goldman Sachs, as one of its executives once suggested.

Macquarie shares have surged and helped drive the S&P/ASX 200 Index higher. At 1150 AEST the stock had gained $3.42, or 8.8 per cent, to $42.30. The shares have risen 55 per cent in the last 12 months.

The company said today its group net profit was $851 million in the 12 months to March 31 compared with $730 million the previous year. The bank's net profit in the 12 months to March 31 was $650 million. That compares with $609 million in the prior year. The guts of its business, banking and financial services, delivered higher profit as expenses were pared. Securities, fixed income, commodities and foreign exchange trading recorded a net profit increase 36 per cent. 

A while ago one Macquarie executive compared the firm to Goldman Sachs. He said Macquarie was the “Goldman Sachs” of the antipodes. But unlike Goldman Sachs, Australia’s biggest investment bank is not number one; even in its home market.

Macquarie was number four in Australian share sales last year. It has been unable to displace UBS who has been the number one Australian equity capital market adviser since 2006. On M&A, Macquarie was ranked number three in 2012. To May 1 this year it was number four. In 2012 Goldman Sachs was the number one investment bank globally in advising on mergers and in ECM.

Macquarie’s return on equity in the 12 months to March 2013 was 7.9 per cent, barely above the risk-free rate of return. It is down from 9.7 per cent in 2011 and 11.3 per cent in 2009, months after the collapse of Lehman Brothers. Macquarie’s return on equity is substantially worse than its international peers. Goldman Sachs’ ROE in 2012 was 10.7 per cent. In the first quarter 2013, Goldman Sachs’ ROE was 12.4 per cent. Macquarie’s ROE does not compensate investors for the risks associated with the volatile earnings cycle that investment banks experience, according to Dean Paatsch of corporate governance firm Ownership Matters.

Despite global bull markets, Macquarie’s operating income fell 1 per cent, in the 12 months to March 31, to $4.7 billion. Fixed compensation at the company is at an “all time high,” according to chief executive Nicolas Moore. He says variable remuneration may increase at Macquarie if its business improves. CLSA analyst Brian Johnson asked Moore whether he and his underlings are going to be rewarded at the expense of shareholders?

Some who follow the company want its $5 billion of equity investments sold off and the money returned to shareholders. Moore says that will probably not happen. Macquarie likes to invest alongside clients, he says. But Moore did say Macquarie’s existing investments in Sydney Airport and Southern Cross Media may be sold off but gave no time frame as to when that will happen.

Macquarie says its 2014 profit will be better than in 2013 “provided financial conditions… are not worse.” That’s hard to see. Markets are over stretched at current valuations.  Macquarie’s rivals in Australia and overseas are brushing it aside. At home, Wall Street and a host of boutiques are being used by Australia’s biggest companies as their preferred advisers. In the mining industry, an area touted by Moore as an area of expertise for the company, Macquarie acknowledges that conditions are subdued in the wake of a commodity price weakness. Asia, the world’s fastest growing region, accounts for just 11 per cent of Macquarie’s income.

Macquarie’s stock may have run too far, too fast.