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Moore realises recovery will take time

WHILE Macquarie Group has attempted to short-circuit its sagging share price through a rare return of capital to shareholders, the planned buyback signals the investment bank believes the global environment will remain weak for longer.

WHILE Macquarie Group has attempted to short-circuit its sagging share price through a rare return of capital to shareholders, the planned buyback signals the investment bank believes the global environment will remain weak for longer.

Until now Macquarie had been resisting such a move. The chief executive, Nicholas Moore, was holding out for a recovery on global markets.

Even with Europe taking steps to sort out its financial problems, Moore has decided that opportunities for Macquarie to deploy capital over the medium term have diminished. Retail banks and investment banks like Macquarie need capital to grow their day-to-day businesses. The faster the growth, the more capital is needed.

Like most of its rivals, Macquarie is currently experiencing little demand for corporate and mortgage lending. And in the investment banking business there are few heavy infrastructure acquisitions on the horizon to flip into (now smaller) managed funds business.

At the same time, the growing pool of cash sitting on Macquarie's balance sheet - at last count in excess of $3.5 billion - was becoming too hard to hide from shareholders, particularly while its share price was languishing at near 18-month lows.

All of this cash was pulling down Macquarie's return on equity, to a tiny 5.7 per cent during the first half - coming in below the bank's cost of capital and well short of the 20 per cent rates that shareholders have been more accustomed to.

The buyback has a number of caveats. It will be partially funded by a hybrid shares issue and like most banks, will need to get the nod of approval from the bank regulator.

This and a number of other moving parts means that it may not be a further year until any buyback starts getting under way. And if this coincides with a rebound in markets, then Macquarie may just decide it needs the funds.


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