THE DISTILLERY: Macquarie maelstrom

Is Macquarie Group bereft of ideas or opportunities? Those are the questions this morning's commentaries tackle in The Distillery. The Australian Financial Review's Tony Boyd says Europe's banking asset purge should give the silver donut more to buy than Macquarie stock, while The Australian's Glenda Korporaal says the investment bank's numbers would've been worse without the record Sydney Airport dividend. Korporaal's colleague John Durie says investors should maintain the faith with Macquarie, while The Age's Malcolm Maiden says all investment banks need to decide whether the pre-GFC era is worth dwelling on.

Firstly, The Australian Financial Review's Chanticleer columnist Tony Boyd delivers perhaps the best piece on Macquarie's declaration that it won't look for growth through acquisitions and will instead opt just for a share buyback.

"There are two conclusions to draw from that. First, the creative juices inside Macquarie seem to be lacking fizz in a world overflowing with opportunities. We are in the middle of a $US2 trillion asset disposal phase by Europe's banks and half the developed world is in recession but Macquarie can't find anything to buy beyond its own stock. In the old days, Macquarie would have identified the sectors or segments of the world economy that stood to benefit the most from an upturn and positioned itself accordingly. It would have Macquarie Capital buying assets or rolling up a big position in the turnaround segment in order to make a killing. The second conclusion is that, after four years of patchy profits, Macquarie is resigned to having its destiny determined by markets. It is responding to the weakness in investment banking and securities trading by doing the boring things that commercial banks have been doing for years.”

The Australian's Glenda Korporaal explains that chief executive Nicholas Moore was notably cautious as he discussed the investment bank's worsening profit numbers last week.

"Less discussed was the fact that the 24 per cent fall in Macquarie's profits would have been even steeper had it not been for a very generous dividend payout of $295 million by Sydney Airport, recorded as second-half income. That compares with a dividend of $100 million from the operator of the country's busiest airport, bought and floated by Macquarie when times were better, the year before. Had the dividend been the same, the group's total income would have been down by another $200 million. But, at a time when investment banks around the world are under pressure, Moore stressed that Macquarie had a strong balance sheet with good risk management and at least $3 billion in surplus capital that would be used to buy back shares and for possible opportunistic bear market acquisitions.”

Business Spectator's Stephen Bartholomeusz points out that the market has seen this coming and Macquarie has been moving to change its footprint.

"What is evident is that 2011-12 was the year Macquarie decided the sea-change in market conditions wasn't a temporary phenomenon and that it had to re-base its businesses. Moore cut 1354 people and a net $419 million out of the group's cost base, but that understates the extent to which the group's cost structures have been lowered. With $227 million of investment in areas seen as having growth potential and $90 million of restructuring costs, the gross cost reductions totalled $736 million, or more than 13 per cent of its cost base. Not surprisingly, the biggest cuts were within Macquarie Securities, Macquarie Capital, banking and financial services and the corporate centre. By the end of the 2012-13 year Macquarie expects the cost bases within Macquarie Securities and Macquarie Capital to be between 20 and 25 per cent lower than they were in 2010-11.”

The Australian's John Durie had some even more encouraging words for Macquarie.

"Unlike the big US investment banks, which face losing their principal trading income under the new post-GFC rules, Macquarie has a more sustainable model. Shemara Wikramanayake (better known as Shemara) has in recent years emerged as the star of the show through her consistently improved returns. This business includes the remainder of the old Macquarie infrastructure business, which is a global leader in fund management and advice. Macquarie's equity investments still have a carrying value of $5.3 billion, up from $5.2 billion a year ago, including assets like Sydney Airport, Charter Hall and Macquarie Atlas that can be sold to boost earnings if required. Within the fixed income division, almost magically Macquarie produced earnings of $253 million on gains from asset sales. This division in past decades has never reported a gain above $100 million and rarely above $20 million. It helps restore the total.”

And The Age's Malcolm Maiden says investment banks, including Macquarie, still have to decide whether to use the heady days of the pre-GFC era as a benchmark, or an anomaly.

"A report on the investment banking industry by Boston Consulting Group says most investment banks are, like Macquarie, now posting returns on equity of between 7 and 10 per cent, and says the pressures on the industry are unlikely to ease. The investment banks may be able to reclaim returns on equity of 15 per cent-plus, it says, but only if they work out how simultaneously to boost revenue and control costs. Macquarie is trying to find the right recipe, by cutting costs and reweighting itself towards funds management and the other ''annuity'' businesses. It is also pushing on with a plan to shrink its share base and support its share price by buying back 10 per cent of its share capital, and was rewarded for the effort yesterday when investors pushed its shares 3.3 per cent higher in a market that fell by a third of a per cent.”

In other corporate news, The Australian Financial Review's Matthew Stevens and The Australian's John Durie go in to bat for Spotless Group chairman Peter Smedley, who held out as long as he could to deliver greater value to his shareholders. As explained in this morning's Breakfast Deals column, Spotless is expected to make an announcement about a deal with Pacific Equity Partners after being on the radar of private equity companies for over year.

Meanwhile, The Sydney Morning Herald's Elizabeth Knight has spoken to Fortescue Metals Group chairman Andrew Forrest, who hit back at comments from hedge fund manager Jim Chanos that the iron ore miner's shares are overcooked. The Australian's Paul Garvey brings word from Minmetals boss Andrew Michelmore, who the writer argues is perhaps one of the most uniquely placed Australians to comment on the inner workings of Chinese business.

The Age's Michael West investigates just who Plenary Group is, given its particularly adept touch in bidding for government contracts. In a separate piece, West takes a few pot-shots at media billionaire Rupert Murdoch. Fellow Fairfax writer Ian Verrender is claiming some credit for suggesting Telstra's structural separation deal for the NBN's construction might have been the best thing for the company, when many other commentators were predicting its destruction.

In politics, The Sydney Morning Herald's Jessica Irvine says the upcoming budget from Treasurer Wayne Swan, widely expected to be a miserly one, is a good opportunity to see where the government's priorities really lie. The Age's Adele Ferguson reports on Financial Services Minister Bill Shorten and his announcement of new legislation to address the lack of transparency in the superannuation industry and its out-dated governance structures. And The Australian's economics editor David Uren says we should expect another round of bank bashing.

Meanwhile, Fairfax's Paddy Manning finds an increasingly urgent tone coming from coal developers as the price continues to weaken. Although The Australian's Robin Bromby says research indicates that coal demand looks set to sour enormously heading towards 2035.