The Distillery: Silver donut shines

Macquarie Bank impressed the market on Friday with two pieces of good news. First was the announcement of a strong profit result, though as one commentator notes, the earnings of the Millionaires Factory are still some way from the halcyon days of 2006-07. The other news applauded by investors was the decision to offload $1.4 billion in Sydney Airport securities to its own shareholders. Still, one scribe finds a dampener to offset a nice little shareholder sweetener.

Meanwhile, the commentariat can’t help but recap what a great week it was for the nation’s financial sector and ask: what will profits be like when the market is no longer ‘tough’?

The Australian’s Richard Gluyas begins with a close look at Macquarie’s Sydney Airport manoeuvrings, describing it as a “clever way to dispose of the group’s largest equity investment.” But lurking regulators offer reason to temper the excitement.

“So, after some tasteful balance-sheet refurbishment and a four per cent improvement in the Macquarie share price, why not break out the Bollinger? Blame the taxman, who seems to have Macquarie in his crosshairs… The sad fact is that Macquarie's pre-tax operating earnings for the September half-year surged 57 per cent, while shareholders "only" jagged a 39 per cent increase. That's because Macquarie's tax rate was an uncomfortably high 38 per cent.”

Gluyas notes the tax rate impact is the legacy of some tax reduction moves of yesteryear, which the ATO is cracking down on with vigour.

Business Spectator’s Stephen Bartholomeusz, meanwhile, explains the background for a reduction in profit growth at Macquarie.

“The shift into annuity-style businesses – the funds management division, corporate and asset finance and banking and financial services – has been the big strategic call made by Nicholas Moore, improving the quality and lowering the risk of the group’s earnings base. But it has also made it difficult to achieve the kind of turbo-charged returns Macquarie was once renowned for.”

Despite this, the group’s earnings are “of higher quality and its returns are improving”.

The Australian Financial Review’s Chanticleer columnist Tony Boyd agrees the result was a strong one, though sees reasons to heed the concerns of BT Investment Management chief executive Emilio Gonzalez.

The BT exec contends a topping out of bank shares is on the horizon with broad implications for the market.

“Gonzalez says that after the enormous rally in bank stocks over the past year, including share price increases of between 45 per cent to 57 per cent, similar price increases are unlikely in 2014… Gonzalez believes this will be significant because bank shares have formed such a core part of the portfolios of self-managed superannuation funds (SMSFs)… (The) tempering of bank stock capital gains will eventually force SMSF investors to turn their attention to diversify their investments and most likely put more money overseas.”

Fairfax’s Michael West pushes on with the broader view of the financial sector, spotlighting the banks’ progression through a challenging marketplace.

“With CBA SpyBank unveiling its $7.8 billion behemoth in August, the big four are on track for a collective bottom line of $27 billion… Imagine what it will be like when lending picks up again.”

Indeed, the banks have done incredibly well through a weak credit environment, but West is also keen to look forward – and he doesn’t like what he sees.

“How or when the party will all end is anyone's guess but the ‘moral hazard’ will prove lethal. And the taxpayer will pick up the chit.”

Sticking with the finance sector, the AFR’s David Bassanese peers ahead to Tuesday and what is likely to be the biggest news for the market this week: the RBA’s rates decision. In his opinion, many market watchers have got ahead of themselves.

“In line with market expectations, the Reserve Bank of Australia is likely to leave official interest rates comfortably on hold at Tuesday’s policy meeting, but the accompanying statement may well disappoint those looking for clearer signals that the rate cut cycle is over.”

In economic news, Bassanese’s colleague Alan Mitchell reports on the lessons Australia can learn from the tepid US and European recoveries, while The Australian’s David Uren updates readers on the long wait for a central bank policy environment resembling normal. We still might not be that close.

The carbon tax, meanwhile, continues to receive a going over from commentators and politicians alike. The AFR’s Phillip Coorey provides the backdrop for how climate policy could play out over the coming year, while Fairfax’s Peter Martin extolls the virtues of price signals and explains why economists don’t expect much from ‘direct action’.

In retail, David Jones was back in the headlines after recording a decent sales result, according to the market. The AFR’s Michael Smith argues it’s a sign the strategy of outgoing chief executive Paul Zahra is gaining traction, though Fairfax’s Michael Pascoe is less effusive. Why get excited about a company that is “going nowhere”?

Finally, Fairfax’s Malcolm Maiden outlines why there is little government enthusiasm for a sale of the HECS student loan portfolio, while The Australian’s Peter Van Onselen demands higher attention to the productivity growth problem. Productivity has lagged for too long in this country for the grandstanding to continue.