Investors sent shares in Macquarie Group Lower yesterday, punishing the bank for a second day after Monday’s surprise 25% earnings downgrade.
The shares lost 78c, or 2.2%, to end at $34.47 yesterday.
That took the two-day loss to $2.77, or 7%, after their 4.7% drop on Monday (they fell 8% at one stage on Monday).
Analysts haven’t yet cut their forecasts for 2010-11 earnings for the bank, but there were reports of staff cuts yesterday.
Some investors are now suggesting that the so-called Millionaires Factory might be vulnerable to a bid from one of its bigger global competitors.
Macquarie has a market value of $12 billion, which is a big bite for anyone, but it could get cheaper if earnings don’t pick up.
But Macquarie only has itself to blame for the latest feeding frenzy from the media and analysts (at other banks and brokers) in the wake of its earnings downgrade.
It set itself up for the hiding it has copped and will continue to suffer until things pick up.
And so it is now with the 25% earnings downgrade and Macquarie’s refusal to see that what caused the slump, is not going away.
Job cuts have been denied (and as some writers pointed out), the staff numbers in yesterday’s presentation still showed the level at March 31 when the 2010 financial year ended.
That’s denial, despite some acknowledged departures of senior executives in June.
The Financial Times Lex column had the best comment on Macquarie’s downgrade, "Australia’s largest investment bank is not alone in lamenting falling fees. But it is time that Macquarie started preparing for the possibility that the more subdued activity of the second quarter – the weakest in six years for combined investment banking revenues globally, according to Dealogic – will become a permanent feature."
If, as Macquarie claimed yesterday, it can still earn around $1.3 billion in the year to next March and produce a solid result, it will have to earn around $800 to $900 million in the current half year to get close, or over twice what it will have earned in the six months to September 30.
Apart from making a profit of around $150 million and freeing up capital from selling its 18% stake in Intoll to a Canadian bidder, there are no signs of where the extra loot will come from.
Macquarie quite rightly pointed out that it has $3.1 billion of surplus capital and around $9 billion of cash on its balance sheet, but this comfort cushion is also depressing returns because of the lower rates being paid by central banks and others for cash, and the slump in yields on government and other high grade debt as fears of deflation and a double dip slump in the US force global long term rates lower. (And other banks will feel a similar squeeze once the new capital rules take effect in the next couple of years.)
Rates have perked up in recent days as US investors no longer see (for the moment) as much doom and gloom ahead, but the change is not nearly enough to help Macquarie.
And if things return to the ‘old normal’ as Macquarie still thinks, that will as likely see an outbreak of more concerns about the eurozone and the financial stability of Greece, Spain, Italy, Ireland and Portugal.
If that happens, hit the action replay button as Macquarie’s ‘old normal’ disappears and is replaced by a repeat of the tensions and worries in the June quarter, which have continued in the current quarter. And if that happens, watch Macquarie’s results tank, again.
There is a massive deleveraging still happening across the globe in all sorts of markets.
Retail investors in the UK and the US have gone right off shares.
They are still buying exposure in indexed share funds, but in actively managed funds or directly, they are selling up and heading for bonds.
US trading volumes last month were on some days the lowest for August since 1999 (when the tech and net booms were starting to sour).
That’s another reason why Macquarie’s outlook for the rest of the year isn’t sustainable, on present indications.
Its equities (shares) business is doing badly because of the slump in volumes, especially in the US and London.
Takeover deals are few and far between, so fees are down, while the easy income pipeline from those listed Australian funds is all but empty.
There’s a recession in the markets and Macquarie’s downgrade reflects that.
