Macquarie Group’s profit downgrade yesterday should be looked at as a big canary in the coal mine sort of warning for the rest of the world’s investment and asset trading banks like Goldman Sachs, Bank of America and JPMorgan.
Despite attempts by some local analysts to claim that Macquarie is some sort of special case it isn’t.
The same ills that forced it to downgrade earnings for the six months to September by 25% will, in about a month or so, be showing up in the third quarter reports from those giants of American, European and Japanese banking.
“Conditions in most markets have continued to be weak,” Macquarie said in a presentation given overnight in London by Deputy Managing Director Richard Sheppard, and released to the ASX yesterday.
He said the company “continues to be impacted by the cost of our continued conservative approach to funding and capital”.
That means the $9 billion in cash being kept as a liquidity cushion, and the $3.1 billion in surplus capital, are combing to depress returns because of low interest rates on cash.
It’s the same factor that hurt the interim results of QBE.
This will increase the likelihood that the bank will fall short in the second half as well.
So the big plunge in Macquarie Group shares yesterday should be taken as a warm up for what could lie ahead in October’s reporting period for big global banks offshore.
Macquarie Group shares fell by more than 8% in early trade, dropping as much as $2.99, or 8.1%, to $34.
That was its biggest intra-day slide since May last year, bringing them to their lowest level since the same month.
The shares ended down $1.74, or nearly 4.7% at $35.25.
A 25% decline in profit for the six months to September 30 would take the figure to about $359 million, compared with the $479 million recorded by Macquarie in the first half of the 2009-10 financial year.
But Macquarie isn’t alone in blaming lower confidence and client activity levels for a fall-off in profitability.
Led by Goldman Sachs, Morgan Stanley and JP Morgan, major banks reported weakening earnings in the second quarter as trading slowed and spreads widened as the eurozone crisis hit revenues, and falling trading volumes on major markets affected commission and other fee-based income (such as fees for takeovers and IPOs).
Big banks have made solid money from corporate debt issues and trading off the back of the low official interest rates, but even that has been getting tougher.
Macquarie said yesterday that the global investment fee pool was down 32% in the June quarter to its lowest levels since 2004 and appeared likely to fall a further 8% in the September quarter.
Except in some parts of resources (the BHP Billion assault on Potash and the Newcrest-Lihir merger) merger and acquisition activity is sporadic and running well behind levels before the crisis erupted three years ago.
Macquarie is however forecasting that full-year earnings will be similar to last year’s if there is some recovery in market conditions.
The second half result will be helped by the Canada Pension Plan Investment Board’s $3.4 billion bid for Intoll, the ‘good’ part of the former Macquarie Infrastructure Group.
Macquarie owns 18% stake of Intoll, which is in its books at $472 million but which is valued at more than $610 million by the bid.
The offer will enable the group to book a tidy $150 million profit .That’s a help, but it needs to find another $750 million from other sources to make the old market estimates of a $1.3 billion profit.
That’s a big ask and there are no signs.the market for deals and trading is returning to the old levels.
Yesterday’s statement confirms earlier hints from Macquarie that weak markets were having an impact on its businesses.
Macquarie reported a net profit of $1.05 billion in the 12 months to March 31, 2010.
Macquarie shares have fallen about 25% this year, more than triple the drop of about 7% in the overall market.
It said yesterday that three of its largest businesses, Macquarie Securities, Macquarie Capital and Fixed Income and Currencies and Commodities have been the most affected by the weak market conditions. They have been its biggest profit earners.
Macquarie’s smaller businesses, the corporate and asset finance division, Macquarie Funds and banking and financial services, continue to expand, the group said.
The update seems to confirm reports in recent weeks of tougher times at the bank, as well as staff cuts. These have not been confirmed by Macquarie.
Those cuts will come, if they haven’t already started.
