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Alan Kohler
Alan Kohler is one of Australia’s most experienced commentators and journalists. Alan is the founder of Eureka Report, Australia’s most successful investment newsletter, and Business Spectator, a 24-hour free business news and commentary website. He also hosts Inside Business, a half-hour Sunday programme on the ABC, is the finance presenter on the ABC News - and producer of the nightly graph (or two).
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Leaner Macquarie eyes some market morsels

With markets imploding over recent years, there was pressure for Nicholas Moore to jettison Macquarie Group's exposure. But some cost-cutting and patience has those segments set to earn again.

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Ever since the global financial crisis erupted Macquarie Group’s markets-facing businesses have weighed heavily on the group’s performance. There might finally be a chink of light and the end of what’s been a long and gloomy tunnel.

It wasn’t just the implosion in the "Macquarie model" of listed satellite infrastructure funds post-crisis that undermined the group’s capital markets businesses’ profitability, although that did severely impact its earnings and strategies.

In common with all the major investment banks it was the dearth of capital markets activity once the crisis subsided that has drained the core profitability of Macquarie Securities and Macquarie Capital.

While Macquarie’s expanded annuity style businesses – its funds management, banking and financial services and corporate and asset finance divisions – have held up quite well, the depressed state of capital markets activity pushed Macquarie Securities into losses and effectively wiped out Macquarie Capital’s contribution.

Businesses that between them had previously generated, on average, more than $1 billion of earnings have been subtracting from its results in recent periods.

Macquarie’s not alone, as the entire global investment banking sector has been ravaged by the severity of the downturn in activity (as well, for some, self-inflicted trading losses from more speculative activity) but that hasn’t prevented debate about the future of those businesses.

That’s why today’s operational briefing provides a glimmer of hope for Macquarie’s Nicholas Moore, who has been urged by analysts to exit those businesses to focus on the less difficult and volatile and more profitable elements of the group.

There has been an improvement in market conditions as the eurozone has stabilised, the US has shown signs of a modest recovery despite the continuing question marks over how it will manage its debt and deficits and central banks have continued to pour liquidity into their economies.

The Future Fund’s portfolio update today, which showed the fund returning 7 per cent for the December half – 12.8 per cent for the year to December – including a 3 per cent return in the December quarter provides a sense of how strong the recovery in markets has been. Stronger and more stable markets are a precondition of any meaningful return of capital markets activity.

Moore referred to that improvement in conditions today in saying that the net profit from his operating groups in the year to March is expected to be materially higher than it was in 2012.

While the 2012 result benefitted from a $295 million contribution from Sydney Airport, Macquarie still expected this financial year’s result to be about 10 per cent higher than 2012’s and it could be even stronger if the improved market conditions persisted.

While market conditions had shown some signs of improvement, he said, client activity remained subdued. He will be heartened by the Future Fund’s view that, while "considerable uncertainty" remained, it believed markets offered reasonable long-term prospective returns.

The structural issues within the eurozone have yet to be resolved, the US has yet to develop an agreed strategy for tackling its issues and Japan has embarked on a desperate effort to stimulate growth.

In the near term, and perhaps beyond, however, markets will be awash with central-bank provided liquidity and investors will continue to chase returns in what will be, in the absence of new disruptive events, a ‘’risk on’’ environment that may support some elements of Macquarie’s markets-reliant businesses.

While Moore has been prepared to maintain those businesses despite their poor performance Macquarie hasn’t been inactive, continuously shedding staff and costs to try to reduce their drag on its performance.

Overall, December quarter expenses were down about 10 per cent. In the first six months Macquarie lopped 27 per cent from Macquarie Securities’ cost base, 10 per cent from Macquarie Capital’s and lowered its overall cost base by about $250 million relative to a year earlier.

With that lower cost base and some modest improvement in activity levels the combined December quarter contributions from those businesses was up strongly on both the previous corresponding period and the preceding quarter.

The annuity businesses continue to perform solidly, with Moore saying their combined third quarter net profit contribution was also up on both the prior corresponding period as well as the September quarter.

It is unlikely that Macquarie will be able to get back to those halcyon days pre-crisis when it was generating turbo-charged profits and returns any time soon, if ever.

The leverage to conditions levels within its market-facing businesses, however, means that even a modest pick-up in client activity should flow quite strongly over a much-reduced cost base and flow through to the group’s bottom line. That is the theory, anyway, and Moore’s hope.

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Index	Last	Chg	% Chg
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S&P 500	1667.47	+17	+1
NASDAQ	3498.97	+33.7	+1
FTSE 100	6723.06	+35.3	+0.5
NIKKEI	15138.12	+100.9	+0.7
Hang Seng	23082.68	+38.4	+0.2

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