Stephen Bartholomeusz
Macquarie's basic instinct
The sharp spike in Macquarie Group’s share price in response to its annual meeting and the wider rally in financial stocks, was a giant sigh of relief. The meeting produced no unpleasant surprises, no new warnings and a reaffirmation of confidence in the ‘Macquarie Model'.
While new chief executive Nicholas Moore did say that it would be increasingly challenging to repeat last year’s record $1.8 billion profit – which no one expected anyway – he didn’t actually rule it out. More particularly, he described the start to the year as "solid", something that few, if any, of Macquarie’s international peers could say.
The fact that the bank was able to say that it had no problem trading exposures and no material problem credit exposures was clearly reassuring to the market, as was Moore’s disclosure that the group now has more than $20 billion of liquid assets and $3.6 billion of excess regulatory capital. The absence of downside risk is more important that the degree of upside in this market.
Moreover, Moore and his chairman David Clarke, defended the group against a series of assaults by its shareholders on the 'Macquarie Model', its governance and its sustainability in an environment where the security prices of its listed satellites bear no resemblance to their directors’ valuations.
Clarke made an interesting observation. Some criticism of the model has linked their performance to the fact that they are externally managed, with Macquarie incented to manage the funds to grow its fee income streams.
Clarke said there was no evidence to suggest that there were any material differences between the performances of internally and externally-managed funds and that the more pertinent comparison was between listed and unlisted funds. Despite the credit crisis there is continuing strong demand from pension funds for unlisted vehicles, a demand that Macquarie has been meeting.
Both Clarke and Moore made the point that Macquarie and its funds are in the business for the long term and have experienced cycles before – Clarke suggested the current investor preference for unlisted funds might be a cyclical phenomenon.
Moore referred to the sell-off of infrastructure stocks at the tail end of the dot-com bubble to remind shareholders that the group has been through a similar experience previously.
There was an underlying tone to Clarke and Moore’s comments that if there turned out to be a structural change in investor preferences, Macquarie would respond to it.
There was also some optimism that Macquarie could exploit its relative strength in current conditions, with Moore saying that while the group remained cautious it saw opportunities to grow market share, expand its teams and enter new markets – essentially taking advantage of unstable conditions and the destabilisation of its peers.
It is notable that after past financial crises – 1987, the Asian financial crisis, the Russian debt crises, the dot-com crash, 9/11 and the SARS outbreak – Macquarie has had periods of strong activity and growth.
It is typical of Macquarie that while most banks and investment banks around the globe are reeling and shrinking both their scale and appetite for risk, it should see the distress and fear as an opportunity.
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