David Taylor reported this story on Friday, October 28, 2011 18:46:00
MARK COLVIN: The financial cracks are getting bigger at Australia's largest investment bank, Macquarie Group. The firm today announced that it had suffered a 24 per cent slump in its first half profit to $305 million. That coincided with the resignation of one of the founding members of Macquarie, Richard Sheppard.
Banking analysts say that it's symbolic of the decline of a company nicknamed the millionaires' factory.
David Taylor reports.
DAVID TAYLOR: Macquarie, originally trading under the name Hill Samuel, opened its doors for business in Australia in 1969. With just three staff, it had a grand vision of becoming a dominant force in the investment banking world.
Macquarie Bank CEO, Richard Sheppard, helped the company achieve that goal. But after 36 years at the company, and one of the biggest market downturns to hit the group, he's calling it quits.
RICHARD SHEPPARD: A remarkable experience to be part of the team that has achieved that result. And frankly, from my perspective, and this is a personal comment, I really think that Macquarie's best days are ahead of it.
DAVID TAYLOR: Curiously though, his replacement is the current chief financial officer of the group, Greg Ward. He's the executive responsible for crunching the bank's numbers and getting its books in order.
BBY banking analyst, Brett Le Mesurier says it's a sign the bank is making cost cutting a priority for the business.
BRETT LE MESURIER: CFOs typically have a greater handle on costs. So it looks to me like cost efficiency, costs out is becoming an increasing part of the Macquarie strategy.
DAVID TAYLOR: Macquarie has already managed to slice 11 per cent from its operating costs, saying goodbye to around 3 per cent of its workforce. That exodus is expected to continue.
BRETT LE MESURIER: They're seeking to release at least 10 per cent of the company's capital from putting businesses into run off or sale, which should be consistent with a reduction in staff numbers.
DAVID TAYLOR: Investment manager Roger Montgomery says there's also a large number of employees choosing to leave the firm.
ROGER MONTGOMERY: There's a morale issue there, and I think that's why we're seeing so many CVs floating around.
DAVID TAYLOR: Macquarie is struggling to adapt to an increasingly challenging business environment. In fact revenue generated through dealers trading the financial markets slumped 38 per cent over the period. The rollercoaster ride on financial markets has also led to a 12 per cent drop in brokerage and commissions.
Macquarie Group chief executive, Nicholas Moore.
NICHOLAS MOORE: In securities it's all about volume and from an activity viewpoint volume is down. Volume is down from a commission viewpoint, volume is down from an ECM viewpoint and volume is down from a derivatives Delta One viewpoint.
So across the board, characterised by these very poor market conditions we're experiencing.
DAVID TAYLOR: And despite progress made last night as European leaders agreed on some important aspects of a rescue package from the sovereign debt crisis, it appears there's little to inspire the traders at the millionaires' factory.
NICHOLAS MOORE: Given the market was looking for it, it's responded well to it. And so we can be, we can be hopeful but of course we're unsure in terms of knowing where we're going to end up with here.
DAVID TAYLOR: It's prompted management to arrange a share buy back; acquiring as much as 10 per cent of its shares. Shares in Macquarie Group have fallen 34 per cent this year, so it's the logical step to boost shareholder wealth and keep the owners of the business happy.
Roger Montgomery again.
ROGER MONTGOMERY: So it's no different to going down to the supermarket and buying strawberries. You can buy them at $7 a punnet or you can wait 'til they're $2 a punnet, as they are now, and you can buy a lot more of them.
So hopefully for Macquarie shareholders, Macquarie's buying back shares at a price that turns out to be cheap and that will benefit shareholders dramatically.
DAVID TAYLOR: But that may not be enough to revitalise the company. Analysts say the bank's simply lost its competitive edge.
BRETT LE MESURIER: I think it doesn't have the lustre that it once did. And it doesn't have the presence and the large deals that it used to have. It's not easy there's much more fierce competition now than there has ever been.
DAVID TAYLOR: News of the share buy-back saw a rush of investors buying the stock today. Macquarie Group closed over 2.5 per cent higher at $25.01. The bank also announced an unfranked dividend of 65 cents per share, that's down 24 per cent on last year.
MQG Price at posting:
$23.79 Sentiment: None Disclosure: Not Held
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