Macquarie Groups shares may have taken a hit after Nicholas Moores cautious forecast for second half earnings but beneath the modest and conditional top line expectations there is a lot of activity occurring.
While inevitably the market and analysts will focus on earnings and balance sheets, investment banks run on intellectual firepower. Macquarie has been adding a lot of it over the past year by taking advantage of the financial crisis-imposed distress of its larger global competitors.
A year ago the group had 12,851 staff, down from a pre-crisis peak of 13,898. Today it has 14,400 after a spate of acquisitions and senior level hirings (Macquarie's master plan, January 10) . It now has more people in the Americas than it does in Asia Pacific. It now has more staff outside Australia than it does in its home market.
In the December quarter alone, excluding acquisitions, the group added 47 director level hirings. In the past year Macquarie Capital alone has hired more than 80 director level executives.
At the same time Macquarie has been bulking up through a string of acquisitions across its businesses that have increased its assets under management from $216 billion in September last year to $342 billion, despite the loss of $18 billion of assets under management as a result of the internalisations of Macquarie Airports management and the strengthening of the dollar.
The group has used the financial crisis to not just bulk up but to globalise its businesses. However, it hasnt done so indiscriminately.
Its expansion has been targeted to substantial niches where it believes it has comparative advantage whether it is in its broking business, where it has built a massive research capability, or in its constant expansion of its energy trading and advisory businesses, or in its asset management operations.
Without fanfare, for instance, Macquarie has grown its broking business to the point where it reckons it is just outside the top 10 brokers by commission revenues in the globe.
All its businesses remain on the lookout for more acquisitions of people and businesses as well as organic growth to replace the once-lucrative fee streams from a listed infrastructure fund model that has been almost dismantled.
Macquarie has the financial capacity to underwrite its ambitions, with surplus capital of about $4 billion and a highly liquid balance sheet (34 per cent of it is in cash or liquid assets). Moore said surplus cash levels would be run down as it was deployed across the group, but also said that Macquarie would maintain a conservative approach to funding and capital.
Given the turmoil in markets last week as fears of a sovereign debt crisis in Europe increased sharply (The dollar of destruction, February 5; Behind the market frenzy, February 5), Moore has an interesting challenge in taking full advantage of the continuing generational opportunities created by the financial crisis to make Macquarie a truly global investment bank of real significance while protecting it against the risk of further implosions within the financial system.
Despite some external concerns about its short-term funding needs after the weekend announcement of the withdrawal of the federal governments guarantee for wholesale funding, Moore said short-term wholesale funding represented only 7 per cent of its overall sources of funding. Its near-term refinancing needs are covered almost five times by its cash and liquids.
While its earnings expectations for the second half might be modest at best a 10 per cent increase on the first half for a full-year profit of just over $1 billion the new Macquarie model is likely to produce more consistent and higher quality earnings as its builds its trading and operational earnings and the write-downs and provisions that have studded recent results disappear.
Although it remains a group in transition or evolution, Moores strategy for not only unwinding the legacy positions in listed infrastructure but also creating a new global growth trajectory is now well understood.
It is too early to tell how successful the strategy will be the bigger acquisitions from last year have only just settled and more recent deals have yet to settle but it is coherent and, while opportunistic, well within Macquaries traditional investment banking comfort zones. "
MQG Price at posting:
$46.73 Sentiment: Hold Disclosure: Held
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