notice he says that the ratings agencies - Moodys and s&p have found no problems with mac's debt
"now I'm not saying the environment's great but I'm saying that Standard and Poor's and Moody's if you read through their ratings reports, and they presumably have had more access than myself, they're reports suggest that there are no major problems in there either."
no major problems .... interesting?
Doubts over Macquaire Bank recovery Print Email Australian Broadcasting Corporation
Broadcast: 18/09/2008
Reporter: Greg Hoy
JP Morgan banking analyst Brian Johnson joins Lateline Business to discuss his doubts over Macquarie Bank's ability to recover from its current predicament.
Transcript GREG HOY: And in another blow for Macquarie Bank, one of its biggest supporters JP Morgan's banking analyst Brian Johnson, tonight has reportedly raised doubts about its ability to recover from its current predicament. He's the second leading banking analyst in the last 24 hours to downgrade his view on Macquarie. Brian Johnson has joined me at short notice in the studio.
Brian, you've been variously quoted today as suggesting today's share price slump offers compelling value on one hand, and then in tomorrow's papers or at least one of them, that the direction of its share price suggests the bank is irrevocably broken. So which is true?
BRIAN JOHNSON, BANKING ANALYST, JP MORGAN: Well, it's a case of very selective reporting of a sentence from a report where I said that if you look at the reasons why the market is selling Macquarie Bank, they don't really stand up to closer scrutiny, but the share price would indicate it's irrevocably broken. I don't think it actually is.
But it is very much a case of selecting one part of a sentence and only reporting that. If you have a look at Macquarie bank, what I'm trying to get at is the share price is not indicating the value is there, now we're in a very changing environment, but when you go through and deconstruct the reasons why people say to sell Macquarie Bank, they just don't add up.
GREG HOY: Well, didn't you suggest that it was hard to identify a catalyst to turn Macquarie's share price around.
BRIAN JOHNSON: Well, let's talk about why perhaps Macquarie Bank has been falling.
GREG HOY: Did you say that though?
BRIAN JOHNSON: No, yeah I did, I did, so really let's talk, if we could, just to kind of explain where we are.
GREG HOY: Sure.
BRIAN JOHNSON: The reason why, if you have a look at the big gyrations in Macquarie Bank's share price, it is on massive volumes. And if you go back and have a look at Macquarie Bank, I would suggest anything over 2 million shares in a day would suggest either short selling or short covering. So what we've basically seen is the people that are setting the direction of the Macquarie Bank share price are no longer the long only investors, its hedge funds.
Now that being said, they're driven by a very different kind of investment horizon to most, and things tend to be very, very binary, and they're betting that Macquarie Bank is similar to a Lehman's or a Merrill's, whereas, in fact I would suggest to you that Macquarie Bank is demonstrably different even if you have a look at the comments from the ratings agencies that presumably have been through Macquarie Bank in some detail.
GREG HOY: Well, in December of last year you had a $109 price targeted on the stock. It's now at $26. Is that all hedge funds?
BRIAN JOHNSON: No, it isn't the world has fundamentally changed. What happened in July 2007 was basically the cost of credit went up markedly, and that changed the value of equities, the world has fundamentally changed. The problem is, when I have a look at Macquarie Bank, you know, share price targets are basic, I set them on what the market looks like at that particular point in time.
And what we've been saying more recently is that if you have a look at Macquarie Bank, when it is rated quite highly in this new environment we are in, I could see it trading into the high 60's even $70 a share.
But the point is, that when you get bouts of short selling like we're seeing at the present time, you could easily see it plummet, I had previously thought down around $40. But if you look at the volumes that we're seeing going through in the share price, it's taken it to a whole new level and it's very important to identify.
Everything has a value, now for some companies that value is obviously zero if you think they're going bust. I don't think Macquarie Bank is going bust. When I have a look at the net tangible asset backing supporting the shares, it's about $29 a share. When I look at the net asset backing it's about $32 a share. You're actually not paying anything for Macquarie Bank apart from the value of the buildings and the fixed assets and the likes. So, right now, Macquarie Bank, it's hard to see what makes it go up, but the one thing I do know is if it's not going bust, it's very, very cheap.
GREG HOY: Surely in this environment though a lot of those assets have lost significant value, and you could understand people being concerned couldn't you about you know, the cost of credit, and the level of debt that Macquarie is now carrying?
BRIAN JOHNSON: Yes, that is very true. But that's one of the very big problems, is that there's so much misinformation circulating around out there at the present time. There are stories in one of the newspapers suggesting that Macquarie Bank had $45 billion of debt they needed to refinance in the next 12 months, that figure is really a quirk of accounting and if you go through and work out the real debt they've got to refinance over the next 12 months, it's a figure closer to $15 billion, which is actually quite achievable.
So what I'm saying is at the moment, and ASIC have even commented on this, we're seeing a lot of incorrect data basically circulating around, a lot of rumours circulating around. What I'm saying is that when you go back and really analyse in detail these reasons why people are saying that Macquarie Bank is going bust, it just doesn't actually stack up.
GREG HOY: We're tight for time, one more question if I can: but at the end of the day are you sure you know everything, no skeletons in the closet, impaired assets that we're yet to hear about?
BRIAN JOHNSON: No one can be sure they know everything. But the one thing I do know -
GREG HOY: But if you don't know Brian Johnson, I mean, who could, because you probably are about their most loyal supporter.
BRIAN JOHNSON: Well, it's not a matter of being their loyal supporter, I'm get paid to basically pick stocks and we picked this one right on the way up, and I must admit I've had a pretty shocking track record on the way done, as have a lot of brokers, but the point about it is, presumably Moody's and Standard and Poor's have been able to get in and look at the detail a little bit more. I can only go on the publicly available information, and on that basis Macquarie Bank does not have any subprime exposures, doesn't have any of these risky assets that are dragging down banks around the world, now I'm not saying the environment's great but I'm saying that Standard and Poor's and Moody's if you read through their ratings reports, and they presumably have had more access than myself, they're reports suggest that there are no major problems in there either.
GREG HOY: We're out of time, Brian Johnson, thanks very much again for coming in at short notice. Thank you.
BRIAN JOHNSON: Thank you.
MQG Price at posting:
$22.35 Sentiment: None Disclosure: Held
(20min delay)