mqg potential break out., page-30

Market shies at Macquarie call
Eric Johnston
September 8, 2010

INVESTORS have cast doubt on Macquarie Group's claim that it can deliver a profit of at least $1 billion this year, after the investment bank warned it was having difficulty adjusting to a prolonged global downturn.

As deputy chief executive Richard Sheppard prepares to brief investors on Wall Street, speculation is growing that all Macquarie's business units are preparing to review their costs. Over the past year, Macquarie has increased staff in anticipation of improved global conditions, but these have failed to materialise.

''A structural cost reduction program appears the only solution,'' said UBS analyst Jonathan Mott. ''Tough decisions now appear necessary.''

Macquarie shares extended their losses yesterday, falling 2.2 per cent to $34.47, their lowest since May last year.

With the downturn in North America possibly worsening and European economies under pressure, Macquarie this week said its first-half profit was likely to be down 25 per cent on last year's $479 million. But it insisted it could still deliver a full-year profit of about $1.05 billion.

The investment bank has yet to explain how it plans to return to the supercharged growth that investors were accustomed to before its listed infrastructure funds business unwound in recent years.

Macquarie has spent nearly $800 million on acquisitions over the past year in North America and Europe, strengthening its funds management, energy advisory and trading activities.

But that expansion has come at the expense of growth in the fast-paced Asian region.

To hit its forecast of a full-year profit, Macquarie would need to generate second-half earnings of $690 million. This represents a 90 per cent increase on first-half earnings, which seems ''ambitious'', according to Mr Mott.

There is speculation Macquarie has started cutting jobs, but the bank has said redundancy decisions are made at the individual business level.

Brokers including Citigroup, Morgan Stanley, UBS and JPMorgan have cut price targets on Macquarie, given the downbeat short-term outlook.

Citigroup analyst Wes Nason said Macquarie's shares were likely to trade around book value of about $35 until market conditions noticeably improved.