Can Macquarie Again Become a Millionaires Factory?

Australia’s largest investment bank, the Macquarie Group, was the high flyer of the Australian Stock Exchange, before the financial crisis hit in 2008. As its share price marched higher and higher, many analysts forecast Macquarie would be the first Australian company to smash the A$100 (US$109.11) barrier, but the global meltdown put an end to that.

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Like investment banks around the world, Macquarie’s share price along with its highly leveraged business model went into freefall. From a peak of A$98 reached in May 2007, Macquarie’s shares tumbled to A$15 in March 2009. From there the share price has recovered, but at A$35 it still languishes well below the all-time highs.

Friday’s results revealed yet another decline in profit at the company called the “Millionaires Factory” thanks to the huge bonuses paid to top executives and employees.

From record profits of A$1.8 billion posted in 2008, Macquarie’s annual profits have now fallen nearly 50 percent to A$956 million in the year to March 2011. Now the question facing both the company and its shareholders is, can Macquarie ever recover to the glory days?

Brian Johnson, banking analyst with CSLA Asia Pacific Markets, says that change is not new to Macquarie Group. The investment bank has constantly had to adapt to market conditions throughout its 40-year history.

“It keeps on morphing into something different. The question now is that following the demise of the listed infrastructure business, can you see anything to replace it and the answer is yes”

Johnson believes Macquarie, led by CEO Nicholas Moore, is developing a clear strategy to emerge from the debris of the global financial crisis in good shape.

“You can see they are investing in the future now. There’s been a lot of talk about developing a resource investment banking business. There is the idea of global energy investment banking. They need to replicate what they’ve done in the past with agricultural commodities. We think they can do it.”

Sean Fenton Portfolio Manager at Tribeca is more cautious. “The big question mark remains, can you generate the same return on equity on those businesses as you did out of the leveraged asset model? That’s where they’re struggling at the moment. Can they get the balance right between compensating employees and shareholders? It’s all still playing out.”

Another issue playing out for Macquarie is retaining top talent in a post financial crisis environment. Subdued trading conditions have meant Macquarie’s reputation as the “millionaire’s factory” along with the bonuses it pays to employees is losing its shine. Don Williams of Platypus Asset Management believes that to stop the exodus, change is required right at the top.

“Up until a few years ago, it was unusual for people to leave Macquarie, but that’s clearly not the case now. We’ve seen more people leave the bank over the last two years than the previous 10. Presumably the only thing that can turn around that is profitability. We’re not sure how profitability can grow with the current management team.”

But shareholders hoping Macquarie can march all the way back to the top might be disappointed. Even banking analyst Brian Johnson who has a buy on the stock believes Macquarie’s revival will take time.

“The great thing about Macquarie is that its not priced for the things to come, it’s priced for the world today. At these prices we’re quite upbeat, but at A$100? I wouldn’t be so confident”

Disclosures: Don Williams of Platypus Asset Management and Sean Fenton Portfolio Manager at Tribeca have no holdings in Macquarie