Macquarie – The Australian

Macquarie group hit hard on downgrade

SHARES in Macquarie Group were smashed yesterday after UBS downgraded the stock to neutral, predicting that a sustained downturn would put “substantial pressure” on the investment bank.

UBS targeted two main areas of vulnerability — Macquarie’s capital levels, as well as the ability of its asset-recycling business model to continue generating strong revenue as asset prices fell.

“Although we believe Macquarie is a strong franchise with strong, diverse businesses, a sustained downturn will place substantial pressure on its

operations,” analyst Jonathan Mott said.

In the stock’s biggest fall since January, shares in Macquarie slumped $4.44, or 9.6 per cent, to a four-year low of $41.61, as the bearish mood infected the satellite funds.

Macquarie Airports shed 14c, or 4.4 per cent, to $3.07, and Macquarie Infrastructure Group gave up 11c, or 4.9 per cent, to $2.12.

In his report, Mr Mott noted Macquarie had $7.1 billion of equity investments and assets held for sale on its balance sheet — equal to 70 per cent of shareholders’ funds.

Significant impairment charges were unlikely in the current half, he said, given the bank’s recent commentary that there were “no material concerns with carrying values”.

However, valuations could come under pressure if prices continued to fall. “Additionally, given equity accounting of a number of these positions, if the boards of these associates chose to write down asset values, it will be proportionally recognised by Macquarie,” Mr Mott said.

“This is consistent with many of the write-downs recently announced by Babcock & Brown.”

At the very least, he said, it was unlikely that Macquarie could repeat the 20 per cent of total revenue it generated from investment disposals in 2007, or even the 12 per cent of last year’s revenue.

Mr Mott also said that, while Macquarie was adequately capitalised, it had less flexibility than widely perceived.

The group has previously said it had about $3 billion capital in excess of its minimum requirements, including $2 billion in Macquarie Bank and $1 billion in the non-banking operations.

But UBS said the minimum was not an appropriate benchmark in a global environment of de-gearing of bank balance sheets.

After adjustments for “more appropriate ratios”, it estimated that group excess capital was closer to $500 million.

“Although we see Macquarie Group as adequately capitalised, we believe there is less flexibility than is widely perceived,” UBS said.

The investment bank downgraded its 2009 profit forecast for Macquarie by 2 per cent to $1.5 billion, and by 10 per cent next year to $1.52 billion.

Switching its recommendation from “buy” to “neutral”, UBS downgraded its 12-month price target from $60 to $48.

But the group was not friendless.

Argo Investments managing director Rob Patterson, holder of a $150 million-plus stake in the country’s biggest home-grown investment bank, said the share market had “completely overreacted” to the UBS report.

“An analyst is entitled to his point of view, but he’s guessing that financial markets won’t be any different next time Macquarie reports (its profit),” he said.

“Sure, Macquarie will struggle to beat 2008 earnings, as it has said.

“But we’re long-term investors and we’re not going to throw the stock out just because it has experienced peak-cycle earnings.”

Source : The Australian

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