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Macquarie must do more on costs, say analysts

Gillian Tan    The Wall Street Journal  October 29, 2012  

MACQUARIE Group's "soft" $361 million first-half net profit result Friday has led analysts to question what Australia's largest investment bank should be doing to cut losses.

In a note to clients today, UBS analyst Jonathan Mott pointed out Macquarie’s equities and investment banking units — Macquarie Securities and Macquarie Capital — are “an enormous drag” on the company. Along with Corporate Centre, UBS calculated the three divisions contributed a loss of around $262m in the first half, implying return on equity, or ROE, of negative 16 per cent.

“We see significant upside to Macquarie if it is prepared to take some difficult decisions and address the structural, not just cyclical, pressure facing (those) businesses,” Mr Mott said, adding the company hasn’t addressed staff costs, which account for 60 per cent of total expenses.
UBS has a neutral recommendation and a price target of $28.50 a share on Macquarie.

Elsewhere, Citi analyst Wes Nason -- who has a neutral recommendation on Macquarie -- lifted his price target to $30.50 from $28.50. Mr Nason believes Macquarie’s surplus capital of $2 billion will provide an opportunity for further buybacks and bolt-on acquisitions.

Citi noted Macquarie’s employee compensation ratio has rebounded by 6 per cent since fiscal 2009, moving in an opposite direction to the group’s ROE which has fallen by 3.6 per cent.

“While the company has done an admirable job of removing headcount, the big leverage on costs is via reducing the profit share,” Mr Nason said, adding all signals point to management continuing to remunerate themselves.

Goldman Sachs analyst Ben Koo -- who has a neutral rating and a $28.75 price target -- says investors needn’t rush to buy the stock. “We continue to see Macquarie range-bound until we see a dramatic change to its capital position or a materially better or worse earnings recovery profile than currently forecast,” he said.

The stock was 1.1 per cent lower this morning at $30.51, underperforming the benchmark S&P/ASX200 which had added 0.4 per cent to 4490.

Last modified onTuesday, 28 May 2013 09:25
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