Breakingviews - Macquarie hits limits of diversification

The logo of Australia's biggest investment bank Macquarie Group Ltd adorns a door to their Sydney office headquarters in Australia, October 28, 2016.

MELBOURNE (Reuters Breakingviews) - Macquarie takes great pride in being a financial supermarket. Boss Shemara Wikramanayake emphasised the benefits of variety again even as her Australian conglomerate suffered a 32% decline in half-year net profit, which included a rare loss in investment banking. The pandemic is stretching what has been a successful business model to its limits.

There can be little doubt about the message Macquarie is trying to send to shareholders and clients. In a presentation that accompanied the results on Friday, the words “diverse”, “diversity”, “diversified” and “diversification” appeared 20 times, all in reference to its broad sources of revenue, both by product and geography.

When a worldwide crisis strikes, however, there are few places to hide. For one thing, Macquarie depends heavily on deals, whether it’s advising big companies on takeovers or selling from its vast portfolio of energy and infrastructure holdings. Buyers were scarce between April and September – the first half of Macquarie’s financial year – as most chief executives hunkered down to cope with Covid-19, putting M&A on the back burner. The market for leveraged loans was also weaker.

Net profit fell in all four of the $34 billion conglomerate’s divisions from the same period a year earlier. Everything from aircraft leasing to subdued market volatility took its toll. The sale of a single European rail business kept the asset management arm from a woeful performance. Macquarie can reasonably argue that its assorted mix cushioned things from being worse, but an annualised 9.5% return on equity – compared to 16.4% in the six months to September 2019 and a 14% average over the past 14 years – also suggests there is only so much the structure can do.

Although there are signs of a pickup in deal activity, Macquarie was not ready to provide a detailed outlook just yet. Its home market may be containing Covid-19, but other parts of the world are either being ravaged by it or heading back into lockdown. Despite the recent stumbles and the cloudy outlook, Macquarie trades at a robust 2 times book value, higher than local and overseas peers. Whatever limitations there may be with diversification, Wikramanayake’s message is resonating.


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