November 2, 2018 / 4:27 AM / 14 days ago

Breakingviews - Macquarie widens gap at home and abroad

Macquarie Group CEO Nicholas Moore speaks at a press conference after the bank's full year results were announced in Sydney, Australia, May 6, 2016. REUTERS/Jason Reed

SINGAPORE (Reuters Breakingviews) - Macquarie is widening the gap both at home and abroad. The $28 billion Australian investment bank is set for another record year, thanks to a first-half lift from its commodities business. Profitability stands apart and local lenders are under scrutiny. New boss Shemara Wikramanayake will need to keep up the impressive resilience in far choppier markets.     

    Universal banking has taken a battering Down Under this year, with the country’s big four commercial lenders facing a probe by a Royal Commission on misconduct in the industry, and public heat after dramatic revelations of bad behaviour. Macquarie, a more sprawling operation, looks even better in that context. First-half profit improved by 5 percent from a year earlier.

    That encouraged the bank on Friday to upgrade its full-year outlook, which pushed the shares back toward the high reached in September. The sale of its stake in $2.2 billion Quadrant Energy should feed through soon and help more.

    The main engine for Macquarie was its capital markets operation and the commodities arm, which has capitalised on the U.S. energy boom. Return on equity at these two units was an impressive 19 percent, at the top end of a 12-year average range. And profit at both offset comparative weakness elsewhere, including in asset management.

    That plasticity explains top-flight valuations: Macquarie trades at well over two times its book value and near 15 times expected earnings, healthier than either domestic rivals or peers on Wall Street.

    Macquarie’s earnings also showed traits of an increasingly conservative institution. Its corporate and asset finance division, which accounted for over a quarter of earnings as recently as 2015, once combined boring businesses such as car leasing with a riskier portfolio that bet on junk debt. Now the autos business has been moved into banks, the investment portfolio has shrunk again and highly regarded Ben Brazil has given up his seat on the executive committee.

    All of that may be just as well. As Wikramanayake takes over, conditions will get tougher. Markets everywhere are getting twitchier and funding costs are rising. That could make pulling all the many levers at Macquarie correctly a challenge.

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