At the same time, the report acknowledges that the “once high-flying” investment bank is “recovering nicely” with returns now above Morningstar’s estimated cost of equity.
But the Morningstar analysis found soft trading activity coupled with weak investment market conditions have impacted Macquarie’s three market-facing businesses, restricting the bank’s ability to compete against international investment banks.
“Macquarie has no real competitive advantages over global investment banking peers,” a Morningstar analyst said.
“Return on equity has been unsatisfactory and a return to historic levels requires strong investment markets,” they said.
Morningstar’s research pointed out that Macquarie – the largest investment bank and investment advisory firm listed on the ASX – has also failed to gain the same traction that its international peers did during the “current soft market conditions”.
“The strategy to build a diverse global investment banking business generating a growing income stream came to a halt in 2009, when the worst of the GFC hit,” a Morningstar analyst said.
“Earnings volatility pre-GFC was successfully offset by an extremely lucrative free income stream sourced from Macquarie’s unique and highly-geared infrastructure and real estate satellite fund model.
“However, tough operating conditions and downside risks in highly leveraged businesses have all but killed off this significant revenue source,” the analyst said.
Morningstar said Macquarie appears to be “less interested” in growing its international investment banking presence but rather is further expanding into corporate and asset finance.
“[Macquarie] is keen to expand further into funds management and asset finance because of the sustainable, less volatile nature of annuity-style earnings-derived funds management and asset finance,” a Morningstar analyst said.
