Despite a nice share price bounce following the Australian government’s move last Sunday to place a three-year guarantee on all financial deposits, recent wobbles at Macquarie, known locally as Australia’s “millionaires’ factory”, deepened on Thursday as Moody’s cut Macquarie’s long-term outlook to negative citing concerns about the impact of the global economic slowdown on the bank’s earnings.
While Moody’s said that Macquarie’s credit profile remained “robust” with negligible investments in troubled assets amid the global credit crisis, it noted that the negative outlook on long-term ratings “addresses the potential for an extended, global economic and capital markets slowdown to negatively affect Macquarie’s earnings in calendar 2009 and possibly beyond”.
In language that suggests looming downgrades for Macquarie as well as others with similar business models of investing in assets and bundling them into funds, Moody’s added that the outlook “also reflects the challenges to wholesale banking business models created by the current environment, which may continue to some degree, even post-crisis.”
However, Moody’s affirmed its Prime-1 ratings and stable outlook for Macquarie’s short-term debt, its A2 rating for long-term senior debt; and A1 ratings for the long-term deposits and senior debt of the group’s subsidiaries, including Macquarie Bank, reports Bloomberg.
Fitch Ratings, meanwhile, last week reaffirmed its stable outlook for Macquarie after the bank increased its cash holdings as a buffer against the seizure in global credit markets, notes Bloomberg, saying Macquarie’s fundamentals remain “solid” as it responded early to the global credit crisis by increasing cash levels to A$20bn.
Even so, Macquarie’s shares fell 8 per cent to A$32.05 at the close of Sydney trading on Thursday, extending their decline this year to 58 per cent. Much to its (well-publicised) chagrin, Macquarie’s shares have tanked this year amid speculation of looming losses at financial companies that depend on debt to drive growth – even as it sidestepped losses on subprime mortgages and credit derivatives. The group’s sensitivity about its persistently negative portrayal in some media commentary came to a head last month when Macquarie complained about allegedly distorted reporting on its financial health in The Australian newspaper.
But even before that, in July, Macquarie sought to reassure investors, with chief executive Nicholas Moore pledging to stick to the company’s strategy of buying assets and bundling them into funds, although he warned that Macquarie may not repeat last year’s record A$1.8bn ($1.2bn) profit.
In late September, Macquarie triggered more speculation about its financial health when it announced it would sell its in-house margin lending operation six months after it began winding down its residential mortgage business that had also fallen victim to the higher cost of debt since the credit crisis began last year.
The group has blamed short-sellers for targeting its stock as plunging asset values and higher funding costs sparked losses at rivals such as Babcock & Brown and Allco Finance, which adopted the bank’s strategy of borrowing to buy infrastructure assets for their funds.
One issue that Macquarie hasn’t really mentioned much – remuneration – is a local obsession among the group’s many local critics, and was indirectly the subject of what could only be called an “outburst” on executive pay by Aussie PM Kevin Rudd on Wednesday. But as Andrew Main, The Australian’s business editor noted on Thursday :
Macquarie executives have notoriously been paid a great deal more than other banks’ executives, led by chief executive Nicholas Moore’s A$24m-plus annual package. But the cynics would say there’s been an eerie transition in the past month in the power relationship between the government and Australia’s most innovative bank. Let’s just say there could be some favours owed.