Thursday, August 28, 2008

Macquarie Bank another domino to topple?

I dont have time to comment on this review but as I have suggested in the past the future of Macquarie Bank and its 'millionaire factory' is being increasingly questioned. In my earlier post I noted that Enron analyst Jim Chanos described Macquarie as a Ponzi scheme.

Certainly the spinoff firms from Macquarie are not doing well and I get nervous in the current circumstances when firms sell assets and use the proceeds to support their share price. I am also nervous when (for whatever reasons) major investments like TransUrban are making losses of $142 million when these investments are basically supported by mountains of debt. Macquarie does not seem to have a lot of free capital to cover itself against shocks and to ride out an expected economic downturn.

9 comments:

jc said...
This comment has been removed by a blog administrator.
jc said...

Please delete the previous comment as I posted it in error.



The firm isn’t in bad shape. The satellites could go and Mac would still be standing on its hind legs.

Chanos' doesn't really understand the firm as he thought the satellites were not at financial arms length. They are.



Here's a summary of a large investment bank analyst latest musings. There's more detail obviously but I'm not going to post it here.

Balance Sheet Risks Overplayed - While we maintain caution on the group's earnings outlook over the near-term, we harbour fewer concerns over its balance sheet and refinancing risks, with MQG better capitalised and less leveraged than its US peers, and with a book value of greater rigidity. Yet at today's closing price, it trades on similar valuation metrics to its US peers.

Refinancing Risk Manageable - MQG's banking subsidiary's (MBL) 2-year, $10bn inter-company loan to its non-bank subsidiary matures in Nov 2009. While funding programs that were to repay this loan have not been executed due to credit market conditions, we note that at 31 March, the outstanding loan balance of $8.8bn was exceeded by the non-bank's $2.1bn of cash & liquid assets, $5.8bn of deposits (to MBL), $4.1bn of undrawn debt and $0.6bn CPS.

Excess Capital - MQG has repeatedly stated it retains ~$3bn of "excess" capital beyond minimum requirements, but given the environment, it is understandable if much of this "excess" is retained until conditions improve.

Better Capitalised than Peers - Nonetheless, MBL has a Tier 1 capital ratio of 12.4% (at 31 March), well above its minimum requirements and significantly higher than its Australian banking peers (6.5%-8.2%), and at the top-end of the range of its US investment bank peers (7.6%-12.4%).

Leverage Lower than Peers - MQG's balance sheet leverage is also well below its US investment bank peers on both a "gross" (total assets / equity) and "net" (funded assets / equity) basis (see Figure 1 below).

derrida derider said...

jc, if you look at the points you made they each depend on Mac's public accounts being a full and fair statement of reality.

Experience should teach you that in highly-geared companies that have had an ethos of aggressive growth (because their exec compensation is linked to that growth), this can't be taken for granted.

Steve Edney said...

JC,

One has to wonder about the viability of their brand if they have too many satellites go bust.

Who is going to invest in a Mac Bank fund in the future if they have been burnt multiple times in the past.

jonesy said...

derrida derider - wow, that's quite a sweeping statement: history says that a highly geared company which also has a track record of strong growth and profit based compensation rewards for its staff is probably lying in its accounts. You could be a top research analyst with such insight.

Perhaps auditors should qualify their audit reports if a company shows such obvious signs of concern (i.e. they are profitable, growing and reward their staff well). And regulators should remove all licences on this basis too. Clearly that approach would leave only the best companies for us investors?

Did you know CBA has more that doubled its profit in the past 5 years, and they have total assets of $425bn vs total liabilities of $401bn, and their CEO was last year paid $6.6m (58% more than the previous year), and almost all their senior executives got more than $2m per year in 2007? I guess someone had better recheck the accounts of that "millionaires factory" too!

andrew said...

harry

isn't jim chanos a known short seller of shares? and if he has shorted a stock, wouldn't it be in his interests to talk the share price down? i imagine this would be pretty easy these days of nervous markets.

jc said...

DD
I don't see how you can say Mac is highly geared. The Sats are of course but not the bank.They seem reasonably well capitalized.

That was Citigroup's analyst by the way and they're not know for putting out bullish/outlandish reports.


Steve E:

Yes you're right. I just don't think they're going broke. they do have a lot of decent businesses, however if one of the sats gets into difficulties it's another story.



the real problem with Mac bank is that they're just so friggen greedy. You never want to buy an issue they control because you just know the coupon has been clipped a dozen times.

If there is anything wrong with the franchise is that a lot of people won't deal with them because they know they're getting hosed.

name said...

DD

I really don't think Mac bank would ever lie about its accounts. that's just my call.

derrida derider said...

My goodness, I must have touched a nerve.

As the washup from a long series of scandals have shown, auditors basically sign off on the facts as reported by the company - they have no independent investigative power. I'm not saying Mac's accounts are a pack of lies, I'm saying that in extremely complex business models there will always be plenty of opportunities to make plenty of very debatable accounting provisions. And that where exec compensation is so closely tied to growth (as against profitability) there is strong temptation on management to make such provisions when things begin to go pear-shaped.

FWIW the Economist thinks Mac is in trouble, but will survive - see here.