An analysis of Macquarie Group released by Morningstar yesterday rated the bank a ‘hold’, noting it has long-held strengths of adaptability, variable costs and a solid balance sheet.
Those strengths, alongside “capable management”, have offset volatile market conditions and place Macquarie in a strong position to “leverage the market rebound”, said Morningstar.
“However, further growth in global capital markets and increased transactional volumes are needed to increase earnings, particularly in the market-facing investment banking businesses,” said the report.
Macquarie surprised the market with a higher-than-expected net profit of $1.6 billion for the 2015 fiscal year last week, up 27 per cent on the previous year.
But while Morningstar lauded what Macquarie has begun referring to as its ‘annuity-style’ operations in recent years, the research house said the investment bank is faltering on the global stage.
“Following the decline in Macquarie’s unique captive infrastructure-related funds management business model we consider Macquarie has no real competitive advantages over global investment banking peers.
“While market conditions have become supportive, during the past five years return on equity has been unsatisfactory and a return to historic levels requires strong investment markets,” it said.
Morningstar also found that despite Macquarie’s “solid global growth potential”, the investment bank does not possess “sufficient competitive advantage” to warrant the research house's ‘economic moat’ status.
“Macquarie’s primary point of difference has been its expertise and strength in niche investment banking sectors and asset markets.
“Exploiting this advantage, the company has built market share in key global markets, but larger peers have moved into this space, increasing competition for fees,” it said.
Macquarie can be viewed as a growth stock, said Morningstar – but earnings will remain volatile because of the bank’s reliance on investment conditions.
However, despite the current low confidence in global investment markets, the long-term outlook remains positive for Macquarie, said the research house.
“Strong management and a disciplined focus has seen earnings rebound as markets recover, boosting returns on equity to more satisfactory levels,” Morningstar said.
