Macquarie Group Ltd. (MQG) would gain from selling or closing its underwriting and loss-making securities businesses, according to UBS AG (UBSN), which upgraded its rating on Australia’s largest investment bank to buy from neutral.
Closing the two units, which were responsible for Macquarie’s 2012 profit falling to an eight-year low, or moving to a capital-light advisory model that excludes backing share and bond sales, would raise its valuation to A$40.42 a share, UBS said, from A$30.87 now. Macquarie shares were unchanged at A$35.62 at 11:48 a.m. in Sydney trading, giving it a market value of A$12.2 billion ($12.8 billion).
Ongoing losses after bonuses “across its equities and investment banking businesses will inevitably force Macquarie’s management and board to reassess its strategy,” UBS analysts including Jonathan Mott and Chris Williams said in a note to investors released today. They expect the two units to lose A$306 million in the year to March 2013 and not return to profit in the foreseeable future.
Macquarie -- which also has funds management, lending and leasing, banking and fixed income, currencies and commodities trading businesses -- has joined banks including UBS and Credit Suisse Group AG (CSGN) in cutting jobs to save on costs as trading and mergers and acquisitions dwindled, Europe’s debt crisis roiled markets and China’s economic growth slowed. In Australia, announced mergers and acquisitions fell in 2012 to the lowest since 2009, data compiled by Bloomberg showed.
Lisa Jamieson, a Sydney-based spokeswoman for Macquarie, declined to comment on the report.
Macquarie Securities, which focuses on equity trading, reported a loss of A$64 million in the six months to Sept. 30, wider than the A$19 million loss a year earlier. Its investment bank, which advised A$36 billion worth of transactions in the period, boosted profit to A$10 million from A$8 million a year earlier.
Chief Executive Nicholas Moore, under pressure to revive profit growth, said in an interview on Oct. 26 while the two units continue to be impacted by subdued market conditions. “there is more confidence out there than there was 12 months ago.”
Macquarie has not fully acknowledged the structural changes in the industry, the analysts said. UBS has announced 10,000 job cuts and a retreat from capital-intensive trading business, while Nomura Holdings Inc. is targeting $1 billion in savings by scaling back its global ambitions.
The UBS analysts said Macquarie should at the very least exit its North American, Europe, Middle East and Africa equities and investment banking business where it is not big enough to compete and focus on adopting a financial advisory and asset management model similar to Lazard Ltd. (LAZ:US)
Lazard, the largest independent advisory firm, spun off its equity, broking and fixed-income brokerage business to closely- held LFCM Holdings in 2005 leaving it with less capital intensive businesses.
Macquarie has been shrinking its equity trading and investment banking units to concentrate on stable businesses such as funds management, corporate lending, leasing, wealth and banking. Those businesses together contributed 63 percent of its operating income in the first half, according to data compiled by Bloomberg from company statements.
Equity trading and investment banking accounted for 32 percent of the 1,625 job reductions in the 12 months to September, filings showed.
Macquarie funds managed A$337 billion in assets, its leasing business owned an aircraft portfolio valued at A$3.2 billion and its wealth and banking unit has relationships with about 1 million Australians as of September 2012, according to the filings.
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