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Macquarie
Published: September 6 2010 09:46 | Last updated: September 6 2010 16:08

Macquarie says that trading and deal-making must return to “more normal levels” if earnings in
the year to March are to match the previous year’s. But what if this is normal? What if the decade
leading up to 2008, during which period Macquarie grew net income 11-fold while recording
average returns on equity of 25 per cent, was the aberration?

Australia’s largest investment bank is not alone in lamenting falling fees. But it is time that
Macquarie started preparing for the possibility that the more subdued activity of the second
quarter – the weakest in six years for combined investment banking revenues globally, according
to Dealogic – will become a permanent feature.

If so, Monday’s “outlook update” was a full-year profit warning in fake moustache and dark
glasses. To hit current consensus net income forecasts of A$1.3bn in the year to March,
Macquarie will have to earn just over $900m from October onwards. That’s almost 60 per cent
more than it made during the same period last year, when equity and debt issues were flying off
the shelves.

It is not surprising that executives are struggling to adjust. Pre-crunch, the bank became
synonymous with a line of business that is now practically extinct: the buying, pooling and
spinning-off of assets into listed, Macquarie-managed funds. Since then, executives have tried to
compensate by bulking up in humdrum banking, securities and asset management.

But aggressive expansion at a time of faltering revenues has savaged shareholder returns. Even
if Macquarie makes those second-half projections, its ROE will be 11 per cent, in line with the
past two years. Investors, at least, seem ready to contemplate a world of fundamentally lower
returns: the bank’s price/book value multiple, an average of 3.5 times pre-Lehman, has now
settled on one.

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