Macquarie warns bank scandals could hit investment

The Australian 12:00am May 5, 2018

Scott Murdoch

Macquarie Group chief executive Nicholas Moore has conceded the royal commission’s shocking revelations of financial scandals have prompted a wave of anti-business sentiment in Australia that could damage the nation’s future investment prospects.

He also said the domestic banking system should prepare for tighter regulations to be recommended against the financial service sector.

Macquarie, Australia’s only domiciled investment bank, revealed yesterday its net profit for 2018 was $2.56 billion, beating most expectations. The bottom line was a 15 per cent increase on the 2017 year and the bank said it expected the current year’s earnings to be in line with this result.

Net profit in the second half of the bank’s financial year, which ended on March 31, was $1.31bn, well ahead of analysts’ consensus.

A final dividend of $3.20 per share was declared, which took the bank’s total payout to $5.25. The higher than forecast dividend and record profit helped lift Macquarie’s shares to a fresh high of $108.11.

Mr Moore backed Peter Costello’s claims that sentiment towards business in Australia was low as a result of the royal commission’s hearings.

In its results, Macquarie highlighted tax and regulatory uncertainties were among the greatest potential risks to the bank’s earnings in the year ahead.

Mr Moore said foreign exchange was also a likely headwind for the bank. He said while it was “early days” it was highly likely that prudential regulation would change again in Australia.

“We are looking at the information as it comes to hand, and we will be making judgments in terms of applicability and its lessons for Macquarie more broadly,” Mr Moore told The Weekend Australian. “That is something that everyone is focused on in the financial services industry more broadly.

“The royal commission is still in its early days. We have not seen any recommendations, we haven’t seen any political response, but there is the possibility or prospect of more regulation.”

Mr Moore downplayed concerns that bank executives and directors had become complacent towards managing risk following the global financial crisis. Mr Costello told the Macquarie conference on Thursday that “genius” bankers had been too prepared to take risks after the global financial crisis because the Australian banks had escaped it unscathed.

However, Mr Moore said Macquarie was constantly streamlining its risk management systems to reduce the risk of a scandal.

“We are constantly working on risk and dealing with risk and working on that at Macquarie. Our risk management culture is a key element of our business,” he said.

“Risk is something that we always have to be very focused on and mindful of … we are watching the royal commission and the APRA report and we are looking at the lessons of that. It’s a constant process of looking at whether we can do what we are doing better.”

The Macquarie annual report showed 38 people were sacked from the bank in the past year for “conduct/policy breaches” while another 32 left after being given a formal warning.

However, the bank refused to clarify the number of those breaches which were related to its financial planning or its advisory business.

Macquarie has yet to be called to the royal commission but has retained Allens to advise it on any future hearings.

The bank has about 300 financial advisers working in its retail business, which Mr Moore said was minor compared to the bigger wealth management groups. However, he conceded the financial advice sector was destined to change in Australia.

“We are a small part of the industry but we are looking at the lessons and it really is too early to draw any concrete conclusions,” he said.

“But there are lots of lessons you can take from it already.”

The bank’s results showed net operating income was up 5 per cent to $10.92bn, outpacing a 3 per cent increase in expenses. Net interest and trading income was steady on the previous year, while fee and commission income was up 8 per cent at $4.67bn and operating-lease income was 2 per cent higher at $935m.

The asset management division contributed a profit of $1.69bn, 10 per cent higher than in the prior year, while corporate and asset finance profit was 1 per cent higher at $1.21bn. Assets under management at the end of March stood at $496.7bn, up 3 per cent on the year before