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Macquarie Group spent six years trying to find a niche between Canada’s big banks and its boutique brokerages. What the Australian financial firm found instead is that is a good way to get squeezed. After six pricey years of experimenting, Macquarie Group is giving up on fighting the country’s big banks. But it’s not giving up on Canada, instead going back to a boutique approach.DANIEL MUNOZ/Reuters

When Macquarie Group Ltd. cut ties with its Canadian retail brokerage and significantly scaled back the size of its Canadian investment banking group, the root reason was pretty obvious: right now, Canada's a tough market for independents.

But there's an important aspect of the story that hasn't been getting much play. Globally, Macquarie Group Ltd. is struggling to return to its former glory.

Just before the financial crisis, the institution's stock peaked at $97.10 (Australian.) Today the shares are worth just over half that figure, and are trading around $49. By comparison, National Australia Bank Ltd.'s shares are worth about 80 per cent of their pre-crisis peak value, while Commonwealth Bank of Australia's stock price is up roughly 20 per cent above its zenith in the lead-up to the 2008 crash, pushing its market value to a heart-stopping $115-billion. (And we think Canadian banks are big.)

The message is pretty clear: Macquarie isn't the shining star of Australian finance.

And management isn't taking it lying down. In recent years, the bank's been very vocal about its cost-cutting initiatives. At the end of fiscal 2013 in March, costs were down 17 per cent over the last two years.

While costs are still a focus, chief executive officer Nicholas Moore acknowledged on the last earnings call that the fat has largely been trimmed, and further cuts will be more difficult to come by. "We will continue to work to make the cost situation better but we're not expecting to see this sort of savings going forward," he said. That forced the bank to make some tougher decisions; cutting back in the Canadian market just happened to be one of them. And because these conversations were happening at the bank level in Sydney, it makes sense that the decision to sell Macquarie Private Wealth to Richardson GMP came as such a shock to the Canadians.

With savings harder to achieve, Macquarie Group is looking for other ways to get investors excited. For example, the financial institution recently boosted its dividend payout ratio to 60 to 80 per cent of earnings, something one analyst described on the most recent earnings call as "remarkably high for an investment bank or even a diversified financial company with an investment bank." The stock's now up 38 per cent since January, much of it coming after the dividend announcement.

But unless capital markets activity picks up, Macquarie could still be in for a rough ride. There's only so much more they can cut before they start seeing a significant impact on their lines of business. "For operating leverage to be fully exploited, market conditions need to show sustained improvement to support the top line now," analyst Frank Podrug at Bank of America Merrill Lynch wrote in a recent note.

Plus, Macquarie's funding costs are higher than a lot of banks because they don't have the best credit rating. Standard & Poor's rates Macquarie 'BBB,' while Canadian Imperial Bank of Commerce and Royal Bank of Canada, for comparison, are rated 'A+' and 'AA-' respectively. (That said, Macquarie Bank Ltd., one of the parent group's subsidiaries, can also borrow money on its own, and it's rated 'A' by S&P.)

All this serves to illustrate that, tough as conditions in Canada are, they likely weren't the only factor behind Macquarie's decision to scale back.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 18/03/24 4:20pm EDT.

SymbolName% changeLast
BAC-N
Bank of America Corp
+1.69%36.01
RY-N
Royal Bank of Canada
-0.07%99.27
RY-T
Royal Bank of Canada
-0.22%134.34

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