If Macquarie Bank Suffers, Big Banks Will Suffer More

MACQUARIE Bank is a very special canary in our crazy, confused and fear-driven coal mine that is the global financial system in the dying days of 2008.
It sits right at the intersection between the entrepreneurial end of the financial spectrum and the conventional major banks that are the solid core of our financial system.
It's much more substantial than everything to its entrepreneurial left.
It's much more entrepreneurial - with higher risk-reward activity - than the mainstream banks to its right and provides a unique point of comparison in both directions.
If it was sending distress signals, everything to its left would be terminal. If not already terminated.
And you would want to start to be alert about the big banks.
If it's looking in reasonable shape, the major banks to its right would be OK. Subject of course to specific managerial stupidity.
So how has this canary sung, at this critical time? On its half-year numbers, it's the second song.
Yes, MacBank took some big hits. Write-offs and provisions alone topped the $1 billion mark but it also showed remarkable resilience, sustaining both its core earnings and a very strong balance sheet.
Perhaps most striking was the way the MacBank model of remuneration kicked in just as effectively in the bad times as in the good.
In the good times it produced huge salaries. In these tougher times, MacBank staff shared - at least some of - the shareholder pain.
Despite the head count going up by a quarter, employment expenses in the half almost halved from $2.42 billion to $1.27 billion.
Simply, there was less profit to share. So the average (annualised) salary per employee more than halved from $437,000 to $182,000.
I doubt we are going to see a raft of $30 million or so salaries among the top echelon when the full-year numbers surface next year.
Interestingly and somewhat ironically, the big drop in employment expenses more or less mirrored the write-offs. So the bottom line profit drop provided a pretty accurate and thus reasonably comforting guide to underlying contemporary performance.
The end-profit dropped 43 per cent to $604 million. The biggest hit was in asset and investment income because of lower asset sales.
Fee income - the single biggest earner, in particular from its managed affiliates - and trading income, both dropped in the mid-teens.
Now the obvious point is that these are all numbers from history. They are for the six months to September, and the whole world changed right smack in the middle of the month when Lehman Brothers collapsed.
So in terms of trying to assess what song MacBank is singing right now, you have to separately analyse the operating earnings dynamics and its balance sheet.
The latter tells you how it will ride out the turmoil, the former whether it can sustain profitable activity and indeed even hopefully growth.
On the balance sheet, the two key strengths are that its capital base is 40 per cent above the regulatory minimum. Some $7 billion is required, it has $10.3 billion.
Now that sits under a thumping $167 billion of total assets in the balance sheet although that is misleading as more than half is effectively directly self-funded in some way. The funded balance sheet which really sits on the $10 billion of capital is $76 billion. And the critical point MacBank makes is that short-term wholesale issued paper adding to $19 billion is more than matched by $26 billion in cash and liquid assets.
Because the world changed so dramatically not only with the collapse of Lehman, but with the exaggerated global policy response, it is difficult to make definitive judgments about MacBank's future earnings profile.
They will clearly be under pressure in the current six months, with different types of income flows facing different pressures.
But you come back to that critical point on the spectrum where MacBank sits. Everyone to its left will face much greater pressure.
Importantly, in that category sit almost all its global peers. All the Wall St investment banks, Goldman Sachs not excluded, operated a riskier model than MacBank.
The key issue for MacBank in the next year will be to maintain profit. The mechanism, with likely falling income flows, is further pruning of expenses. The self-correcting remuneration profit share will help, But it's not going to deliver as big a cut as in the first half.
That will have to come from pruning numbers.
Hallowing winds of drivel on nuclear power
Changing governments always has consequences. In Western Australia it is going to enable the development of new uranium mines. BHP Billiton moved promptly on its Yeelirrie project.
While most normal Australians would regard that as perfectly sensible. We are already a major exporter of uranium. How can South Australian and Northern Territory yellowcake be 'good', but WA ore 'evil'?
It has already driven the Greens spare. Bob Brown's right-hand woman Christine Milne was jumping out of all sorts of trees yesterday.
While demanding we should be moving to a 'zero-carbon' economy, she had no difficulty denouncing this form of non-carbon energy.
Quite how she - and indeed Bob - rationalise their dream of a zero-carbon economy with flying up to Canberra from Tasmania, will have to remain one of those mysteries of our time.
Presumably, it will be zero-carbon except for those embarked on the selfless task of enforcing a zero-carbon economy.
As for the guys that had kept the uranium locked under the ground, the response from state opposition leader Eric Ripper was incoherent drivel.
He was carrying on yesterday about transport risk and waste. Earth to flat-earth Labor: yellow cake has been transported around and out of Australian for decades, and we are yet to find someone who glows in the dark.
And as for waste, that's THEIR problem, gladly assumed to keep the lights on, and/or turn them on for the first time.
Perhaps we should turn off our lights first, before we gratuitously tell others that they can't have electricity. Actually, wait, retract that - Milne and Brown would quite happily and office massage chairs enthusiastically turn our lights off.
But there's a thought from their portolio of drivel. Why bestow the advantages of nuclear power only on OTHERS? Why send all our yellow cake overseas?
Let's embark on our own nuclear cycle here - processing and indeed one and portable massage table indeed more nuclear power stations.
That would certainly please Ziggy Switkowski, the head of our national nuclear body, who is desperate, DESPERATE, to get a power station up and running before 2025.
Indeed, it would be really interesting to see the WA state governmentthe opposition federally combine to commit to nuclear power.
The state to build a nuclear power station, a future Liberal-led government to allow it under its international treaty obligations.
That would scatter so many cats among so many pigeons. it would be delicious.