The Commonwealth Bank's boss, Ian Narev, recently noted that the financial fallout from the bank's financial advice scandal had not been significant and it's probably fair to say that in the longer term it won't sustain any real brand damage.
Even if it needs to cough up hundreds of millions in compensation/remediation, it won't put much of a dent in its massive cash flow.
In terms of collateral damage from the CBA fallout, Macquarie Bank has sustained plenty. Its private wealth clients were found by the Australian Securities and Investments Commission to have been given poor levels of advice while many of its advisers kept poor records. It was slapped with an enforceable undertaking and had to comply with monthly checks by the regulator.
While this took place in January last year, the far bigger CBA scandal around its systemic financial advice issues, which ultimately became the focus of a recent Senate inquiry, shone the spotlight back on Macquarie Bank's own deficiencies.
Two of the Senate committee called on ASIC to open a thorough investigation into the Macquarie division to ensure it is complying with the enforceable undertaking and to extend it beyond its expiry next January, amid claims that Macquarie had been tardy in its co-operation with the inquiry.
Senator John Williams said Macquarie still had a myriad of matters to address. "There are a lot more questions for Macquarie Wealth to answer and they need to look pretty hard in the mirror in terms of their compliance," he said.
At Macquarie Bank's quarterly profit update and annual meeting on Thursday, it gave its first public response since the Senate inquiry. Chief executive Nicholas Moore was pretty short on detail but said that implementing the changes to its financial advice and investing in new processes, practices and systems had cost it close to $50 million in two years. It has undertaken 11,500 hours of face-to-face training and a review of all its advisers. Moore says it has also reviewed plenty of case files where concerns were identified by the company or its clients.
What Moore didn't say is whether the bank has needed to compensate any of these clients.
It's a sensitive matter. In June, for example, it took issue with a report in The Australian Financial Review about comments it made regarding Macquarie's response to the Senate inquiry. Macquarie felt the matter was resolved in January 2013 and that it's well down the track to rectifying the situation.
Ultimately, the high net worth clients it services will be the judges of whether they have been professionally and fairly treated.
Private Wealth forms part of the Banking and Financial Services division and didn't appear to suffer adverse financial consequences, according to the commentary released as part of the bank's quarterly result.
Indeed, Moore had bigger problems to deal with arising from Thursday's announcement that first-quarter earnings were down on the corresponding period last year.
It sent the bank's share price about 2.9 per cent lower despite Moore's forecast that the full-year result in 2015 will match the bumper profit of 2014.
It was what the group calls the capital markets facing business – that includes Macquarie Securities, Macquarie Capital and Fixed Income and Currencies and Commodities – where underperformance pressure has come from.
The bread and butter divisions like Macquarie Funds Group are travelling along relatively well but the group's ability to post big improvements are highly dependent on markets over which they have little control.
Deal flow and trading volumes remain sufficiently sluggish that Moore is not feeling safe enough to predict that the current year's underlying profit will be an improvement on 2014.
At the update on Thursday, the company said that in Macquarie Securities market conditions were characterised by low volatility and reduced secondary market volumes – particularly in Asia.
And while Macquarie Capital had done 106 deals in the quarter worth $18 billion, this was 46 per cent down on the previous three months.
Nomura Securities notes there is limited upside risk to earnings but said that performance fees could be a swing factor if Macquarie's funds sell assets at attractive prices.
This has produced fairly regular but one-off gains in previous years.
But for some market watchers that were expecting 2015 to produce meaningful gains on 2014, Moore's comments will be disappointing.
Based on a consensus view of a 10 per cent rise in profit for 2015, the stock had already run up at a steeper rate than its international peers and as such was vulnerable to disappointment.
Moore is not ruling out that if conditions improve, the result could be higher and with seven months to run before the end of the bank's financial year (March 2015) there is a distinct possibility that the markets will improve and take Macquarie along for the ride.Author: Elizabeth KnightSource: The Age Business Day
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