Moody’s Investors Service has placed Australian financial conglomerate Macquarie Group Ltd. on review for possible downgrade, as it worries that financial market weakness may be persistent.
The rating agency says that if current capital market conditions remain protracted, then Macquarie may face challenges in maintaining its traditionally strong capital coverage and moderate risk appetite, which have historically supported its credit ratings, while also meeting shareholders’ return expectations.
“The review will focus on the outlook for the group’s earnings against a backdrop of protracted weakness in the financial markets, and the extent that this trend may be secular as opposed to cyclical,” says Patrick Winsbury, a Moody’s senior vice president and analyst based in Sydney.
More broadly, it will consider long-standing issues facing institutions operating in the wholesale financial markets, namely complexity and inter-connectedness, which can create unforeseen exposure concentrations and susceptibility to swings in market sentiment, the rating agency says. It also notes that regulatory changes and technology advancements are creating fundamental challenges for certain business models.
Moody’s notes that Macquarie Group has reoriented its business in response to the global financial crisis, improving both its liquidity and capital positions. It has exited legacy risk positions and has minimal exposure to crisis-hit asset classes, it says. The firm is also increasing investment in businesses that tend to generate relatively stable cash flows.
“The review will also consider the challenges posed by Macquarie Group’s expansion, including risk management of an increasingly global and diverse business, as well as greater competition in many global capital markets business lines,” adds Winsbury.