Fitch Ratings has downgraded Australian financial services giant Macquarie Group Ltd., due its dim view of the environment for large financial institutions in the short term.
Last month, Fitch said that it had placed Macquarie on rating watch amid a review of the largest banking institutions in the world. “This review has been ongoing for some time and was prompted by challenges facing financial institutions globally, in particular those that are more exposed to market- oriented income. These actions do not reflect any developments specific to Macquarie, but result from this broad global review,” the rating agency says.
Macquarie has exposure to a number of market-oriented businesses, Fitch says, noting that “an uncertain global economic environment and increasing regulation mean that absolute returns from these businesses are likely to be subdued relative to pre-2008 levels in the short- to medium-term. Also, market-oriented businesses have a more volatile earnings profile than traditional commercial banking businesses.”
Fitch also says that Macquarie has a greater reliance on wholesale funding relative to its peers, which, when combined with its concerns about more volatile earnings, contributed to the downgrade.
That said, the rating agency also points out that Macquarie’s market-oriented businesses have only modest proprietary trading exposures, which offset some of the risks. “The group has also been proactive in addressing the changing operating environment and regulatory issues, exiting a number of businesses, reducing costs and undertaking capital efficiency initiatives. In addition, a number of non-market oriented businesses with a more stable earnings profile provide some offset to earnings volatility,” it says.
And, it says that other aspects of Macquarie’s financial profile, including asset quality, capital and exposure to market risk continue to compare favourably with other large global trading and universal banks.