I'm Rebecca Jones and this is the Bloomberg Australia podcast, where each week we go behind the biggest stories shaping Australia's place in global business.

Shares in McQuary Group took a dive after its one point seven billion dollar profit didn't meet expectations.

Mcquarie has agreed to fourcarts three hundred and twenty one million dollars in compensation to the victims of a rogue investment scheme.

I think overall we have maintained our our look as we are guided At the beginning of this year, they still call it the millionaire's factory.

But right now the machines are spluttering.

Mcquarie's shares are down almost ten percent since October.

Is our homegrown investment giant starting to lose its mojo?

To help me take a look at just what's going on at our fifth largest bank, I'm joined by our Sydney based finance editor, Adam Hague.

Adam, welcome back to the pod.

Thanks very much, it's great to be back.

So investors really punished Quarry after the results last week.

Shares were down more than like seven percent in one session.

What drove that reaction Adam.

Yes, I think the share reaction beck was actually quite renounced and quite surprising to a lot of people.

So broadly speaking, that the profit number was a little light, and I think there were certain areas of the business that really stood out as just continuing to see quite a few headwinds, and one of those, most notably, of course, is the commodities in global markets business, and that's been the real earner for Macquarie for many years, but in the past kind of eighteen months or so shown that some areas of that business have been struggling, and I think what investors were looking for going into these numbers were some signs of support there and they didn't get that.

Indeed, a few people have brought down their expectations for full year profit based around the struggles in that business, so I think that was a key part of it.

And then there's also the sense that you know, overall, you know, bank stocks have been have been doing reasonably well, so expectations were going into this, you know, people did want a little bit more than they got, so I think the move ended up being a bit more pronounced because of that disappointment.

So the market's message to mcquarie here seems to be you know, we're not buying mcquarie's story as readily as we used to.

Well, I think the tricky thing with mcquarie is that they've had this historical legacy of just continuing year after a year after year to drive these these profits.

So I think it should be seen against that backdrop.

That is important context to understand what people feel when they own mcquarie stock, both retail investors here in Australia, but also big institutional investors that hold Mcquarie that might be based in other parts of the world and that may indeed have held the shares for a long time.

Expectations are still very high on what this company can deliver based on what it's done in the past.

So there are still lots of people who are prepared to bet that they can get back to the good old days of real pronounced profit growth.

But I think at the moment they are going through a tough patch.

There's no doubt about that.

Adam.

Let's dig in a little bit deeper into the divisions.

You briefly mentioned commodities, and I want to get into that a little bit more deeply later.

Despite the headline disappointment that than investors had last week.

There were some bright spots though, right particularly in asset management and investment banking.

Why was that and what hasn't gone so well for them recently?

Yes, I do think it's important to remember just how huge this organization is and to break it down into the division.

So one of the areas of bright spots was banking and financial services, that's the name of their main banking arm, which has been really pushing into Australia home loans.

That's been one of the key growth areas and they now have got up to a position where they have about six and a half percent of the market share there of Australian home loans.

And this is of course an area that's been immensely profitable for Australia's biggest bank, Commonwealth Bank.

Of Australia, for many, many years.

But Mcquarie over the last few years has just been chipping away with a digital first product that really pushes technology.

You don't have to go into a branch, you just do it all on the app, you get your mortgage approved quite quickly, and that it seems, is continuing to provide really good numbers from Macquary.

They're prepared to keep committing capital to that and keep spending to try and grow that area.

So I do think that's one important area.

But also Macquarie Asset Management, the big infrastructure arm of Macquarie that's built up over the years to now become a real huge player on a global scale, that also is showing some signs of doing well from continued fee growth and around some of the assets that it still owns in that area.

So I think those two divisions that are notable did pretty well this time around.

Now on the negative side, I did mention commodities in global markets, that is the biggest part of Macquarie, and that is still struggling.

But then there are a couple of other areas as well that are just struggling.

And I think, you know, investment banking activity in Macquarie Capital did pick up, so that in some sense is a bright spot.

But I think some of the commentary around what's playing out for the second half of this year suggested that that growth might be a bit more muted over the next six months, so comments around the deal pipeline, mergers and acquisitions activity might be a little bit more subdued.

So I think, you know, you do have a couple of areas there which speak to the fact that the second half of this year is still going to be pretty tough for mcquarie.

And I know you've been doing a lot of reporting on the commodity side of mcquarie.

You had a story out recently that I'll pop in the show notes for our listeners to check out a little bit later.

Can you talk us.

Through why investors are now uneasy about the commodity's business because that was their golden goose for a great many years, right it.

Was, and it's a business that's grown over time, as we kind of explored in that story, that bolted on businesses that they acquired, but they've also grown it organically from within Mcquarie for it to be a real powerhouse.

I mean, it used to be led by Nicocaine, who's a very famous trader in that division, who left mcquarie last year to join Mercuria in Switzerland.

So you know you have had not just him, but a number of other senior traders leave that division.

They are also facing white some headwinds in North American energy markets, where some other Cedia traders in their Houston office have also left.

In recent months, so they are finding it difficult, I think, to continue to take the risk that they used to.

Generate the profits.

Now.

Part of that is because of compliance and a continued burden on compliance, but also some of this regulatory pressure that the bank has been facing in lots of jurisdictions in recent years.

I think that's making it harder for them to take the risks that they used to to generate the profit.

So I think all that in totality just means that that business is getting harder to make money in now.

The other area, of course, is just how markets themselves behave and how commodities markets behave.

If the subdued activity and there's less volatility in that area of global markets, then you tend to see prices depressed, but also less of a trading opportunity because prices don't move as much.

And of course, historically a couple.

Of years ago when you had the big energy market flare up and the war in Ukraine started, you know, you've got huge spikes in energy markets and you've got a lot of money for mcquariy to be made in trading those markets and its customers.

So we're not in that period anymore, we're in a more subdued period and indeed that's making it harder.

And of course Nico Kaine that you just mentioned, he was paying more than the CEO when he was at mcquarie, wasn't he.

He was, Yeah, And that speaks to just how well you can do at mcquarie if you're in a business that's generating very good profits.

You know, the whole pay structure at mcquarie is designed to reward people who can make money on the way up.

So he was a very good example of that.

And Simon Wright, who now runs that business, is also you know, still doing still doing very well, even though his businesses not doing just as well as it was a year or two ago.

And what is the the CEO Shamara Wikram and a Yaki saying about that?

Well, I think for Shamara really she's trying to paint a picture of we've told analysts and investors where the difficulties are.

She pointed out in commodities in global markets that its trade finance.

Business continues to do very well.

There's guidance there which she's trying to kind of and she's done this for a while.

Is just play down the idea that we're not in a period of high market activity like we were a year or two ago, so people should dial down their expectations.

So she's trying to kind of, you know, somewhat reset people's expectations so that they can deliver something that's in line with it, in line with a slightly lower set of.

Targets on people's minds.

And this is all, you know, on the backdrop of quite significant or not insignificant shareholder discontent that we've seen over executive pay.

Now back in July, Adam in VISs has gave mcquarie a strike against its pay report.

Can you explain what that is and how much of that discontent is feeding through to the reaction that we saw in the share price last week.

Yeah, Well, the setup for this, remember, was a few weeks heading into that AGM at the end of July was characterized by Macquarie having to deal with quite a lot of investor feedback on some of the issues that were going on around their pay structure, but specifically around how their pay structure deals with problems.

So when there are problems associated with regulatory risk, so be that the Australian Securities Regulator or problems that they've had in Germany or the UK or in the US, the right accountability happens for senior executives and they get an appropriate cut to their compensation or that you know, the accountability is there and they can demonstrate that.

So I think that was what a lot of the investor feedback was around that.

So going into the AGM, it kind of set the tone for Macquarie wanting to get out in front.

And indeed Chamara at the AGM was very clear about how she'd actually spoken to a lot more of her top thirty investors than she normally does, and she was very clear to say that although she wasn't always leading those discussions, she was really listening to those investors, and of course some of those were some of the big Australian pension funds, but also big overseas institutional investors as well.

So I think what you've seen in subsequent weeks and subsequent months since the AGM is a demonstration of that.

There's a document that shows how executives have been held accountable for some of the problems, and indeed Shamara herself, you know, her compensation has been lowered as about five million Australian dollars that she's forfeitters.

So there is a demonstrated now accountability of some of the issues that have been going on over the last few years.

And I think that discontent is fading somewhat in the sense that Macquarie is now trying to draw a line under that.

The board and senior management have said, listen, we've listened to you, we've changed and we've thought some more about the way we hold people to account when things don't go right, and they've tried to say, listen, we've done the right thing here.

Austin answered, let's see how it goes looking forward, Adam, what are the signposts that investors are going to watch for to decide whether or not they're still going to back mcquarie.

You know, more than half the analysts that we track at Bloomberg have got a buy recommendation last time I checked after the update last week.

What are the analysts scene?

I do think that the majority of the analyst community are still, broadly speaking.

Kind of bullish on Macquarie.

I think part of that's to do with how much the shares of underperformed recently, which does give them some sign that you know, we might be through this bad patch and that return on equity might start to pick up again.

But I think there's also a few analysts in there, including Bloomberg Intelligence as Matt Ingram, who he's still saying the second half of this year still looks, you know, somewhat tricky.

There's still a lot playing out there.

You've got the weakness in the commodities and markets business.

You do have potential, of course for McQuary asset management to continue generating that fee income, and they also make money when they sell big assets, and there are some of those in the pipeline that might get sold in the next six months, which could help profitability.

In that area.

So I think viciously optimistic maybe would be a term to kind of characterize how the street is viewing mcquarie at the moment.

But I don't think anyone's banking on a blowout second half of the year now.

But of course we'll have to wait until May when their four year numbers come out to really know.

And the big question that everyone is asking is succession around the CEO Shamara.

Now she's been in the hot seat for about seven years now, is there someone waiting in the wings to take her job.

Yes, this topic of her succession is kind of like an ongoing discussion and rumor mill within markets, not just in Australia, but in trading floors in other areas of the world as well, just because this financial giant is such an interesting company for many people and really punches above its weight in the banking sphere.

So I think how long she's going to stay is still an open question.

There's a sense after the chief financial officer, Alex harv he said that he would leave soon, that she will probably stay on a little bit longer to make sure that there's a good transition.

They have a good internal candidate coming through, So that kind of the baseline expectation is that she'll probably get to ten years, so at least another few years from her.

It would certainly be a surprise to a lot of people if it was any sooner than that.

But of course you never quite know, and there may be an opportunity for her, you know, to leave a little bit earlier, but I think for now, all the noises suggest that she will stick around for a little bit longer.

And finally, let's touch on the big four banks, who've all updated the market in the past couple of weeks.

You and I of course spoke to the CEO of WISPAC, Anthony Miller, just last week, and it also looks like in vist has liked what they saw from the Nuno Geddon Nuno matters the new CEO of A and Z.

Any big surprises there for you in the results that have come out, Adam.

Well, I do think that A and Z has been a standout outperformer.

I mean, if you look at how that share price is.

Doing now over the year, I mean it's up thirty percent and is notably outperforming the broader market but also the broader landscape of banks, and a lot of that, of course, is predicated on a belief that Nunomatos can change that bank around, that he can wim back market share in the traditional home loan market for Enzed that it's struggled in in recent years.

He's obviously slimming down the workforce in certain areas, he's cutting duplication, he's completely reformed the risk and the compliance structures of the bank.

So hopefully he can not just get investors back on side, but he can also over time get regulators back on side as well.

And as I say, that's been at the moment rewarded in the share price and I think you can see that.

So yes, A and Z has been a standout there.

It is worth just mentioning Commonwealth Bank of Australia this week.

Their share price did get hit fairly hard on Tuesday morning after they had their first quarter update.

There wasn't much in that because it's only a five or six page document, so not a huge amount of detail, but I think it did really speak to the competition that still exists in home loans and the margins still being under pressure there.

So I think they have a little bit to look at over these next few months.

They're making a big push into business banking, which is continuing to do pretty well, but I think they are a notable standout as well.

On the downside.

If you found today's conversation insightful, be sure to follow the Bloomberg Australia Podcast wherever you listen, and check for more reading on Australia's banking sector, including the latest reporting from Adam Hague at Bloomberg dot com.

This episode was recorded on the traditional lands of the will Wondery and Getigal people.

It was produced by Paul Allen and edited by Ainsley Chandler and Chris Burke.

I'm Rebecca Jones, and we'll see you next week.

MHM.