UBS sees risks for Macquarie strategy

Macquarie Group, which is trying to win business in North America from mid-sized companies, risks being caught in an unsustainable position as it is squeezed between Wall St giants and smaller advisory firms, UBS says.

Macquarie's approach, after at least US$766 million ($992 million) of acquisitions in the region in less than two years, entailed high cots without the guaranteed or diversified income to deliver adequate returns, said UBS analysts led by Jonathan Mott.

They cut their rating on Australia's biggest investment bank to "neutral" from "buy" after a share rally.

"This is a challenging proposition," the analysts wrote.

"Few competitive industries are likely to sustain 'middle-market' players, not least investment banking, given the short life cycle on perceived competitive advantages."

Sydney-based Macquarie, which on Tuesday cut its second-half earnings forecast, has become increasingly reliant on the United States, Canada and Latin America after acquisitions in the past two years.

Tim Bishop, head of the US business, said it was a challenge to differentiate Macquarie from its largest rivals and to raise the bank's profilein a region where it is poorlyknown.

Macquarie closed down A$1.35 yesterday at A$39.75 on the ASX.

The stock lost 0.3 per cent on Tuesday after the bank said profit in the six months to March 31 would drop about 5 per cent, reversing a forecast for growth.

Macquarie's workforce in the Americas almost doubled to 3732 people in the two years ended September 30, helped by takeovers including Fox-Pitt Kelton Cochran Caronia Waller.

In that period, the proportion of group income from the region more than tripled to 27 per cent, company filings show.

New York-based Bishop said in an investor presentation in Sydney yesterday that while it took time to generate revenue, the bank was making progress.

"The traction we're getting with the client is real," he said. "It's now coming through in terms of the revenue and the pipeline of mandates we have."

Bishop said the largest US investment banks were focused on the biggest companies, while boutique firms had a narrower range. Macquarie was targeting companies worth US$5 billion or less, he said.

"The opportunity that we see is to wedge ourselves in the middle," he said.

"We're not walking into the Americas and saying we want to compete with the bulge-bracket firms head-to- head."

- BLOOMBERG