Macquarie Pips Ubs In Broking
Sydney Morning Herald
Monday February 27, 2006
THE latest market share figures for Australian stockbrokers confirm that UBS is in a dogfight with Macquarie Equities for the top position and that the three-year-old alliance between Goldman Sachs and JB Were has lost momentum.
So far in 2006, UBS has won a 9.8 per cent share, down 2.1 percentage points from a share of 12 per cent in the same period of 2005. Goldman Sachs JBWere, owned 45 per cent by Goldman and 55 per cent by former partners of Were and Goldman, captured 7.1 per cent of the market, down from 8.5 per cent a year earlier. UBS's slide left it in a position with which it is unfamiliar - second place behind Macquarie's institutional broking business, which has captured 10.9 per cent of the market so far this year, up from 10.3 per cent a year earlier. Macquarie surged to prominence in 2003, when it lifted its market share from about 6 per cent to more than 9 per cent. Citigroup, CSFB, Merrill Lynch and Morgan Stanley have also started well, lifting their market share so far in 2006 by 0.5 percentage points, 1.1 percentage points, 1.3 percentage points and 0.9 percentage points respectively, to 8.6 per cent, 7.4 per cent, 7.5 per cent and 4.1 per cent.Market share is not a perfect measure because it is always affected by how much in-house, or principal, trading is undertaken, and affected in the short term by big block trades. The statistics are nevertheless closely watched, because full service outfits such as Macquarie, UBS, Citigroup and Goldman need a big slice of the market to justify their high-cost business models. Firms that provide selective services and employ fewer people can survive with lower market shares and examples in this market are Morgan Stanley (a lean, wholesale-only broker here, unlike overseas, where the US parent offers a full suite of services and products), and Merrill Lynch (which downsized significantly a few years ago). UBS can point to the fact that for all of 2005 it was in the No.1 spot, with a 10.6 per cent market share, followed by Macquarie at 10.3 per cent. UBS and Goldman also lifted this month, with UBS accounting for 9.9 per cent of the trade, and Goldman 7.6 per cent. But Macquarie, which handled this month's on-market raid on AGL by Alinta, also lifted, to a share of 11 per cent, and UBS obviously has a serious challenge on its hands. Goldman must be concerned by its market share numbers. Goldman Sachs had a market share of 2 per cent when it acquired 45 per cent of JBWere in March 2003, and Were had an 8 per cent share. From that base of 10 per cent, the merged operation has lost about 25 per cent of its original market share. Were can argue that it does less in-house trading than some of its big competitors and as a result its flow of external fees (and profits) from trading are stronger. But its profitability will be under pressure if it does not get its share up and market activity cools, as could occur later this year. The firm, in my opinion, still needs to match UBS and Macquarie by generating more share trading and share placement activity out of takeovers and other deals that it advises on. And it might have to decide soon whether it is going to match its major competitors in the business of in-house, or principal, trading - an issue that for Goldman SJBW is complicated by history. Goldman Sachs is a huge principal trader everywhere else in the world and has in fact been described as the world's biggest hedge fund. The old JBWere partnership avoided in-house share trading, believing that it put its business in competition with its external clients. That is one reason why Goldman SJBW still does relatively little principal trading.But even if it decides to pump up principal trading, it could be difficult to achieve under the current ownership structure. The giant Goldman Sachs combine could easily finance a substantial increase in principal trading but the partners who own the other 55 per cent of the business are less well resourced. And there's no obvious incentive for Goldman to fund more than 45 per cent of a principal trading portfolio if it only gets 45 per cent of the profits. For that reason alone, it has to be possible that the ownership structure will be considered if the business doesn't get its market share back up towards the 10 per cent inherited in 2003. *** Goldman SJBW's profit season monitor meanwhile suggests that the December half results have not made a comprehensive case for the bulls or the bears. At the end of last week 63 per cent of the companies in the ASX 300 index had reported, including 89 per cent of most important companies tracked by Goldman. Profits overall were 31 per cent higher than the December 2004 half, including a 7.8 per cent rise in industrial company profits and a 63.4 per cent rise in resources company profits. The overall profit rise was 1.1 percentage points below what Goldman analysts expected, with resource company profits undershooting by 2.2 per cent (and by 4.9 per cent, ignoring the titans, BHP Billiton and Rio Tinto), and property trust profits missing the mark by 3.3 percentage points. But industrial companies, excluding property trusts, beat forecast by 1.1 per cent, and by 3 per cent excluding financial companies and Telstra. Small industrial companies beat forecast by a healthy 2.4 per cent. A total of 39 per cent of all results beat expectations by at least two percentage points, 31 per cent were below forecast, and 30 per cent were in line with expectations. Excluding the financial companies, 50 per cent of large industrial companies exceeded expectations, and 48 per cent of smaller industrials outperformed. Individual companies that posted profits and outlooks that did not meet the market's very high standards were punished. On Friday, for example, Caltex boosted earnings and dividend only to see its shares lose 2 per cent. Still, industrial companies were the main area of concern going into the reporting season, and the better than expected overall outcome in that sector lends the sharemarket some support.
© 2006 Sydney Morning Herald
