How Macquarie Group is vying to unseat CBA

The homegrown investment bank is not regarded as a competitor to Commonwealth Bank of Australia (ASX: CBA) before, but that may be about to change.

I am not talking about Macquarie Group Ltd (ASX: MQG) vying to overtake CBA in home loans or market cap. CBA’s position in both these fronts look unassailable.

But I am referring to the hearts and minds of investors. CBA dominated investor perception of what is a high-quality financial institution for so long, and some of this gloss is wearing off.

CBA’s leadership losing its shine

CBA commands a market premium as it’s the undisputed leader when it comes to these revered qualities. This is also why mum and dad investors are fiercely loyal shareholders that are hooked in its dividends.

I am not suggesting for a moment that CBA isn’t a quality institution. But Australia’s largest home lender’s reputation could take a hit this Wednesday when it releases its quarterly update.

This will stand in contrast to Macquarie’s full year results unveiled on Friday that triggered a 6% jump in the Macquarie share price to a two-month high of $105.19.

This is despite the investment bank posting an 8% drop in FY20 profit, the halving of the dividend and withdrawing of its profit guidance.

Macquarie vs. big banks

But the profit outlook for the big four domestic banks makes Macquarie’s “bad” news look delectably good!

The three big banks turned in big double-digit profit crashes in the first half. Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) even went as far as suspending their dividends.

Meanwhile, National Australia Bank Ltd (ASX: NAB) slashed its interim dividend by more than two-thirds to 30 cents a share while pleading with investors to provide a $3.5 billion in extra cash via its cap raise.

Talk about a reverse capital return – big bank style!

Better protected

Further, Macquarie’s provisioning of a little over $1 billion is modest compared with what the big banks have to set aside for bad debts amid the COVID-19 pandemic.

CBA is tipped to announce total provisioning of $3 billion this week and a significant fall in quarterly cash profit that will make Macquarie look like the king of the banking hill.

Macquarie isn’t seen to be a direct rival to other ASX Australian banks as its income mix is different, even though it’s aggressively moved into home lending recently.

Foolish takeaway

The bank’s commercial lending and asset management business helped buoy its results with a 12% increase over FY19, while its commodities, markets and capital divisions, took a 29% profit hit.

While Macquarie isn’t immune to the coronavirus economic fallout, its better spread of income, which also includes offshore operations, means it may hold up better than our domestic banks.

For these reasons, some of the premium gloss from CBA could well rub-off on Macquarie – at least for the interim.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, Macquarie Group Limited, National Australia Bank Limited, and Westpac Banking. Connect with me on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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