Is Macquarie Group Ltd (ASX: MQG) facing a Commonwealth Bank of Australia (ASX: CBA) moment?
It's an almost unthinkable question for the market darling as Macquarie's share price soared 19% over the past year when the Big Four banks tumbled around 10% as investors brace for a bruising time from the Banking Royal Commission and slowing credit growth environment.
Commonwealth Bank, our nation's largest mortgage lender, is seen to be particularly vulnerable to potential class action lawsuits for its bad behaviour and has been de-rated by the market. The stock used to command a big premium over the other three big banks that include Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) – but not anymore.
The Royal Commission was supposed to focus on the Big Four retail banks but the investment bank (Macquarie) could be forced to share the spotlight on allegations that its wealth management business cheated clients and manipulated the share prices of microcap stocks.
Macquarie's senior managers had to front a consumer protection hearing committee (a separate process to the Royal Commission) to defend the investment bank's culture and rebut accusations that Macquarie had misappropriated client funds and engaged in "pump and dump" stock tactics.
According to press reports, the accusations centred around Cleveland Mining between 2011 and 2013 where Macquarie's advisors ramped up the share price of the speculative junior explorer by pumping clients' money into the stock, sometimes without their knowledge.
The stock has subsequently collapsed and is now worth next to nothing.
It is alleged during the committee hearing that Cleveland Mining wasn't an isolated incident and the Australia Financial Review reports that law firm Macpherson Kelley is considering a class action against Macquarie, which is more affectionately known as the Millionaires Factory.
Around 80 investors are also believed to be pursuing litigation and some will make submissions to the Banking Royal Commission.
An adverse finding by the Royal Commission could pave the way for more lawsuits against Macquarie or any other banks and this is one of the reasons why UBS has downgraded its valuation on the Big Four retail banks to reflect this risk.
It seems that a discount may also need to apply to Macquarie until there is greater clarity on the extent of the damage on its reputation.
On the upside, at least trading conditions are favourable for the investment bank due to its leverage to rising investment markets and the global infrastructure boom.
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