Suncorp shares took a pounding yesterday despite the financial services and insurance group lifting dividends by 7% and promising a high payout ratio as the company steps up investment.
Suncorp is the first major financial group with a June 30 balance date to report – its weak banking and wealth management result (a small fall in earnings) suggests that the likes of the Commonwealth Bank, AMP and Bendigo Banks could report weaker than expected figures in the next fortnight.
It seems it was that plan to boost investment by more than $100 million in the current year in revamping itself upset the market – another example where silly investors are putting income over expansion.
Suncorp reported a 3.6% rise in full-year cash profit to $1.075 billion for the year to June 30, helped by a strong rebound in its insurance arm which offset a lower return from its banking and wealth management. That was shy of some market forecasts which had the company lifting earnings by 5%.
Revenue rose more than 12% to $17.39 billion,
With insurance prices rising and claim costs contained by low inflation, insurance profits surged 30% to $723 million, with a solid recovery in the nSW market reported (which had been a previous headache, especially in third party/greenslip business).
Although banking and wealth earnings were more subdued, Suncorp lifted the final dividend by 2 cents a share to 40¢ cents a share. The increase takes dividends paid over the full year to 73 cents a share, up 7% on last year.
The group’s dividend payout ratio was pushed to 81.9% – slightly above its target range, which it said "reflects the board’s confidence in the outlook for the group". But the increase and the promise of more to come was not enough for investors who pushed the shares down more than 6% to $13.57.
Suncorp’s banking and wealth profits fell to $400 million, down from $418 million last year, as thanks to slower credit growth and higher investment in a technology revamp of its banking systems.
Loan growth slowed to 1.9% over the year, down from 4.55% in 2015-16, after APRA put the brakes on the mortgage market, especially on non-interest lending to investors in particular and foreign buyers. Its net interest margin – what it charges for loans compared with its cost of funds – narrowed slightly to 1.83% from 1.8%. the cost to income ratio egded up slightly to 52.7% from 52.5% (but that is still much higher than the majors).
Chief executive Michael Cameron said in yesterday’s statement that Suncorp had turned around outflows in customer numbers, with the overall number of customers now growing.
"Broadening and deepening relationships with our customers will unlock significant future value for shareholders," he said. Looking to 2017-18, Suncorp says it invest an extra $100 million in its goal of developing a “marketplace” for financial services, an overhaul of its online presence, physical stores and brokers.
And it plans to lift the dividend payout ratio above its 60% to 80% target range in order to offset the impact of extra investment spending.
It also pointed to "improving" net profit and a commitment to return surplus capital to shareholders.
Suncorp is the owner of major insurance brands including AAMI, GIO, Bingle and APIA, and the results showed 3.9% growth in gross written premium.
It also released $301 million in insurance reserves (down from $348 million in 2015-16) that had been set aside previous claims, an amount it said was “well above long-term expectations” of releases being around 1.5% of net earned premiums and a reflection of very low inflation generally and especially in the cost of claims.
In its outlook Suncorp said “positive price momentum” was expected to continue in 2018 in its consumer insurance business – a sign customers can expect premium increases for cars, home and contents and related property related insurance..
Its rival Insurance Australia Group benefited from a similar development which saw IAG upgrade its 2016-17 profit forecast in June. despite that IAG sold down 2% to $6.55 on the back of the Suncorp report and comments – which is odd.
