Challenger had nowhere to turn yesterday as its annual profit took a huge hit from the June half year slide in markets, while its $35 million adventure into banking is coming badly unstuck.
Both bits of news from the 2021-22 annual results went down like a lead balloon with investors, who sold the shares down more than 10% to $6.40.
Challenger said its full-year net profit fell almost 60% as the investment manager took a hit from turbulent financial markets and put its recently acquired bank under review.
Net profit fell 57% to $253.7 million for the year to June 30 from the year-earlier $592.3 million and “was primarily due to investment markets impacting the fair value of Challenger Life Company Limited’s (CLC’s) assets and liabilities. Investment markets were significantly stronger last year.”
In other words, like Warren Buffett’s Berkshire Hathaway and other investors, Challenger has had to take into its accounts unrealised losses on its shares and bonds in the year to June 30 because of the drop in prices (and rise in yields for bonds) as central banks started raising rates to combat rising inflation.
Challenger buried that performance and preferred to highlight a 19% rise in its “normalised’ profit to $472 million which was up from the ’normalised’ profit of $278.50 million in 2020-21
“Profit was toward the upper end of the guidance range ($430 million to $480 million) and was driven by strong sales and FUM growth, coupled with stable margins.”
That performance saw Challenger target a small improvement on that figure for 2022-23.
“Challenger is targeting normalised net profit before tax guidance between $485 million and $535 million,“ it said on Tuesday which would be a rise of between 3% and about 10%.
And then the banking adventure that has gone wrong to the point if you wanted a bank, Challenger has a bargain for you.
Under different management in late December 2020, Challenger Ltd paid $35 million to buy the small bank from Catholic Super, with plans to turn the new lender into a powerhouse in the $1 trillion Australian term deposit market.
In August 2022, that move cost Challenger $11 million in losses in for the 11 months to June 30 this year and the whole idea is up for review which usually means it is looking to get rid of what seems to have been a very odd idea.
The bank’s net interest margin (NIM) was 0.93% for the 11 months to June. Its bigger rivals such as the Commonwealth had a NIM of double that
Challenger explained the review in Tuesday’s statement saying:
“Since announcing the Bank acquisition in December 2020, market conditions have changed and it is becoming apparent the Bank is unlikely to realise the expected benefits in the timeframe anticipated. As a result, Challenger is reviewing the Bank’s position within the group and has commenced a strategic review of the business.
Challenger is considering all options in relation to the Bank and has appointed Gresham Partners to assist.
“The review is considering if the Bank will realise the expected benefits in the timeframe anticipated, and its alignment with Challenger’s strategy,” Challenger CEO Nick Hamilton said in Tuesday’s ASX statement.
In other words, if a buyer can be found, the bank is out the door. If no buyer then closure and handing back the licence would have to be a very real option.
Shareholders will get a full year dividend of 23.0 cents per share fully franked, up 15% on last year with a final of 11.5 cents a share, up from 10.5 cents previously.
Mr Hamilton said the strong result was delivered against a challenging external backdrop including market volatility, economic uncertainties as well as the ongoing impacts of the pandemic.
“The result reflects the underlying strength of our franchise. Our Life business continues to leverage favourable retirement and demographic trends while higher interest rates are supportive for both annuity sales and investment returns,” Mr Hamilton said.
“Our Life business recorded book growth of 14%, driven by strong Life sales of $9.7 billion. Institutional sales were up 68% to $6.7 billion, reflecting our continued focus on expanding relationships with institutional partners. Retail sales increased by 11% to $2.4 billion.
“Funds Management grew earnings by 17%, benefiting from average FUM growth of 13% and higher margins,” he said.
