One day the $7.9 billion in shares and cash Suncorp Metway spent on acquiring the rival Promina insurance group will be seen to be a good investment.
One day. Can’t tell you when, but it will happen, one day.
Until that day happens we are faced with a financial services group which has found a new way to be hammered.
The move deeper into insurance just before it was struck by more bad news (storms, claims in NSW and Queensland, not to mention Melbourne), while its existing banking business has taken a hit from the impact of the credit crunch and rise in risk aversion, like every other bank.
At least SUN’s bigger competitors, such as the NAB, CBA or ANZ have just taken a hit on the banking side from tightening credit standards, rising funding costs, poor lending and slowing returns from funds management (which will be very evident in the six months to March).
But SUN added an extra whammy from deeper exposure to insurance.
In reaction to a 28% drop in earnings to $382 million, (from $527 million a year ago), courtesy of storms, floods and the impact of the credit crunch, Suncorp shares fell 8% to around $14.31 at the close, their lowest level for three and a half years. (The day’s low was $14.31.)
Before amortisation and non recurring items. the result was $468, down 11%
Besides the problems with insurance and rising interest costs, SUN also revealed in its statements that the dividend payout would exceed the net profit, meaning the company was being forced to get the dividend reinvestment program underwritten.
That big price for buying Promina is turning out to have a much bigger cost, despite upgrading the integration savings to well over $300 million over three years.
Seeing Promina was bought in late 2006, early 2007 when the shares were around $20, it’s a very sharp re-rating and an expansion plan that just has destroyed shareholder value.
Suncorp said its insurance claims expenses jumped 22% to $2.18 billion after large-scale flooding and storms in eastern Australia. Its Suncorp, GIO and AAMI insurance businesses were exposed to claims in Queensland, NSW and Victoria in the half, and these claims have continued to mount in the current half, especially in Queensland with another $100 million in payouts signalled (that’s a maximum under a re-insurance deal that capped claims from bad weather until June 30 at a maximum of $100 million for the company).
On the banking side, the higher funding costs, sparked by the global credit crunch, cut Suncorp’s net interest margin by 0.27%, a substantial reduction. With bank bill rates above 8% at the moment for 180 day paper and around 7.84% for 90 day paper, banks like Suncorp are facing additional pressure on their interest margins in the current half.
The 8% fall in Suncorp shares yesterday compared to a fall at one stage in the market of 1%.
A sign of how the company is struggling to keep up its funding base is that it is bringing back its dividend reinvestment program. That will raise around $316 million to boost its capital. The DRP will be 65% underwritten, meaning the company wants shareholders or an underwriter to raise a minimum of $316 of the $484 million (52c a share fully franked) payout.
That payout exceeds the after tax profit of $382 million meaning that it needs the DRP to work, otherwise it will have to dip into reserves to pay shareholders, which is not a good look for a bank or any sort of financial institution.
That net profit is around $80 million under the market estimate of around $466 million, so no wonder the sell off was so great, especially as some analysts reckoned the underlying result wasn’t bad.
Suncorp has exposed itself to a double whammy from banking and insurance, and insurance increased its exposure through the Promina takeover, which lifted its presence along the East Coast, where the storm-related and flood-related damage has been concentrated since last June.
Directors said, "The decision to underwrite a 65% participation rate in the DRP on the interim dividend of 52 cents per share has been taken to fund future growth and ensure capital flexibility. We continue to target absolute growth in dividends for the full year, however, given all the factors outlined above, and that synergy realisation will initially lag implementation costs, it is expected that annual dividend growth for the year to June 2008 will be nominal."
So no change in dividend for the year; Suncorp can’t afford it, nor can it really afford to cut the dividend.
The capital will be cheaper to raise from shareholders via equity than going into the markets and trying to lock in long term capital.
The Group had previously flagged it would consider its capital position by the end of June 2008. However directors said "given the impact of external factors in the first half, regulatory changes and the ongoing operational needs of the business, a capital return could be ruled out in the short term".
CEO, John Mulcahy said the decision to partially underwrite the interim dividend reinvestment plan "would fund future growth and protect the Group’s capital position in a volatile external environment".
Yes, but it will enable the dividend for the full year to be paid more easily.
"We expect that global credit markets will remain volatile in the short term with little prospect of immediate contraction in credit spreads,” John Mulcahy said in a statement.
Suncorp said the integration of Promina was on track and reiterated its annual synergy benefit of $325 million from the merger.
On a more upbeat note, the group adjusted up its full-year profit outlook for its banking division to between 10-12% growth, before tax and bad debts, up from 10% forecast previously, on strong demand for business lending.
Mr Mulcahy said "The Bank was in a position to upg
