Suncorp clouds part
The insurance and banking group will receive about $960 million and book a post-tax loss of between $470 million and $490 million in the June half as a result of the discounted sale to Goldman, but this is a major desk-clearing deal for Snowball.
He inherited an $18 billion "bad bank" loan portfolio when he took over as chief executive of Suncorp in September 2009, and has spent up to half his time in investor Q&A sessions since then, fielding queries about how the group is resolving the matter.
The loans were written by Suncorp's banking division under former chief executive John Mulcahy's leadership ahead of the financial crisis as part of an aggressive expansion of corporate lending, property development lending, property investment lending and lease financing.
At $18 billion when they were carved out of Suncorp's regional banking franchise in the first half of 2009, they amounted to about 20 per cent of group assets, and that was dangerously high.
Not all the loans were bad, but their funding base had been destroyed by the collapse of the wholesale funding markets during the crisis, and as commercial property prices slid, problem loans in the portfolio grew.
About 40 per cent of the portfolio was in Queensland, much of it in the south-east of the state including the Gold Coast and Sunshine Coast markets where property prices were hit hard in the wake of the crisis, but Suncorp had also built large exposure in NSW and Victoria in an attempt to take on the Big Four banks in lending markets they dominated.
Snowball endorsed the workout plan after he took over and, in truth, there was no other option. Buyers were scarce as the crisis mutated into Europe's sovereign debt debacle, and there were about 120 accounts valued at more than $50 million each. A fire-sale of the entire portfolio would have realised about 30¢ in the dollar, creating a life-threatening $12 billion hole inside the group.
Suncorp had cut the loan book to $2.8 billion ahead of the Goldman deal in a workout that insiders describe as a relentless grind.
The sale to Goldman, which out-bid Macquarie and the US private equity group Blackstone, cuts the book to $1.2 billion and Suncorp expects to have worked the total down to $500 million by the end of July. The $500 million balance is made up of about 130 smaller loans that will be fully provisioned as part of the latest deal.
Suncorp has been booking write-downs as it erodes the problem loan portfolio, and its losses since the loans were stripped out into the "non-core" vehicle total about $1.5 billion. That's a big price to pay for failed expansion, but compared with the losses that were possible, it's a great result.
Snowball now has a growing set of insurance and banking businesses to showcase. He said at an investor briefing late last month that the group was aiming at top-line revenue growth of between 7 per cent and 9 per cent over the next two years, and a dividend payout ratio of between 60 per cent and 80 per cent of earnings.
That's a solid growth path, and while the group's shares dipped 1.8 per cent on Thursday in a weak market, they are up 54 per cent since the middle of last year compared with a 20 per cent rise for the S&P/ASX 200 Index as a whole, and a 29 per cent rise for financial companies in the index.
Suncorp chairman Ziggy Switkowski reaffirmed the group's 60 to 80 per cent dividend payout ratio target on Thursday, and said Suncorp still intended to return excess capital to shareholders.
About $530 million of capital is tied to be workout portfolio, and most of it will be absorbed by losses on the latest deal.
Suncorp is still holding about $800 million of excess capital overall, however, and most of it can be expected to find its way to shareholders fairly quickly, perhaps even at the June 30 result this year.
The group cut its excess capital from $1.3 billion to $800 million last year with a special 15¢ payout, and will probably take the special dividend route again.
mmaiden@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Suncorp sold a $1.6 billion debt portfolio made up largely of problem property loans to Goldman Sachs. The portfolio was sold at about 60 cents in the dollar, so Suncorp will receive roughly $960 million from the transaction.
Suncorp’s CEO Patrick Snowball viewed the sale as a major desk‑clearing move to remove a large, hard‑to‑manage portfolio that he inherited. Buyers were scarce after the financial crisis, and company advisers said a fire‑sale could have realised only about 30 cents in the dollar and created a much larger hole in the group. The discounted sale to Goldman was seen as the best option to reduce risk and accelerate the workout.
When carved out in early 2009 the bad portfolio was about $18 billion. Suncorp had cut the remaining non‑core loan book to $2.8 billion ahead of the Goldman sale. The Goldman deal reduces the book to about $1.2 billion, and Suncorp expects to work it down to roughly $500 million by the end of July.
As a result of the discounted sale to Goldman, Suncorp will book a post‑tax loss of between $470 million and $490 million in the June half. Separately, Suncorp has already booked about $1.5 billion of write‑downs since the loans were moved into the non‑core vehicle over the past years.
About 40% of the portfolio was concentrated in Queensland, particularly the south‑east including the Gold Coast and Sunshine Coast where property prices fell hard. The loans originated from aggressive expansion in corporate lending, property development and investment lending, and lease financing under Suncorp’s former bank leadership.
Goldman Sachs out‑bid at least two other interested parties — Macquarie and US private equity group Blackstone — to secure the $1.6 billion portfolio. Goldman’s offer at about 60 cents in the dollar was acceptable to Suncorp compared with the much lower prices a fire‑sale would have achieved.
Suncorp noted roughly $530 million of capital was tied to the workout portfolio and most of that will be absorbed by losses on the recent deal. Despite that, the group still held about $800 million of excess capital overall, which the company said was likely to be returned to shareholders, possibly via a special dividend at the June 30 result. Chair Ziggy Switkowski reaffirmed a target dividend payout ratio of 60–80% of earnings.
Although Suncorp’s shares dipped about 1.8% on the day the news was reported in a weak market, they were up roughly 54% since the middle of last year. For context, the S&P/ASX 200 Index rose about 20% in the same period and financial companies in the index rose about 29%.
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