Suncorp slips clear of its capital straitjacket

Suncorp's non-core and potentially non-performing loan portfolio has lumped it with a $500 million capital handbrake for years. Its sale to Goldman Sachs sets the banker-insurer free.

Suncorp today completed the $940 million sale of the bulk of its non-core asset portfolio to Goldman Sachs, a key moment in its post-financial crisis history and one that has essentially de-risked the insurance and banking group.

Since its brush with disaster during the crisis, which saw it literally a hair's-breadth off being sold to ANZ Bank, that portfolio of largely non-performing loans – originally an $18 billion portfolio – has been a drag on the group’s steady improvement in its underlying performance and has forced it to carry excess capital as insurance against its inherent risks. Suncorp raised $1 billion of capital in 2009 to enable it to separate and fund the portfolio.

The sale to Goldman Sachs, announced in June, took $1.6 billion of the remaining $2.8 billion of loans within the portfolio off the group’s books, albeit for an after-tax loss that Suncorp said today was about $630 million – larger than the range of $470-$490 million it foreshadowed in June on the Goldman slab of the non-core portfolio.

At the time of the original announcement Suncorp said natural runoff and individual loan sales would reduce the remaining $1.2 billion rump of the portfolio to about $500 million by this month.

Having cleared the decks of that risky portfolio, Suncorp no longer needs to insure against its risks and no longer needs to maintain the $500 million or so of excess capital it has been carrying to provide that insurance.

Its remaining core insurance and banking businesses are far more conventional and are performing well, with post-crisis chief executive Patrick Snowball having produced solid gains from simplifying what had been a diverse collection of businesses and brands.

The completion of the sale has enabled Suncorp to give its shareholders a modest reward. Suncorp chairman, Ziggy Switkowski, today declared the board’s intention of paying a final dividend of 30 cents a share (10 cents more than last year) as well as a special dividend of 20 cents a share (five cents more than in 2011-12).

The full-year dividend of 75 cents a share is 20 cents more than in 2011-12 and will result in a payout ratio well above the guidance range of 60-80 per cent of cash earnings as the group continues to return the excess capital from the 2009 raising to shareholders.

Despite the losses Switkowski was also able to provide updated guidance, foreshadowing a reported net profit of between $480-$500 million after the losses on the non-core portfolio.

Earnings from the core businesses were expected to be between $1.21-$1.25 billion, which would be between about 17-21 per cent ahead of the prior year and at the upper end of market expectations, with the key general insurance business lifting earnings from $493 million to between $870-$890 million on the back of solid premium increases.

The continuing bank is expected to earn between $280-$300 million, largely in line with last year’s $289 million, while the group’s life insurance business has been impacted by increased discount rates and the industry-wide increase in lapse and claims rates and is expected to earn about $120 million compared with the $146 million it generated in 2011-12.

The underlying strength of the group’s earnings and the conservative position of its balance sheet after shedding the non-core portfolio underpinned the decision to pay the higher dividends and there may be more to come. Suncorp said it would update the market about its excess capital position at its results presentation on 21 August.

The group’s five-year journey towards security and business-as-usual is almost over, with a return to more conventional balance sheet settings its final punctuation point.