THE DISTILLERY: The new pariahs

The reporting season kicks off today with miners and banks (Rio Tinto, CBA) dominating this week along with Telstra. But will the banks be supplanted as the 'bad boys' of business by the insurers?

The Australian's Andrew Main says: "Australia's insurers seem to have replaced bankers as the target for righteous indignation, and with about the same modest degree of genuine justification. Sure, the insurers aren't perfect, but like the bankers they are just an industry trying to make a return by offering a service." 
 
So with that in mind, what will customers think about this report in The Australian this morning? "Suncorp chief executive Patrick Snowball has reassured investors that the devastating cyclone and floods in Queensland have not affected the group's ability to deliver a margin increase of at least 3 per cent by 2012. Suncorp, Queensland's largest insurer and one of Australia's largest regional banks, has extensive exposure to the significant damage inflicted on the state during the January floods crisis and last week's Cyclone Yasi. But Mr Snowball said yesterday that his company would still deliver the margin increase because of the diversity of the group."
 
And this report in today's Fairfax business pages: "Suncorp has become the first of the big insurers to strongly signal that the cost of household and other insurance will rise following the devastating floods and cyclone Yasi. Bosses of the big insurance companies have been reluctant to detail the effect of the disasters on premiums, but yesterday the chief executive of Suncorp, Patrick Snowball, said the companies would take them into account. He talked down suggestions that premiums in Queensland would soar by at least 30 per cent. There have been forecasts of rises of at least 8 per cent across the country." So one paper sees it as a margin increase, another as a rise in premiums. Customers, though, will pay no matter how it's described.
 
The Sydney Morning Herald's Economic Editor, Ross Gittins has another good column this morning, nailing the essential weakness in the opposition of economists to levies and other government activity: "Some economists stress that Julia Gillard's decision to finance part of the Queensland infrastructure rebuild by means of a temporary tax levy is a ''political'' choice, not one dictated by the needs of economic management. It's true. But the economists don't go on to acknowledge that their almost universal opposition to the levy is based not on value-free (or ''positive'') economic reasoning, but on a political philosophy buried so deep within their model – and so deep in the way economists are trained to think – that many of them don't know they're being just as political as the pollies. I support special levies – including most of the Howard government's levies – because they teach a freeloading electorate the most basic economic lesson: if you want it, you have to pay for it."
 
The Sydney Morning Herald's Danny John says: "As the economy continues to chug along at a decent rate, you might expect the country's big four banks to be creaming it on the back of an accompanying growth in credit. Certainly there is little reason for them to be crying poor despite the ongoing pressure of higher wholesale funding costs that have crimped their margins and squeezed the earnings power of their all-encompassing retail businesses. But having enjoyed a record year last year when their combined net profits topped $21 billion, life has become a little tougher for the four as they seek to maintain the bottom-line growth that shareholders now expect from a dominant oligopoly."
 
And The Australian reported that big investors and analysts have finally woken up to the fact that the banks face limited future growth: "The largest Australian banks are facing intense earnings pressure as investors start to question where the next stage of growth will come from, for the sector that helps dictate market sentiment. Commonwealth Bank, the largest by market capitalisation, will kickstart this year's earnings season when it delivers its first-half results on Wednesday. Most analysts expect earnings of at least $3.3 billion, putting the bank – Australia's second-largest company behind BHP Billiton – on track to eclipse last year's record-breaking $6.04 billion bottom line. The remaining three of the top four banks – National Australia Bank, Westpac and ANZ – as well as investment bank Macquarie will deliver first-quarter trading updates to the market over the next fortnight." 
 
In business, The Australian's John Durie wrote this morning: "Woolworths' boss Michael Luscombe appears to be writing his own corporate obituary in a weekend interview talking about life after running the nation's biggest retailer. When a leader under pressure starts canvassing personal alternatives it is tantamount to waving the white flag, and can quickly become a reality. It is certainly not a great morale booster for staff. Talk is rampant among suppliers and the market that Luscombe's days are numbered. If that is not the case, Woolworths chair James Strong needs to publicly declare the state of play before the company is further destabilised."
 
And Durie wrote in the Saturday paper: "Boral will be one of the first companies to spell out the impact of the floods when it reports a relatively flat first-half profit of around $75 million. The market consensus number compares with the $67 million reported last year and comes after six months in which the weather made building work impossible. One concrete plant in South Australia managed just three days of work last September. The building and construction materials company has pricing power but Queensland accounts for 25 per cent of Australian revenues and profits." Boral is due to release its interim figures on Wednesday, JB Hi-Fi is out today, CBA on Wednesday, Telstra and Rio on Thursday.
 
The Australian Financial Review says: "The arch rivalry between Qantas and Virgin Blue has already seen pointed comments from the CEOs of each airline about the other's international strategy. It could be about to spill over into an open competition for alliance partners in Asia as both carriers look to tie their masts to the region's economic boom."
 
'Rate Rise Looms' said The Australian this morning, despite the RBA's statements last week. One market economist reckons the central bank is wrong: "Citi chief economist Paul Brennan said the Reserve Bank's forecast in its quarterly review, released last week, that the unemployment rate would fall only "very incrementally" and that inflation would pick up only gradually, implied that official interest rates would not need to rise significantly over the next 12 months. But Mr Brennan said there were risks that the RBA's forecasts of above-trend economic growth would lead to a faster tightening in the labour market and more inflation pressure than its official forecasts would suggest. "We continue to expect more tightening than currently priced by markets will be required to ensure that the large change in relative prices driven by the commodity boom doesn't spill over into a deterioration in inflation expectations," he said. "We also suspect the RBA is underestimating the inflation pressure created by the flood rebuild against this backdrop of a mining and energy investment boom." The RBA last week held the official cash rate at 4.75 per cent and foreshadowed interest rates would remain on hold for the next few months, with inflation under control. He added that he expected 100 basis points of tightening this year, backloaded into the second half." So he says rates will be at 5.75 per cent by the end of the year. We'll remember that forecast. 
 
Sydney Morning Herald Finance Editor Michael West on Saturday discussed a good idea that hasn't got enough play: "As with any boom, few will pick the top for copper, or commodities in general. But when that rainy day comes, it will be too late for Australia to open a savings account. Surely, it is time now to set up a sovereign wealth fund. (The Future Fund is commonly mistaken for a sovereign wealth fund but its purpose is to cover public servants' superannuation liabilities.) Ten years ago, copper fetched 80 US cents a pound. Now it sells for $US4.50. All commodity prices have shot through the roof: base metals, coal and gold, and soft commodities such as sugar and wheat. All of which Australia has in abundance. All of which won't last forever, super-cycles and Chinese economic miracles notwithstanding."
 
The AFR's Chanticleer columnist loved the QBE deal on Saturday: "When a stock adds $1 billion in value in one day it is worth sitting up and taking notice, especially if the company has enormous leverage to the fast-recovering United States economy."
 
And The Australian said investors cheered as well: "Shares in QBE Insurance surged yesterday as investors embraced the terms of the purchase of US insurer Balboa, shrugging off a weaker 2010 profit and about $US100 million ($98.2 million) in expected losses from Cyclone Yasi. After an unusually quiet period on the acquisition front due to a depressed share price from three years of declining profits, QBE caught the market off-guard, paying $US700 million for Balboa, which mainly insures lenders against damage to foreclosed properties where the homeowner's policy has lapsed. QBE will also assume $US1.2 billion in Balboa's insurance liabilities in a deal expected to reap an extra $US1.3 billion in net earned annual premium. The transaction was expected to be accompanied by a formal capital raising. But QBE said it would fund the deal with short-term bank debt and a full underwriting of its dividend reinvestment plan – an effective equity raising of about $US500 million."
 
Fairfax's Malcolm Maiden also liked Friday's QBE deal (which is at the foot of Saturday's column): "QBE is taking on insurance liabilities of $US1.2 billion and matching tangible assets, and paying Bank of America $US700 million for the distribution rights. (CEO Frank) O'Halloran estimates the deal will generate net earned premiums of $US1.3 billion a year. And he says the insurance profit margin will be between 15 and 20 per cent, or $US195 million to $US260 million. The deal has to be renegotiated in 10 years, but looks to be a corker. And he said the January floods that hit Queensland, New South Wales and Victoria, along with cyclone Yasi, looked like costing QBE about $200 million. QBE has $1.5 billion in its 2011 disaster kitty: no wonder its shares jumped." 
 
 And in a long column on last week's ASIC cash generating settlement with KPMG (the auditors of the failed Westpoint group) Fairfax columnist Ian Verrender on Saturday made some very much under-reported points: "As has become standard fare in out-of-court settlements, KPMG maintained the fantasy that even though it had settled the case and agreed to the compensation, it was in no way admitting any wrongdoing or liability. That line was pushed even though the three KPMG partners responsible for the audits were banned for between five months and two years from acting as auditors back in 2009. But a crucial concession on the part of the accounting group was its decision to drop a constitutional challenge to the power of the regulator. But the High Court action by KPMG was astounding. At a time when the pendulum has swung firmly back towards greater regulation worldwide, it seems almost inconceivable that a global accounting firm would challenge a government-appointed regulator in such a manner. Memories are short in the world of high finance. Arthur Andersen was brought undone by shoddy auditing. Hopefully, this week's settlement – no liability of course – will help revive some memories; and standards."
 
And Terry McCrann pointed out in The Weekend Australian: "With all due respect to the good professor Warwick McKibbin, the Reserve Bank board appointment that really matters takes place next February and not July, when McKibbin's term is well and truly up. Although it's true that the person chosen to replace McKibbin – or Don McGauchie, whose term is up ahead of him next month – could ring the bell on that February appointment. That's when the current deputy governor Ric Battelino retires. For very simply, the person chosen to replace him will be the person chosen to succeed Glenn Stevens as governor. And that's the job that really matters. Stevens' term runs until September 2013, which positions it in a very interesting place in the political calendar."