Suncorp investors have cautiously expressed their support of the long-touted sale of its banking arm, despite the challenges it would face before any deal can be consummated.
In an interview with The Australian Financial Review, David Berthon-Jones, founding partner and joint chief investment officer of Aequitas Investment Partners, which has a shareholding in Suncorp, said there were several reasons for Suncorp to leave banking.
“Banking is a scale game... and Suncorp is just too small,” Berthon-Jones told The Australian Financial Review. “With small gains on each loan made a function of scale, you want to leverage up those gains. Suncorp can’t carry the amount of gearing needed to make good returns.”
Some investors appeared upbeat on the notion of a divestment, with Suncorp shares closing 39¢ higher, or 3.6%, to $11.23 on Monday, outpacing gains of rival IAG and regional lenders such as
Bank of Queensland, although big four lender Commonwealth Bank was up harder at 3.97%.
Street Talk recently revealed a review into the multibillion-dollar banking-arm sale, which was confirmed by Suncorp in a rare share market announcement on Monday morning.
“Suncorp, from time to time, reviews its strategic alternatives in relation to all of its businesses and is currently doing so in respect of its banking operations,” the Brisbane-based financial conglomerate said.
But why would Suncorp examine selling the bank now, with sector shares having been smashed in the past month?
Berthon-Jones said that along with interest rate hikes, bank interest margins could expand, but that would depend on how fierce the competition was and also required bad debt expenses not to increase and offset those gains.
“So it is not a slam dunk for the banks, and hence better to have a pure-play business, particularly one that exits the banking arm at a time of reasonable momentum,” he told AFR.
Suncorp, a conglomerate manned by 13,000 employees, was established in 1996 by merging Queensland state-owned entities QIDC and Suncorp with the listed Metway Bank. There has long been pressure on whether to keep both insurance and banking in the same company.
The insurance division, whose brands include AAMI and Apia, is one of Australia’s two biggest home and car insurers. The division posted only $114 million in earnings in the six months to December after being impacted by wild weather.
The bank is a regional-sized lender that had been declining for a long time and only in the second half of last financial year started regaining ground on home mortgages, earning $200 million in the six months to December with its overall lending book at $59.3 billion in March.
Industry sources said selling off Suncorp’s banking arm, leaving the conglomerate’s mainstay insurance business, requires overcoming some hurdles, including staff, political and competition considerations.
One issue has been that talk about selling the bank has unnerved staff, resulting in a management headache. Steve Johnston, Suncorp managing director, tried to reassure employees on Monday in a message seen by AFR.
“I’d like to make it clear that no decision has been taken,” Johnston wrote to them. “While I understand how distracting this might be, please focus on what you do best – and that’s to deliver for our customers, each other, and our communities.”
Since Suncorp’s formation in 1996, a number of legislations continue to exist, including a Queensland act binding certain functions of the Metway banking entity and its holding company, Suncorp Group Limited currently, to the state. This includes requiring the head office to be located in Queensland and the managing director to reside in the state, along with key functions such as treasury operations and human resource management, AFR reported.
