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Few positives in Suncorp's 45pc profit dive

Emma Rapaport with AAP  |  15 Feb 2019Text size  Decrease  Increase  |  
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A $60 million cost blowout in the wake of the Hayne inquiry and a $200 million reinsurance bill led Suncorp (ASX: SUN) to the year-on-year interim profit slump.

Suncorp's first-half 2019 profit has been slashed to $250 million, a fall the financial services company blames on natural hazards, volatile investment markets and banking royal commission-linked costs.

The drop from $452 million in net profit a year earlier was exacerbated by a $145 million write-down on the sale of its Australian life insurance business, but declined 11 per cent even after this adjustment.

“Natural hazards, investment performance and unforeseen regulatory costs will impact our full year cash return on equity,” chief executive and managing director Michael Cameron said.

Morningstar senior banks analyst, David Ellis, cites December's severe Sydney hail storms, which caused around $670 million of damage, among the main causes of a sharp profit decline in Suncorp's insurance division, which slumped 43 per cent to $133 million.

storm

December's hail storms incurred $670m in damages on Australia's east coast

The banking and wealth division's result was comparatively flat, down 3 per cent to $183 million due to a combination of declining net interest margins and aggressive competition on mortgage pricing. However, it wasn't enough to offset the Australian insurance division result.

Despite the result being largely expected, Suncorp stocks fell 3 per cent in the first hour of trade today. Ellis says this is due to a considerably higher customer remediation bill linked to the Hayne inquiry findings, and a $200 million outlay for natural disaster reinsurance.
Suncorp also conceded its regulatory costs are likely to stretch beyond $140 million, well beyond its original $90 million estimate.

Cameron recognised the Hayne royal commission had uncovered instances where the insurer had acted poorly.

“The financial services industry today faces a great deal of change,” he said. “This includes future policy settings, shifts in regulation, and material impacts on business and distribution models.

“I acknowledge the importance of the royal commission process, and accept that Suncorp has, at times, fallen short of community expectations.”

Morningstar has left the fair value estimate on hold at $14.50, but Ellis has made modest reductions in his earnings 2019 and 2020 earnings forecasts.

A better-than-expected business improvement project was one positive Ellis drew from the result. This is tipped to drive $225 million in savings, up from Suncorp's earlier estimate of $195 million.

Outlook

Ellis is unphased by additional natural peril costs stemming from this month's Townsville floods, as Suncorp's reinsurance program will minimise losses for subsequent claims.
Cameron says the business is well placed to meet original expectations and achieve sustainable growth.

Suncorp will pay a fully franked interim dividend of 25 cents a share.

 

. Emma Rapaport is a reporter for Morningstar Australia.

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