ANZ hasn’t ruled out another bid for the troubled insurance and banking firm but the most likely buyer may end up being a regional rival

It is the slam-dunk deal that has never happened – the breakup of Queensland’s Suncorp.

Every time the troubled banking and insurance combine opens its mouth the inevitability of such a move becomes ever-more apparent. At least that is the received wisdom.

In response to a query from the ASX, Suncorp last week said weather-related insurance claims, volatile financial markets and continuing bad debt claims would slash its profits by a third.

After-tax earnings for the year to June would fall from A$556 million to between A$340 million and A$360 million.

The response? Perversely, Suncorp’s shares held their ground.
Many were thinking it but it was best articulated by a trader in Sydney: “There is an issue here that it’s inevitable.

Suncorp is going to be broken up at some point and the market is saying, ‘Hang on, the more bad news that comes operationally, ironically the more pressure the board is under to actually resolve the strategic dilemma’.”

All financial services companies have had to weather the financial crisis and have had their share of weather-related underwriting losses.

But Suncorp has done it tougher than most. As it attracts only a single-A rating, its banking business faces higher funding costs than its stronger AA-rated rivals.

Its aggressive lending during the boom years has come has come at a huge cost and it has now retreated to vanilla lending such as mortgages, small business, agribusiness and unsecured personal lending.

The residual book, mainly commercial property lending and development finance, has been spun off into a so-called “bad bank” and is being wound down.

Finally, the acquisition of Promina in 2007 has never really delivered; while a spate of weather-related underwriting losses have constrained an already stretched balance sheet.

The sale of the banking business – so the story goes – would leave Suncorp with a singular focus, while the banking business would be better left to a better capitalised rival.

The trends were evident in the latest warning.

Gross profit at its banking business is expected to fall from $A597 million to around $A50 million, reflecting an increase in bad and doubtful debts from $A71 million to $A730 million.

Insurance gross profit is now expected to rise from $A307 million to $A570 million as Suncorp starts to put previous bad weather behind it.

But before this warning, the appointment of Aviva UK chief Patrick Snowball as its chief executive designate and a formal separation of the banking and insurance businesses have all fuelled the speculation. What expertise does an UK insurance mandarin have in running a bank?

There is no doubt that Suncorp bank is in a state of disrepair and is strategically challenged but that does not mean it will be hived off any time soon.

The popular putative suitor is ANZ. Following Westpac’s acquisition of St George Bank, and CBA’s acquisition of Bankwest, ANZ has been left in a distant fourth place after NAB.

It has also made no bones of its ambitions for the Suncorp’s business, having bid A$4.58 a share last October. That deal was rebuffed and controversially was never shown to shareholders.
Meanwhile, ANZ chief executive Mike Smith last refused to rule out another tilt at Suncorp.

However, even Mr Smith recognises it could be a struggle to get such a deal past the Australian Competition and Consumer Commission, which has already warned about the growing concentration of ownership in the Australian banking market.

This point was underscored last week when it was revealed that CBA and Westpac wrote 85% of all mortgages in the Australian market in the June Quarter.

Westpac also bid for the Suncorp in 2006 at $23 a share but was rebuffed. Its recent acquisition of St George has left it preoccupied and more to the point even less likely to negotiate competition hurdles.

The most likely buyer therefore may be a smaller regional rival such as Bendigo & Adelaide Bank or its rival Bank of Queensland.

Such a combination, however, would face many of the same problems that dog Suncorp – higher funding costs and a weaker distribution channel. This is not to say it will not happen but any deal is sure to be done at a discount to one struck with the major banks.

It is hard to see Mr Snowball, who takes the reins in September, rushing into such a decision.

Moreover, such a move will not be an easy story to sell investors, especially since the major trading banks have been so willing to consider Suncorp a target in the past.

Richard Inder is an investment adviser at Macquarie Private Wealth. His disclosure statement is free and is available on request. Clients may hold shares in the firms mentioned.

Comments, think differently? Write to richard.inder@macquarie.com