by
William Arnold | Jun 19, 2013
In 2009 Suncorp set up a ‘non-core’ or ‘bad bank’ to run off $18bn of loans that soured after the GFC due to “inappropriate risk settings”. After four years and more than $1bn in losses Suncorp announced last week the resolution of the non-core bank. This will involve:
(i) the portfolio sale of $1.6bn of corporate and property assets to Goldman Sachs at 60c in the dollar
(ii) a further $700m of run-off/sales during June/July 2013, and
(iii) a residual portfolio of $500m (~50% impaired) on which specific provisions have been increased to >50% with the majority expected to be settled over FY14.
Additional write-downs associated with the portfolio sale and significantly higher provisions on the remaining $500m book will see the group report an approximate $480m post-tax loss for the non-core bank 2H13.
With $530m of capital in the non-core bank at December 2012 and this approximate $480m loss to be taken in 2H13, the resolution will see little capital extracted. The sale largely brings forward losses from the non-core bank, removing the overhang going forward.
S&P affirmed Suncorp-Metway’s ratings after the announcement. S&P said that a further reduction of non-core lending assets is within their expectations at the current rating level, and they believe that earnings streams will improve and at the same time become more stable and repeatable, underpinned mainly by lower-risk residential mortgage assets.
While domestic Suncorp securities look fully priced, there appears to be value offshore with GBP Suncorp Insurance Fund Lower Tier 2’s offering a rate comparative to roughly AUD 90day BBSW + 422bps. These securities are only available to wholesale investors.
All prices and yields are a guide only and subject to market availability. FIIG does not make a market in these securities.