Suncorp revives plans for demerger of banking unit

Suncorp’s insurance unit generated $547m in net profit for the year to June, up 42.4 per cent, while the bank generated $419m of net profit, up 69 per cent. Picture: Richard Gosling

There is talk in the market that Suncorp is reviving plans for a possible demerger of its bank.

A separation by the Queensland financial of the lending arm from the insurance division has been long mooted, with investors keen for a separation, given that insurance firms typically trade on higher earnings multiples than banks.

The $15bn listed Suncorp generates most of its income from its insurance operation, but the argument from the company to retain the bank has always been that it provides a defensive aspect to the business.

Banks have a return on equity of about 8 per cent and for regionals that is not expected to increase, whereas for insurers it is 12-14 per cent.

Sources say current boss Steve Johnston was keen on the bank demerger or sale when he was Suncorp’s chief financial officer, but when he was promoted to chief executive in 2019 he signalled that the strategy was for the bank to be retained.

Now sources say that Suncorp is believed to be busy working on a plan.

The understanding is that Suncorp has passed up the opportunity to buy Zurich’s Australian general insurance arm that is currently for sale through Goldman Sachs and PwC because of the corporate activity it has afoot.

Suncorp.

While talk exists that work surrounding the bank is happening, what remains unclear is whether Suncorp is planning to demerge the unit on the Australian Securities Exchange or see it combined with another banking business, either through a sale or a merger.

One suggestion is that Bendigo and Adelaide Bank could be part of the equation in a straight scrip merger.

The lender has a reputation of paying up for assets and DataRoom reported in 2018 that Suncorp had UBS exploring a tie-up between the two financial institutions.

Others say an acquisition or merger of Suncorp’s bank probably makes more sense for Bank of Queensland, with the pair previously being on the cusp of doing a deal.

This could create a Queensland banking champion.

Bank of Queensland has former Westpac executive George Frazis as its managing director and career investment banker Patrick Allaway as its chairman, both thought to be keen on merger and acquisition activity, with it recently buying ME Bank.

ANZ is keen to grow mortgages in Queensland and is known to have had its eye on Suncorp’s bank for some time, but its challenge would be gaining approval from the Australian Competition & Consumer Commission.

Apparently, ANZ made an opportunistic offer for Suncorp’s bank more than two years ago, when it was chaired by David Gonski, at about 0.6 times book value. Interestingly, Mr Gonski chairs recently formed investment bank Barrenjoey Capital Partners, which now advises Suncorp.

ANZ was also interested in buying Suncorp’s bank in 2009 when the then boss of the Queensland bank, Patrick Snowball, was quoted as saying his “polite message to those who seek to target us is: ‘get your tanks off our lawn’.’’

Market experts believe that a demerger of the bank is the right move by Suncorp, suggesting that the bank is a distraction of its core business of insurance.

Financial technology groups are taking market share and regional lenders do not have the capital to invest in the same level of technology as their larger rivals.

Suncorp’s shares have lagged of late, but IAG has also seen its share price down as local insurers’ battle with recent natural hazard claims from five storm events since October.

Suncorp’s insurance unit generated $547m in net profit for the year to June, up 42.4 per cent, while the bank generated $419m of net profit, up 69 per cent.