Cautious Suncorp lifts half year cash profit 40pc

Suncorp shares jumped 5pc after it unveiled a first-half result showing higher earnings across all business lines.

Steve Johnston, Suncorp CEO at their Sydney offices. John Feder/The Australian.

Suncorp CEO Steve Johnston is optimistic on the economic outlook but taking a cautious approach ahead of JobKeeper winding down next month, as he flagged the possibility of returning excess capital to shareholders later this year.

Speaking to The Australian after handing down a stronger-than-expected first-half result, Mr Johnston warned that the transition away from JobKeeper would need careful management.

“Everyone‘s taking a very pragmatic approach to (deferrals) and I think, as an industry, we should continue to do that.

“From my understanding of the Australian Banking Association and the various industry bodies looking at this, there‘s a uniformity in the view that we have to manage the transition of JobKeeper very carefully,” Mr Johnston said.

He said it was possible banks may see fresh home loan deferral requests once the government support is taken away.

But borrowers who have already taken repayment holidays won’t be afforded further extensions, he said.

“If a loan has been deferred for ultimately, when jobkeeper comes off, that will be 12 months … it’s very hard to defer a loan for much longer than that.

“So what you‘ll probably see, in the normal course of events is that loans left through that deferral prices will go into hardship, and then we’ll manage them, as the industry will, through the established hardship approach.

As the economic recovery gets underway, and house prices hit record highs, Mr Johnston sees no sign of a property bubble but admitted that the swift turnaround had caught him by surprise.

“I sort of scratch my head a bit, like a lot of people. We had assumptions in our original models of house price reductions of 10 to 16 per cent (last year). Well, clearly, we haven‘t seen that, in fact the reverse.

“And I don‘t see anything on the horizon to suggest a rapid reversal of that, in the short term.

Momentum in various parts of the market, including lack of supply, excess stimulus, responsible lending reforms and low rates, were driving the price gains, he said.

While home lending at Suncorp’s banking division contracted over the six months through December, it saw “a significant improvement” in lodgements and settlements, particularly towards the end of the half.

It also recorded its highest volume of new home loan applications in over 18 months in December.

The bank is targeting above-system growth this year.

“People want to do business with Suncorp. And if we get our processes right there‘s no reason why we shouldn’t be able to grow, not multiples of system but certainly ahead of system, he said.

Suncorp shares closed up 2.8 per cent after it posted a 40 per cent jump in first-half profit.

The bancassurer saw higher earnings across all business lines in the six months through December, pushing its cash profit up to $509m.

Profit after tax in its banking and wealth arm rose 11 per cent to $190m, with an 8 basis point improvement in net interest margin over the period to 2.04 per cent.

The better-than-expected result helped push Suncorp shares up 5.4 per cent to an 11-month high of $11.00 in early trade before they fell back to close at $10.73

With the group’s excess CET1 capital sitting at $1bn, Mr Johnston flagged his intention to return excess capital to shareholders over the next six to 12 months.

But he said there were a number of markers to watch for before making any decision, including the unwinding of government support and potential business interruption claims.

“We don’t intend to hold this level of capital ... We have a very strong capital position and we’ll always take a cautious and prudent approach.”

The company has historically chosen to return excess capital at the full year rather than the half year, he said.

The insurer announced a fully franked interim dividend of 26c per share, flat on the prior year and reflecting a payout ratio of 65 per cent of cash earnings.

As it lifted its provisioning for a potential influx of business interruption claims, Suncorp said the impact of the COVID-19 pandemic was broadly neutral on the first-half result.

It increased its provisioning by a further $19m to $214m.

This “prudent approach” reflected the finalisation of interim reserve valuations and included an allowance for the possibility of further legal costs, Suncorp said, with steps taken to cover potential business interruption claims largely offset by reduced claims frequency.

The bancassurer has received about 600 business interruption claims to date, Mr Johnston said.

The company also revealed it will permanently cease underwriting travel insurance under all brands and Suncorp Bank will no longer offer personal loans as it looks to simplify the business. The financial impact of these exits would be immaterial, it said.

Its insurance Australia arm saw strong growth in the consumer portfolio in the half, alongside higher investment returns and prior period reserve releases. The division’s profit after tax jumped 109.8 per cent on the prior corresponding period to $258m.

Total natural hazard costs across Australia and New Zealand were $561m, $86m above the allowance for the half and $42m above the prior corresponding period.