He acknowledged that the bank had not worked well. The bank earns about $ 500 million with $ 5 billion in capital. This compares badly to the insurance business that earns about $ 1 billion with a capital of $ 7.4 billion.
If Suncorp’s board had been proactive and sold its bank in the midst of the pandemic, the valuation would have been 25 to 30 percent higher than it is today.
Lost value
Banks are valued at less than they were then due to declining profit margins due to rising interest rates, falling house prices and rising costs.
Johnston’s ambitious cost-cutting target for 2025 is unlikely to be achieved, as the cost-revenue ratio was about 57% in the six months to December.
Suncorp Bank has annual costs of about $ 700 million. These costs will have to go down by about 20 percent if the bank follows its current path of minimum income growth.
This is a big question at a time when personnel and technology costs are heading north.
Suncorp has been successful in gaining market share this year in housing and customer deposits. But its performance in other key areas is not inspiring.
A bearish view of banking?
The timing of the bank’s potential sale could be because Suncorp and its advisers, Barrenjoey Capital, have a bearish view of the bank’s future. The sale could be an attempt to avoid the balance sheet problems induced by the recession.
By reviewing the “strategic alternatives” for your bank, Suncorp’s board could devise a strategy to prepare it for sale later this year or early next year. It could increase yields by reducing costs and writing off loans that other banks will not make.
If a potential commercial buyer has been found, the board should only maximize the price.
This could be difficult given the small number of commercial buyers in Australia.
It is extremely unlikely that the Australian Competition and Consumer Commission under new chair Gina Cass-Gottlieb will allow one of the four major banks to buy Suncorp’s bank.
This leaves only four potential buyers: Bendigo & Adelaide Bank, Bank of Queensland, AMP Bank and Macquarie Group.
It would be safe to rule out BoQ and AMP given the existing list of problematic issues they face and the difficulty they would have in raising capital to fund a deal.
Bendigo looks comfortable with his own skin. But its board of directors could consider the acquisition of Suncorp Bank worth all the disruption and possible invisible problems.
Macquarie is growing his bank fast enough without having to buy assets, but he may see the deal as a strategic move at or near the bottom of the banking cycle.
It would be a concern if the extraordinary profits from the sale of the bank were destined for further expansion of the insurance sector, as it faces a growing risk of climate change.