Good Bank, Bad Bank Day

Shareholders in struggling Brisbane-based financial services group, Suncorp Metway, face a further loss of value of up to $2 billion or more after the most eventful day in the group's history yesterday

The future independence of Brisbane-based Suncorp Metway has been left in doubt after it revealed a sharp drop in profit, more than halved its dividend, revealed ambitions to raise about $900 million by selling new shares and the departure of chief executive, John Mulcahy.

Suncorp plans to sell the new shares at $4.50 each, a huge 37% discount to its last traded price of $7.13. Trading in the company's shares was halted at Wednesday's close.

That capitalised the group at $7.225 billion at $7.13 a share. The market cap is likely to end up around $4.9 billion. That will be after the extra capital.

At their peak, the shares were valued at $22 each, so the losses have been huge.

Suncorp has been thought to be the most vulnerable of the country's banks with its underperforming insurance business hurting group results last year.

There has been media speculation that Suncorp was the biggest beneficiary of the move by the Rudd Government to guarantee bank deposits and debts early last October, after Ireland set off the silly bank bidding war internationally.

At $7.255 billion, it means the group has destroyed all the $7.9 billion it paid for Promina two years ago, a move that was championed by the departing CEO, John Mulcahy who had come to Brisbane from the Commonwealth. His chairman, John Story, who remains at the group, was also a big supporter.

Its shares will drop by around 30% or a bit more (equal to the issue price discount to the last traded price). Shares in Westfield and Qantas' have fallen by close to the discount in this week's treading after they raised billions of dollars in fresh capital.

Suncorp's share sale includes a $390 million placement to institutions and a $502 million share offer to retail investors.

That's another worrying sign: usually more money is sought from big investors and the smaller amount from the retail investor.

Suncorp must be really in a bad way to be after that much from its shareholders after all it was only last September when one third of shareholders voted against a generous remuneration report at the annual meeting, with some openly bagging the board.

Their criticisms have been well justified by subsequent events.

That the chairman remains on the board, and other directors, is amazing; after all they are just as culpable as the departing CEO for the problems.

A surge in bad debts and poor business returns (unlike the Commonwealth Bank earlier in the week and even Macquarie Group yesterday) has seen Suncorp's board go for the big decisive fund raising and management change in a final bid to remain independent and in its present form as an insurer/bank/wealth manager.

Suncorp dumped plans to sell its Metway banking business last year when it couldn't find a real buyer at the right price. Some rivals looked, but didn't like what they saw.

That stance was justified by the slump in first-half profit after tax, which dropped to the range of $250 million to $270 million, down at least 30% on the previous year's reported profit, which in turn represented a fall of over 50% on the 2007 result.

Insurance earnings will be off by up to 47% to between $240 million and $260 million as storms in Queensland led to an increase in claims (for a third year in a row).

The insurance profit may be as low as $180 million if the company’s reinsurance position isn’t accepted by reinsurers.

Pre-tax earnings from the Metway banking are down by up to 68% to between $90 million and $100 million, thanks to soaring bad debts from lending to failures like Babcock & Brown.

Bad debt expenses will rise to $355 million in the half, including a $79 million provision for Babcock & Brown. The bad debt charge earlier in the year was just $16 million in banking.
Wealth management earnings will fall to between $100 million and $120 million, compared with $131 million in the first half of the 2008 financial year.

Suncorp's news came an hour or so after Macquarie Group updated the market and revealed 1,047 members of the Millionaire's Factory, were no longer with the bank here and overseas, that earnings would be down around $900 million and revenue for the year to March, would be off 15% or more. That left employee numbers around 12,851 at the end of last month.

Macquarie Group shares fell; then rose on the news; the shares of the CBA, Westpac and the ANZ all fell on worries from the US about banks, then Macquarie, and finally the shocker from Suncorp.

A series of bad storms around Australia and in New Zealand increased losses in Promina and the two other insurance businesses owned, Suncorp and GIO, and despite raiding the insurers reserves for hundreds of millions of dollars of benefits over the past two years, Suncorp couldn't get earnings drive.

A well connected market analyst says the departure of Mulcahy has improved the chances of Suncorp remaining independent for a while. Westpac and the Commonwealth both looked at Suncorp last year, but Westpac went after St George and the CBA after Bankwest.

QBE might be interested in some of the insurance businesses after trying to get IAG to the starting like last year, but failing.

The insurer said the rise in bad debt expenses to $355 million was "significantly above forecasts''.

Suncorp also cut its dividend to 20c a share from 52c a share in the first and second halves of 2008. The bank forecast flat lending growth for fiscal year to June, so the second half will show no improvement. In fact it will be a very hard slog.

The Suncorp news overshadowed Macquarie's update of full year earnings halving as a result of an additional $900 million in write-downs and other charges during the second half, mostly as a result of a slump in the value of its listed funds, particularly its property assets.

Macquarie will book a loss of $200 million related to the exit from its Italian mortgage business, a similar amount in loan impairment provisions, and $1.5 billion in estimated write-downs from its fund management assets and trading positions.

The larger than expected charge, will take total write-downs for the year to $2 billion.

And for the first time, the investment bank revealed the extent of its jobs purge late last year, confirming some 1047 staff have been cut from the bank

Macquarie now expects a full year profit of $900 million for the year to end March, down sharply on the $1.8 billion profit last year.

However it said it had been able to strengthen its balance sheet in recent months raising some $21 billion in new funding and deposits.

The bank said cash and liquid assets on its balance sheet totalled $32 billion, almost three times the size of its holdings of short term issued debt of $12.7 billion.

The company has raised $10.9 billion in term funding since the federal government introduced a plan to guarantee wholesale debt sold by lenders operating in Australia in November of last year.

The contrast between Suncorp and Macquarie's updates yesterday was illuminating: one a bank that is struggling to survive and desperate for fresh capital, the other, rolling in liquidity, but being upfront about write-downs and falling earnings.

The market got it right. Macquarie shares jumped more than 5% to $24.13, up $1.26.

All the other big banks fell, with the ANZ off 7% at $12.34, Westpac down 2.7% at %16.02 and the NAB off 4.1% at $18.64. The CBA ended down 20c at $28.98 after being lower for much of the day.

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