Developers shown the door
18th May 2009
Suncorp is pulling entirely out of property development lending, lumping another $3.5 billion in loans to the Queensland institution's "non-core" – or "bad bank" – arm.
Yesterday's move was linked to tougher funding markets and cyclical volatility in the property sector, which is now suffering from rising troubled loans.
Analysts at Macquarie predicted the shift would result in "strained earnings" but medium-term upside as Suncorp's funding profile improved.
It ends Suncorp's role in a sector stretching back to before the insurance-banking conglomerate's 1996 amalgamation.
Suncorp in recent years ramped up its lending to property and new areas like corporate finance.
Property developer Kevin Seymour said Suncorp, until roughly three years ago, had been a "boutique lender" to select developers and charged slightly higher margins.
But Suncorp took on more risk and lowered margins, he said.
"They went out and bought market share," he said.
Rising problem loans helped pummel results last half. Bank profits fell from $307 million to $97 million. At the time, Suncorp aimed to run off "non-core" business worth almost $13 billion such as corporate loans.
While analysts dubbed it a "bad bank", Suncorp disputed the god-bad distinction. Small parts of the core book were impaired while the non-core section retained some "pristine" components, Suncorp's head of banking David Foster said. Last half, Suncorp flagged continuing with some smaller development finance.
That has now gone to the non-core segment, which will wind down in the next few years.
"It's a prudent thing to do based on making sure we've got a core business that is sustainable," Mr Foster said.
Suncorp said that a reason was that margins would weaken against major banks, as property was funded via wholesale markets.
Suncorp aims to lift funding levels to a ratio of 60-70 per cent of deposits to "core" segment loans.
"You need a less volatile profitability profile into the future to reach this," Mr Foster said.
Suncorp said the move could worsen its cost-to-income ratio (a measure of profitability) to "close to the 50 per cent" level.
But Mr Foster declined to specify a potential earnings loss or how Suncorp's property book was travelling.
"What we've seen, broadly consistent with our major competitors (is) some deterioration in property values," he said.
Mr Seymour said a slow run-down of Suncorp's book should see developers able to refinance.
Article Source : Liam Walsh
