SUNCORP PROFIT HIT BY BAD ASSET

SUNCORP Group’s (ASX:SUN) 32 per cent drop in net profit is a case of short-term pain for long-term gain as the business works to close its poisonous non-core bank.

Net profit after tax (NPAT) was $491 million for the last financial year, down from $724 million on FY12, largely due to the $632 million loss from the sale of this bad asset.

The group is expecting benefits from the sale to be received from FY15, when it will enjoy savings of $225 million, growing to $265 million in FY16.

Profit after tax from core business lines in the year to June 30 increased 19 per cent, from $1,033 million to $1,232 million, as a result of strong top line growth and operational efficiencies.

Suncorp paid almost $1 billion in dividends last year, but still holds $847 million capital in excess of operating targets. The business will pay a fully-franked full year ordinary dividend of 55 cents per share, plus a special fully-franked dividend worth 20 cents per share.

NPAT for the general insurance arm of the business enjoyed a significant boost to $883 milllion, up from $493 million the previous financial year and the core bank NPAT was $289 million, on par with FY12.

Suncorp Life NPAT suffered a steep drop to $60 million from $251 million the previous year, a result the bank says was impacted by significantly increased discount rates.

Suncorp Chairman Dr Ziggy Switkowski believes the simplification process SUN is going through will unlock the true potential of the bank.

“Resolution of the non-core bank came at a cost to the headline profit but the decision to undertake the portfolio sale has de-risked the Bank, released capital in support of shareholder returns and made clear the true value of the Suncorp Group,” he says in a statement today.

SUN established the non-core bank to house about $17.5 billion in bad loans in 2009 and it has worked to substantially reduce that debt in the years since. Goldman Sachs bought a portion of the underperforming loans for about $960 million in June, and Suncorp will attempt to pay off, or absorb the rest back into its main bank.

CEO Patrick Snowball says a number of significant financial and operational milestones have been achieved.

“Our three-year Building Blocks program has been completed and our businesses are now fully integrated. We are also making great progress on a range of initiatives designed to simplify our legal, administrative and operational structures that will make our business more efficient and lead to further savings,” he says.

SUN has committed to achieving group growth of between 7 per cent and 9 per cent per annum over the next two years; to meet or beat an underlying insurance trading result of 12 per cent through the cycle; and to achieve group return on equity of at least 10% in the 2015 financial year.

SUN shares were trading steady at $12.47 early this afternoon. The price has increased about 50 per cent in the past year.