Suncorp shares sink on profit dive-By Nick Lenaghan

jialiren

SUNCORP Metway said severe storms and the global credit crunch would cut its annual profit by half, prompting it to maintain a flat dividend in fiscal 2009, and sending its shares into a tailspin.

A PERFECT storm of bad weather, a global credit squeeze and rising bad debt has slashed Suncorp Metway's annual profit, dampened its dividend forecast and sent investors scurrying for cover elsewhere.

Suncorp (sun.ASXuote,News) said its expected 2008 profit would fall between $525 and $550 million - half last year's result - and forecast a flat 2009 dividend at 107 cents per share.

Shareholders reacted sharply, sending the insurer, banker and wealth manager's shares down $1.92, or 14.35 per cent, to $11.46 by 2.45pm (AEST). By the close of trade the shares were $1.85, or 13.83 per cent down on the day, at $11.53.

After its February interim result, analysts were tipping a full year net profit of around $600 million, already well down on the fiscal 2007 record result of $1.064 billion.

"Financial services companies in Australia have spent the last 12 months managing the knock-on effects of US subprime issues, including the subsequent global credit squeeze and volatility in investment markets," chief executive John Mulcahy said.

"Suncorp has not been immune from this at all."

The global credit crunch took the biggest bite from Suncorp's bottom line, with its wealth management business falling well below previous guidance of 10 per cent growth.

Suncorp now expects its wealth management earnings to fall to between $130 million and $135 million, down from $150 million in 2007.

Wealth management earnings are expected by the group to stay flat in fiscal 2009 due to falling global markets.

"I find this a disappointing result," Mr Mulcahy told analysts.

Bad weather along the eastern seaboard also played its part in the profit forecast, more than doubling Suncorp's normal $200 million provisioning to $415 million.

The best news Suncorp had for its shareholders came from its banking division, which is expected to hit the top end of its previous growth guidance of 10 to 12 per cent, equating to $630 to $635 million.

Even so, the bank's growth will return to more sober "high single-digits" in 2009 as the credit environment turns.

Bad debts are expected to rise to between $70 million and $75 million for 2008, the bulk of losses emerging in the second half.

Mr Mulcahy and chief financial officer Chris Skilton were at pains to point at Suncorp's impairment losses were running at around 22 basis points as proportion of assets, some two thirds of the industry standard of 35 basis points.

They hope to maintain that position - a bad debt ratio at two thirds of the major banks' ratio - as Suncorp's bad debt charge increases as expected.

"The question of would it rise is really a question of where you think the top of the cycle going to be for the industry," Mr Skilton said.

"I'd still say it's probably going to get a little bit worse before it gets better, we're probably not there yet."

The pair also acknowledged Suncorp's dividend payout ratio was high, without disclosing the actual amount.

"We always recognised as we went through integration we were going to kick up in our pay-out ratios," Mr Mulcahy said.

"This year's been unusual circumstances for any stretch of the imagination for everyone.

"But as we move back into what will be a more normal year next year then we will still expect a relatively high payout ratio on the basis that the benefits are still flowing through but we have still got the costs.

"In subsequent years the costs run off but the benefits are retained."

Suncorp acquired general insurer Promina Group last year and is leaving its 2008 final dividend unchanged at 55 cents per share.

Thanks to the global credit crunch, its $7.7 billion technical reserve portfolio was hit by widening credit spreads, with the full 2008 impact expected to be around $140 million.

"This is purely an accounting and timing issue, which will reverse as the investments redeem or as credit spreads settle,'' Mr Mulcahy said.

"There is no concern about the quality of these investments," he added.

Falling share and bond markets will result in an additional loss of $235 million, plus a $35 million expense on the group's defined benefit schemes.

At its general insurance business, Suncorp forecast a fiscal 2009 insurance trading ratio (ITR) of between 10 and 12 per cent, after it achieved an ITR of about 10 per cent in fiscal 2008.

"This assumes weather events remain within normal provisioning and there is no further widening of credit spreads across the group's technical reserves portfolio," Mr Mulcahy said.

from http://www.news.com.au/heraldsun/story/0,21985,24111345-5005961,00.html