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IAG Posts 51 Per Cent Half Year Profit Decline
Australian insurance major IAG reaffirming recent guidance given to investors posted a 51 per cent decline in first have net profit.
IAG’s first half profit for the six months ending December 31 fell 51 per cent to $161 million from $329 million during the same time period in the previous year.
IAG blamed the decline on a $121 million loss at its UK subsidiary. The company’s insurance profits fell from $488 million in the previous year to $470 million, with insurance margins declining to 12.7 per cent from 13.4 per cent.
IAG chief, Mike Wilkins confirmed that the company’s guidance was revised on Wednesday following the earthquake in New Zealand.
“The ongoing underlying strength of our businesses in Australia and New Zealand gives us confidence the group will deliver an improved insurance margin in the 2011 financial year, compared to seven per cent reported in the 2010 financial year,” Mr Wilkins said.
“This is despite the substantial net natural peril claim cost resulting from the sequence of severe weather events in Australia, as well as the powerful earthquake in New Zealand, in the opening weeks of calendar 2011.”
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Suncorp Posts Better Than Expected Decline In First Half Profits
Australian bancassurer Suncorp reported a 39 per cent decline in first half profits, coming in better than expected, with the company saying that despite goodwill write-downs and natural disasters occurring over the period, its underlying business was performing well.
Suncorp which is based in Queensland and had heavy exposure to the flooding in the state also announced that its current chairman John Story who is set to step down, would be replaced by former Telstra chief executive Dr Ziggy Switkowski.
Net profit after tax and abnormal items fell to $223 million for the half-year, from $364 million in the prior corresponding period. Analysts had expected net profit after tax of $190 million.
Suncorp increased provisions during its first half used to cover the potential impact of abnormal weather events by $35 million. The banc assurer purchased additional reinsurance for the full year, after fully utilizing its $400 million in aggregate reinsurance cover.
Patrick Snowball, Suncorp’s chief executive said that the impact of recent weather events would have been much more significant had the company not made progress in simplifying its business. Natural hazard claims were $182 million above budget.
“Our group is considerably stronger and far more stable than this time last year,” Mr. Snowball said.
“Premium rates are expected to increase following the sequence of natural hazard events that have continued into the 2011 calendar year,” the company said.
Suncorp’s life insurance business posted a 42 per cent fall in first half net profit to $61 million, due to higher than expected claims and policy lapses.
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CBA Hits Back In Australian Bank War For Mortgage Borrowers
Australian banking major CBA has fired its first shot in an increasingly bitter battle between the big four banking groups, as the lender responded to NAB’s advertising campaign which aims to lure customers of its rivals by offering to pay their exit fees.
CBA is offering NAB customers as much as $1,400 in cash if they switch from the lender to refinance their mortgage, open an account and apply for a credit card according to Bloomberg News which cited an internal memo that the agency had obtained.
“If they want to play games with price, I’m happy to compete,” Ross McEwan, head of retail banking at Commonwealth Bank, said in a separate note to employees. “We’ll use the opportunity to target their customers.”
CBA’s current move is in response to NAB’s offer to pay the $700 exit fees for mortgage borrowers who switch lenders, leaving CBA or Westpac for NAB. In December, Federal Treasurer Wayne Swan unveiled a number of banking reform proposals designed to stimulate competition within the industry and making it easier for customers to switch banks.
The big four lenders in Australia control 88 per cent of the mortgage lending market according to figures from the Australian Prudential Regulation Authority.
NAB has embarked on a strategy of distancing itself from its big four rivals, and as part of its latest marketing campaign published a mock relationship break up letter to its three main rivals which appeared in full page newspaper advertisements nationally and started by saying “It’s over between us,”
The campaign has also featured helicopters flying over the headquarters of CBA and Westpac carrying signs that say “You’re dumped.”
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Westpac Chief Orders St George Overhaul
Gail Kelly, chief executive of Australian banking major Westpac has ordered a shake up of its subsidiary St George after it emerged that the lender experienced a substantial slump in mortgage lending.
During Westpac’s first quarter trading update, Mrs. Kelly revealed that she was unhappy with St George’s current lending levels, particularly in its key New South Wales and South Australia markets.
Westpac declined to specify by exactly how much lending had slow down, however Mrs. Kelly did indicate that new mortgage growth at St George was below the banking industry average of 7 per cent a year.
Major lenders use the 7 per cent hurdle as a target growth rate to achieve or exceed.
In response to sluggish mortgage lending growth, Mrs. Kelly has ordered Rob Chapman the new chief executive of St George to overhaul the business and increase mortgage lending.
“I really was disappointed — its (lending) has fallen away sharply, it did not grow at the levels that it should have been able to. But Rob had his hand at the tiller, he’s out growing the business and I’m confident we have the momentum up there now.” Mrs. Kelly said.
St George began overhauling its business in 2010 which has included concentrating on the creation of regional hubs, the abolition of broker networks and reducing the lenders commercial property loan exposure.
Mrs. Kelly said 2010 “was the year that we went through and restructured the St George business and took it back to its regional roots. We have shifted the bank back to its heartland of NSW and SA. We know there’s a set of customers that prefer to bank with a regional, or a local, non-major bank. We also really wanted to really reduce the relation on third-party broker networks in NSW and SA, where there is already really good distribution with St George.”
St George has reduced the proportion of mortgage written through broking channels from 50 per cent of new loans to 40 per cent, the lender has also reduced its commercial property loan portfolio by $10 billion.
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NAB Intensifies War For Australian Home Loan Customers
Australian banking major NAB has launched an all out assault on its big four rivals, urging customers to dump their banks.
NAB escalated what appears to be an intensifying war between big four lenders for borrowers. The lender is estimated to have spent several million dollars on its campaign which was launched on Valentine’s Day and using the slogan which appeared in several newspapers which said “It’s over between us.”
The campaign was launched on Monday, when actors pretending to be couples were placed in bars and restaurants around Australia, and then staged noisy break ups over issues such as hidden bank fees.
Videos of the fake break ups were then posted on YouTube on Wednesday, with full page advertisements appearing in newspapers.
NAB executive director for corporate affairs and marketing, Andrew Harger, said the campaign was an attempt by the lender to break away from its big four label, because it no longer wished to be associated with its rivals.
Federal Treasurer Wayne Swan welcomed the campaign, saying it suggests that competition has returned to the Australian banking industry.
In its advertisements NAB claims that its mortgage borrowers have saved a collective $115 million in interest on its 7.67 per cent standard variable rate compared with CBA mortgage borrowers who are faced with a 7.81 per cent standard variable rate.
Mr. Swan said that more intense competition between the big four lenders would be good news for their mortgage borrowers.
“I think it’s terrific to see the NAB throwing down the gauntlet to the other big banks. It’s about time they had a scrap . . . We need to see more competition.” Mr. Swan
Westpac was the first big four lender to respond to NAB’s decision to cover the exit fees for customers who switch their bank, and has dropped as much as $995 in fees from its Premier Advantage mortgage product.
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Westpac To Get Aggressive In Emerging War For Home Loans
Australian banking major Westpac has fired its first salvo in an emerging and increasingly bitter war in the market for home loans, after the lender launched an aggressive discount campaign on Tuesday as it seeks to win new customers and expand its market share in the face of more intense competition from rivals.
Australia’s second largest lender in the latest twist to an increasingly bitter battle for market share was responding to NAB’s revelation at the weekend, that it would pay the ext fees for CBA and Westpac borrowers who switch their mortgages to NAB.
According to The Australian , which obtained an internal email, Westpac strongly criticized the move by NAB and has outlined a the contours of a strategy to deal with the threat including dramatic discounts on its Premier Advantage mortgage package.
Westpac will waive a number of fees associated with mortgage, such as the annual and establishment fees. The lender also intends to offer as much as 75 basis points in discounts on mortgages valued between $250,000 and $500,000, and as much as 80 basis points on home loans valued above $500,000.
Westpac will also no longer require borrowers who have an 80 to 85 per cent loan valuation ratio to take out mortgage insurance.
NAB has run a “fair value” strategy over the past 18 months to maintain the lowest standard variable rate of the four largest banks.
Its 7.67 per cent rate compares with Westpac’s 7.86 per cent, CBA’s. 7.81 per cent and ANZ’s 7.8 per cent.
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Westpac Reports Drop In First Quarter Earnings
Australian banking major Westpac reported first quarter cash earnings on Tuesday, which declined by 3 per cent to $1.55 billion. The lender said that the impact of the flooding in Queensland was about $50 million.
“The operating environment is positive, although the recent natural disasters and subdued consumer sentiment are likely to see businesses remaining cautious,” Gail Kelly, chief executive officer.
Westpac’s first quarter results compare poorly with rivals, last week NAB reported an 18 per cent jump in first quarter earnings, whilst CBA announced a 13 per cent gain in earnings from a year earlier.
Despite the relatively poor performance, analysts remain unconcerned, with analysts at Credit Suisse and Goldman Sachs saying the lender remained a solid bet, was managing its margins, and maintaining cost control.
Westpac said first quarter earnings came in lower than the same time period in the previous year, which has being boosted by high treasury and financial markets income. The lender said that the flooding in Queensland cost it roughly $50 million in pretax income for the quarter, however it expects increased insurance claims as the impact of natural disasters becomes clearer.
Additional claims would be mitigated by reinsurance, and were expected to be a further $30m in the second quarter.
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IAG Revises Insurance Margin Guidance Downwards
Australian insurance major IAG on Monday cut guidance on its margins after its UK subsidiary incurred a loss and following the aftermath of floods and storms in Australia.
Australia’s largest home and car insurer issued insurance margin guidance of between 9 to 11 per cent for the year ending June 30th 2011. The company had previously expected to deliver margins of between 10.5 to 12.5 per cent.
Despite predicting a lower margin IAG said that its gross written premium growth is expected to remain at between 3 to 5 per cent.
Mike Wilkins, IAG chief executive, commenting on the flooding in Queensland, Victoria and New South Wales said:”It requires a collaborative approach between industry, governments and communities,”
“Initiatives needed include better flood maps, stricter land use planning, stronger building codes, appropriate infrastructure, and a common definition of flood.”
First half profits for the period ending December 31st are expected to come in at $470 million compared with $488 million during the same time period in the previous year IAG said in a statement.
Its UK subsidiary lost $121 million as bodily injury claim inflation continued to affect that industry.
“This, coupled with rate increases taking longer than anticipated to emerge in non-private motor classes, has contributed to a greater than expected loss for this business,” Mr. Wilkins said.
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CBA May Trigger Price War In Market For Home Loans
Australia’s largest mortgage lender Commonwealth Bank of Australia, which has recently lost some of its market share has ambitious plans to rebuild its mortgage lending business, which is likely to trigger a price war in the market for home loans, as rivals who gained market share at CBA’s expense, seek to defend their gains.
CBA chief executive Ralph Norris whilst announcing the lenders first half results said the following a slowdown in mortgage lending, the bank had been writing more home loans in recent months. CBA, during the financial crisis was one of the most active lenders in the market as it sought to expand its market share at a time when others were pulling back, since then the lender has deliberately slowed the growth of its mortgage loan book.
In the last few months of 2010, CBA grew its mortgage portfolio by 16 per cent, and the lender will maintain the pace of growth into this year according to Mr. Norris.
Jonathon Mott, banking analyst with UBS in an interview with The Australian said that CBA’s plans could well be the trigger for a brutal price war in the mortgage lending market, putting pressure on profit margins of all the major lenders.
“CBA is now targeting a return to system levels of mortgage growth after losses in market share through most of 2010. With low levels of credit growth likely to become a more permanent feature of the banking market in Australia, the other banks may follow CBA’s lead.” Mr. Mott said.
Rival NAB has been the main beneficiary of CBA’s reduction in mortgage lending, having increased its market share by 31 basis points and writing $8 billion of new home loans during the first quarter of the current fiscal.
According to Mr. Mott, the increased competition in mortgage lending may result in bank relaxing their credit standards, or increasing the level of discounts offered to new borrowers.
CBA which scaled back loans to first time home buyers has become the most active in that segment.
“The reaction could potentially lead to two outcomes — an increase in lending to borrowers of lesser quality, which could lead to higher impairments in the future, or there could be an increase in price discounting as a tool to win and retain market share,” Mr. Mott said.
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Westpac Seeks To Expand Institutional Banking Business
Australian banking major Westpac is hoping that M&A activity will rebound in 2011 at it seeks to expand its institutional banking business and raise its level of lending to the mining industry.
Rob Whitfield, who heads up Westpac’s institutional banking group on Tuesday said that the number of potential deals in the pipeline were growing, which was likely to enable the business to maintain its level of earnings for the year.
Institutional banking is a major contributor to Westpac’s bottom line, accounting for 26 per cent of the lenders overall earnings, which was $3.29 billion in revenue and $1.5 billion in cash earnings.
According to Mr. Whitefield, corporate lending is set to rebound despite the thaw in corporate issuance in debt capital markets, and an rash of equity recapitalizations.
Westpac is one of the largest corporate lenders in Australia, however it plays second fiddle to rival National Australia Bank which has the most profitable business banking division in the country.
Westpac’s institutional banks has a loan portfolio valued at $189.9 billion, which is primarily composed of finance, insurance and property sector loans.
“We have seen a strong pipeline of M&A activity, I think some boards are starting to feel pressure that their balance sheets are underutilised both from a capital and debt perspective. But there seems to be some uncertainty. It seems boards are getting their balance sheets ready but not ready to pull the trigger just yet.” Mr. Whitfield said.
“There could be some deleveraging and companies looking at other companies which have allowed their balance sheets to become lazy, I would expect balance sheets to be put to work more in the second half of this year. I don’t think we are going to see a V-shaped recovery (in credit demand) — it will still be more of a grind — but we are encouraged by the pipeline.” he added.
Westpac also wants to increase its lending to the resources industry as it seeks to take advantage of the commodities super cycle. Currently the mining industry accounts for just 3 per cent of Westpac’s institutional lending, which the lender is keen to build on Mr. Whitfield says.
Westpac has deliberately slowed its lending to commercial property after it merged with St George in 2008. “We have been really transparent to the market that when we put Westpac and St George together, our exposure to commercial property was beyond our risk appetite,” he said.
“In natural resources we are underweight; we see that as an area of significant growth. It’s a complex sector dominated by the very large players but, then, also some very small players.
“We would like to participate more in a measured way.”