ANZ Group Holdings Limited (ANZ) Earnings Call Transcript & Summary

Good morning, and welcome, everyone, and I thank you all for joining us at short notice on this Monday morning. I'd start, as usual, by acknowledging the traditional owners of the lands on which we meet today and to pay respects for elders past, present and emerging. So today, as no doubt you're aware, we are announcing the sale of Suncorp Bank to ANZ. Of course, this is a very significant event in the history of the Suncorp Group, and I can assure you that it's a decision that has not been taken lightly, and that's been informed by extensive analysis and consideration. It's a decision we firmly believe is in the best interest of our people, of our customers, our shareholders and of course, the state of Queensland, and we also believe it's a decision that is in the national interest. Importantly, the sale will result in a simplified Suncorp Group, focusing on growing its market-leading insurance businesses, both here in Australia and across in New Zealand. Also provide an opportunity to accelerate the growth plans of the bank under the ownership of ANZ. I make the point that the transaction will not impact the delivery of the FY '23 strategic targets that we outlined to the market in May last year, which remain well on track, and I'll come back to that at the end of the presentation. So to the next slide and the proposed sale of the bank is the latest step in our efforts to reshape and simplify the business over the past 3 years. As you know, during this time, we have divested several businesses, including Australian Life and Wealth, our Capital Smart business and the RACTI joint venture. We've also exited a number of underperforming portfolios, and we've restructured the group to improve executive accountability and to ensure that the efforts of everyone at Suncorp are directed to improving the services we provide to our insurance and banking customers. This restructure established the bank with end-to-end processes under the leadership of Clive van Horen and a new team of experienced banking executives. This team has improved the bank's performance in a short space of time in an extremely uncertain and a competitive operating environment. Put simply, the bank has become an attractive asset with good momentum, a derisked book and a strong alignment to the high-growth state of Queensland. Now to the next slide, which outlines the strategic rationale for the sale, and we believe it to be clear. Firstly, Suncorp and ANZ share a similar purpose, values and an ambition to create a brighter future for our customers and the communities that we operate in. Growth ambition that ANZ has outlined is very much aligned to the future potential that we envisage for the bank and the sale positions Suncorp Bank's customers and people for greater success over the medium to longer term. We also believe the sale price maximizes value for Suncorp shareholders, and it fairly values the improvements that Clive and the team have orchestrated and delivered. Going forward, and of course, subject to the regulatory approvals being achieved, Suncorp will be a simpler, growth-focused, trans-Tasman insurance company, protecting what matters for its customers and being at the very forefront of sustainability and advocacy. So to the next slide. And in considering the merits of the transaction, it was important to us that any potential acquirer demonstrated a commitment to Queensland and had long-term plans to grow in what you would expect me to provocatively call the most important state in the Commonwealth. Demonstrate this, ANZ has committed to no net job losses and no further reductions in branch numbers in the region for at least 3 years post completion. Over time, we understand that commitment will extend to lending for projects that support the clean energy transition in the state. Transaction also serves to benefit Suncorp's customers and staff in the region, with customers able to benefit from the many product and technology initiatives that ANZ currently have in development. Suncorp Bank employees will benefit from additional training and development, and there will be a substantial career progression opportunities that will emerge from being part of 1 of the big 4 banks in this country. In building on ANZ's commitment to the region, I would reaffirm that Suncorp's head office will remain in Queensland and that we will continue to be located in our new purpose-built facility here at Heritage Lanes 80 Ann Street, Brisbane. This will also be the location of our new event response center, which will incorporate our market-leading geospatial and claims mapping capabilities and be the employment hub for our flexible event workforce. This will significantly enhance our capability to respond to disasters and will be -- put us in a better position to better support our customers. At this point, let me hand over to Jeremy to provide you with an overview of the transaction, and I'll come back to finish up the presentation. Jeremy?

Thanks, Steve, and good morning, everyone. I'd firstly like to reiterate what a significant announcement this is for Suncorp. It allows us to bring forward value for our shareholders, and I'll now take you through some of the details. The total consideration is expected to be $4.9 billion, calculated as $1.3 billion above the net tangible assets of the bank at 31 December '21. There's a simple NTA completion adjustment mechanism, and the NTA at completion are expected to be broadly in line with this. The price represents 1.34x net tangible assets, which we believe is an attractive premium for the bank. The transaction is expected to complete in the second half of 2023 and is subject to certain conditions, including ACCC approval, approval from the Treasurer under the FSA and amendments to the Metway Merger Act. The sale includes a brand licensing agreement for 5 years with the potential for it to be extended by a further 2, which allows ANZ to use the Suncorp Bank brand. The fee for this is a minimum $50 million for the first 5 years, and ownership of the brand will remain with the Suncorp Group. We've also entered into a transitional service arrangement for 2 to 3 years. The stranded costs arising from the sale of the bank are expected to be around $40 million per annum, net of the TSA, across various corporate support functions, including technology. We are committed to removing these costs and are targeting doing so within 3 years post completion. Moving to the next slide. The net proceeds or capital generated are expected to be $4.1 billion after allowing for an estimated $500 million in separation costs, transaction costs and other divestment-related provisions and capital gains tax of around $300 million. Now these are indicative estimates, which will be firmed up over the period [ through ] completion. Consistent with Suncorp's approach to capital management taken in previous divestments, the current intention is for the majority of proceeds to be returned to shareholders. Excess capital is likely to be returned through a combination of a pro rata capital return, a fully franked special dividend and potentially share buybacks. And I note the final approach is particularly subject to agreed tax positions. And before I hand back to Steve, I'd like to give a quick trading update on the bank. The bank has performed strongly, highlighted by growth in the home lending book, which exceeded $4 billion for the year with just under $3 billion occurring in the second half. Growth has reached 2.5x system in May and continued to accelerate in June. The quality of this strong growth has been good, with origination LVR decreasing to 66% in the second half from 73% last year and the proportion of lending with an LVR above 80%, [ halving ] to 10%. And new business with a debt-to-income ratio above 6x continues to trend favorably to industry. We are competitively positioned on price, but not market-leading. The net interest margin declined over the half by 7 basis points to the midpoint of our target range at 1.9%. This was driven by the rate environment, competitive market pressures, higher liquid assets and fixed rate business mix. I note that fixed rate mortgages in June comprised just 2% of new business. We're also pleased that growth has returned to our business banking portfolio which expanded by over $0.5 billion in the half after contracting in recent periods. In addition to the quality of new business, credit quality across the portfolio has improved with the dynamic LVR falling to 54% in the second half compared to 59% last year, and arrears are at multiyear lows. Despite this, we've maintained our collective provision of $180 million, reflecting the improved risk profile of the book and a prudent view on the economic outlook. The reduction in other operating income was driven by mark-to-market losses on economic hedges in the last quarter, the change in the accounting treatment of fixed brake fees and lower levels of gains on the liquidity portfolio. And finally, we remain confident in delivering on the 50% cost-to-income target by the end of FY '23, driven by strong balance sheet growth and improving rate environment and the efficiency benefits from our strategic initiatives program of work. And on that, I'll now hand back to Steve.

Thanks, Jeremy. And to the next slide now, and I'd briefly like to focus on the ongoing Suncorp Group and its insurance operations of course, the regulatory approvals are achieved. The post-completion Suncorp Group will operate across Australia and New Zealand, which are 2 large and established general insurance markets with market sizes of $45.6 billion and $6.7 billion, respectively. Suncorp already holds a strong competitive position in these markets through our extensive portfolio of brands, which is, of course, led in Australia by AAMI, which is our national brand with the highest brand awareness in the country. Supporting AAMI are our regional champion brands, the Suncorp and GIO that maintain loyal customer bases here in Queensland and New South Wales, respectively. We also have a suite of niche brands led by the rapidly growing motor enthusiast brand, Shannons and Apia, which has a significant market share amongst older Australians. Vero maintains a strong presence in the intermediated commercial market alongside our direct commercial insurance offerings through AAMI and GIO. In New Zealand, our Vero and Asteron Life brands are supplemented by the brand presence of our joint venture, AA Insurance, that continues to perform well. Now you'd be aware of the priority that we have applied to reinvigorating our brands as part of our FY '23 plans and commitments. This has included increased investment, better segmentation and more effective marketing execution. Our most recent financial results provide evidence that these initiatives are delivering, and I'm confident that the numbers we'll report in a couple of weeks will further underscore the progress that we are making. So to the next slide, and this describes the post-completion investment thesis. Australian and New Zealand general insurance markets are large, profitable and well-regulated with established participants. Growth rates are forecast to be attractive across all GI portfolios with significant longer-term opportunities for businesses with clear strategies and a track record of execution. Alongside the strength of our brand portfolio, Suncorp's competitive position is supported by the scale advantages that are derived from our market -- our leading market share positions in both Australia and New Zealand. Additionally, we've invested heavily in core insurance capabilities such as claims and pricing, alongside more contemporary capabilities in digital, data, automation and AI. The key focus areas of our recent strategic investment program were outlined to the market in May last year, and they continue to track well. Our scale and market-leading capability are supported by our corporate culture, highly engaged workforce and has been assessed at the top quartile versus our peer group. Post completion of the transaction, the strategy for the business will be more of the same but faster. We acknowledge the needs of insurance customers are changing with a preference for seamless digital interactions and products that are designed to recognize personal circumstances and the individual risk profiles. We also acknowledge the changing external environment with an increase in the frequency and severity of natural hazard events, which is interacting with poor planning laws and low levels of government spending on mitigation and adaptation, you've heard about us talk about those points consistently. These external factors are driving increased costs for insurers globally and affordability challenges for consumers. Suncorp will remain committed to developing a more sustainable and resilient business by continuing to invest in loss prevention and initiatives such as resilient housing, while advocating for governments to invest more through our 4-point plan for a more resilient Australia. Going forward, we'll also look for opportunities to increase participation in partnerships across our mobility, home and commercial portfolios as opportunities emerge. Ultimately, our expectation is that we will increase the group's return on tangible equity and have a business that generates strong organic capital. These outcomes, of course, will benefit all of our stakeholders. So just in concluding, I'd like to reaffirm, on the next slide, the key FY '23 targets that we presented to the market in May last year. First, we targeted cash return on equity above the through-the-cycle return on equity. And while cash ROE has been heavily impacted in FY '22 by investment markets and to a lesser extent, natural hazards, the improvements in the underlying business have us on track to deliver returns exceeding cost of capital in FY '23. In GI, our underlying ITR has been improving steadily over recent periods and, as we disclosed on July 4, is on track to achieve the targeted 10% to 12% by FY '23, with the tailwinds afforded by increased bond yields partially offset by natural hazard-related headwinds. In the bank, as Jeremy pointed out, lending growth, the rising rate environment and operational efficiencies are forecast to improve the cost-to-income ratio to an exit point of around 50% by the end of FY '23. So at that point, we might pause the presentation and hand over to your questions. Thank you very much.

[Operator Instructions] Please note, we will be receiving questions from investors and analysts only. Your first question comes from Nigel Pittaway from Citi.

Steve and Jeremy, just first of all, a question on the stranded cost, if I may? I mean why do those take sort of 4 years from now to remove? And is that sort of a comfortable or an aggressive estimate in terms of that time period?

Thanks, Nigel. I guess, the -- some of the complexity around the stranded cost removal is that they go vertically through an organization first, that's the first point to make and need to work through that in a constructive way. The other one is, to some extent, they rely on systems, non-FTE-related costs, license agreements and other activities where we simply have to work through the transition of the licenses or the leases or all of the elements that are associated with that. So I think it's a conservative view. I think we will have plenty of opportunities over the course of the time between today and completion to talk to the market about how our program of work will be mobilized to remove these stranded costs. And I think it does provide an opportunity for us to, again, look at the efficiency of our business, the stand-alone-focused insurance business and work through a cost base that's absolutely relevant in the future.

Okay. And then just secondly, I mean, obviously, you flagged that ultimately, we should see a range of capital initiatives in terms of returning the capital. I mean is it your expectation that those will largely be carried out simultaneously or do you think that sort of return of capital will be sort of staged over a sort of longer period?

Yes, Nigel, Jeremy here. I think the intent would be to get through completion and work to those conditions precedent. And then once we've done that, they would -- the intention to work through those mechanics is in reasonably close order to one another. I think the -- as I listed them is the order of preference around that pro rata capital return and then the franked dividend. But obviously, it all depends on the -- where we land with the ATO on the tax cost base. But in terms of those 2 mechanisms, the intent would be to do those in reasonably short order after we've completed.

Your next question comes from Andrew Buncombe from Macquarie.

Just 2 for me, please. On the first one, just while we're looking at Slide 11 and the FY '23 targets, you've obviously commented on the cost-to-income ratio for the bank. But are you reaffirming your cost base guidance still to drop to $2.7 billion or has that changed?

Yes. No, I mean embedded within that underlying ITR commitment and the bank cost-to-income ratio is still the expectation that our costs will be, we've always said, around $2.7 billion. And so we would still expect that to be the case. Now of course, that's -- that will be -- the only caveat I'd put on that is some of the separation costs and pre-completion costs will fall into 2023, but they shouldn't impact on that cash ROE metric. But there will be some of the transaction costs that come into '23.

Yes. And then my second question was perhaps a bigger-picture question. In the past, you've said that the bank has been the diversification factor behind the group and the primary reason why you haven't bought more reinsurance or hold of account quota shares for the GI business. I wonder now that this business is proposed to be sold, does that change your view on the structure of the reinsurance and the earnings volatility in the GI business?

Yes, Andrew, look, I think it's obviously a good question. And when we made the first point would be that we, every year, go through a process as we go through our reinsurance and renewal looking at the structure of the program, we look at everything from the existing program, the balance sheet protections, the aggregate covers in the P&L, volatility protection and just see whether that continues to suit us. And then we pivot around what the market is doing. So obviously, as you've seen in our most recent renewal, we've had to move some of the deductibles around and be a bit flexible around the circumstances that are in the market. Back the point we've always tested things like whole of account quota shares relative to the market circumstances at the time and the construct of the group. And as the construct of the group changes to the extent that we're successful in completing this transaction, then we will look at that again and probably will have a slightly different lens of consideration around it. But again, it will have to make sense. It will have to be accretive to return on capital, and it will have to be taken alongside the various elements of our catastrophe and other covers that we purchase. Jeremy, do you want to add anything to that?

That's rightly said. I mean we've always said we'll consider them, and we'll continue to do so. And I think the approach and sophistication that we're continuing to implement around our underwriting is another key feature around that -- managing that volatility along with the advocacy program at work that we're looking to accelerate.

Your next question comes from Andrei Stadnik from Morgan Stanley.

Can I firstly ask in terms of any potential for one-off investments to improve the insurance operations, given the large return of capital you're receiving here? And given you've lost almost 3 percentage points of market share in terms of the total premium pool in the last 4 to 5 years and some of the challenges and test volatility, that this presented opportunity to make some one-off investments to make the insurer substantially more competitive going forward?

Look, Andrei, I think we're pretty comfortable with our competitive position in insurance at the moment. And I think, I just want to be a little bit cautious about -- I don't want to get into a full results preview here. We can go through all of those details in a couple of weeks' time, but I think, as you've seen in more recent results presentations, we have been building momentum in our motor portfolio from both an average written premium and a unit count perspective. We're very comfortable with the state of that portfolio. Obviously, the home portfolio has been slightly different, and that's been, I think, understandable as we've moved pricing to reflect the inherent input costs that are going through those portfolios, and that has seen some market share. But again, the longer-term view is that's in the best interest of the franchise. And we think that as the rest of the market catches up with that pricing, then those unit count market share numbers will improve. So look, I go into this transaction with a very comfortable disposition around the performance of our Insurance business. And the strategy doesn't change. We've got to make sure that our brands are positioned in the market appropriately and then we're executing the marketing positions well. And we've got a big digitization program of work. We've made great progress in terms of our digital sales and service and claims lodgment, but there's more to do. There's opportunities to automate our business -- incremental opportunities to automate our business and continue to drive through the best-in-class claims program, which has had a material benefit to us in offsetting inflation over the last 2 reporting periods. So look, I think I describe it as being more of the same and to the extent that we can speed that up through the focus that we will have, that will be a benefit.

And if I can ask my second question, just around -- look, with [indiscernible] budget, you recently set for FY '23, now at first glance, $200 million increase is very substantial, taking it to $1.16 billion, but at the same time, the aggregate retention will increase by $200 million and possibly more given the deductible events also being higher, and there was a 50% chance of La Nina for -- now for FY '23 -- for the summer of FY '23. So how should investors think about that in terms of gaining comfort on -- in terms of catastrophe budget volatility, particularly for FY '23?

Well, I mean when we set the budget, Andrei, we've made some pretty substantial changes to the modeling over the last few years, including shortening up the return period over which we look at certain events. And so it's not just as simple as looking at the absolute retention levels and changes there. So we're confident that the 1160 number reflects the through-the-cycle expectation of what we think natural hazard costs are going to be, as I said, having done that work, quite a lot of work around the models and the way we use those models for the hazard allowance. The other thing, of course, to note in that context is with La Nina is obviously no one landing in a year is the same. So if we look at last year's experience compared to the year before, it's fair to say that if we had last year's FY '22 experience again in FY '23, then that would put some pressure on the allowance. But if we had the previous year's La Nina then we would be quite comfortable. So you just need to be careful around things like La Nina because they're not always experienced in the same way. So we feel pretty confident having done those changes to the model that the 1160 is the right through the cycle has allowance for us.

And in my previous commentary, Andrei, I sort of didn't mention the work we're doing to create a more resilient business around underwriting loss ratio performance more broadly, and that's going to be a big focus of our activities over the next couple of years.

Your next question comes from Kieren Chidgey from Jarden.

Steve and Jeremy, a couple of questions. Just starting on the process. Just wondering if you can talk about whether or not this was a competitive process with any other sort of parties engaged other than ANZ?

I don't propose, Kieren to sort of unpick all the elements of how we've gotten to where we've gotten to. But I think Jeremy and I and the Board, I think, sit here today, very comfortable that the value that's realized in this transaction is the best value that we can receive in terms of a cash offer at this point in time. So we'll be a bit silent as to how we've gotten to that conclusion, but I'm very convicted that, that is the outcome.

Okay. And secondly, Jeremy, I think you touched on sort of a range of potential capital management options, can you provide sort of any very high level comments in terms of the potential mix and what the capacity is for fully franked specialties?

Yes. Kieren, the preference would be the pro rata capital return. We think that's the best mix to return capital. I would expect that to be the lion's share of the return, by far, the majority of it but it does come down to where we land with the ATO on the definition of the tax cost base. So we've made an estimate around that. So I think, yes, the majority would be in that form. I think based on where we're expecting at the moment, a relatively smaller special franked dividend. At this stage, I'm not seeing the need for buybacks. But I'll just flag that one to the extent that the need to do buybacks in terms of capacity generated from those other 2. So that's the ordering of how we look at it. And by far and away, the majority I'd expect to be in the pro rata capital return.