Suncorp To Focus On Margin Versus Growth

Australia | Aug 09 2019

Brokers suspect several targets set by Suncorp in recent years will not be met and FY20 will be a transition year.

-Subdued economic conditions putting new business under pressure
-Focus appears to be on margin over growth
-Capital return and share consolidation take the spotlight in the near term

 

By Eva Brocklehurst

General insurer and regional bank Suncorp ((SUN)) faces a tough outlook in FY20, suffering the impact of lower bond yields and elevated costs. Brokers suspect several targets set by the company will not be met.

Suncorp will seek to remediate the soft volume trends by reinvesting in its business but this will have some consequences for profit, Ord Minnett asserts. On this topic, the acting CEO was careful not to commit to any of the prior long-term guidance targets other than indicating these were aspirations.

The broker describes FY20 as an investment year with the company reinvigorating its business. This is likely to put pressure on general insurance margins and increase the cost base in the bank segment.

Credit Suisse suspects, having previously lowered expectations around hazard claims and reinsurance, the acting CEO is now lowering expectations around costs. This positions Suncorp for a recovery in FY21 and FY22.  Economic conditions are putting the business under pressure, Macquarie observes, leading to fewer new business opportunities, stemming from lower housing growth, reduced turnover and a slowing in new car sales.

While there are difficulties with the bank division and Citi forecasts flat earnings, some pick up in system growth is expected following the two reductions to official cash rates. Pressure on net interest margins is likely to continue although, as a regional bank, Suncorp has a lower proportion of at-call deposits earning less than the cash rate and a recent keenly-priced wholesale funding deal should help.

Overall, general insurance conditions appear broadly favourable to Citi, with claims inflation in line with, or above, rate increases and commercial line margins finally at a level where the company is looking to consolidate.

Also, the broker contends, if bond yields stay low, or are further reduced, this makes Suncorp's dividend yield look more attractive and, with a strong balance sheet, there is potential for further capital initiatives as the business continues to rationalise its footprint.

No top-line guidance was provided and, therefore, Morgan Stanley asserts the focus is on margin over growth, while the potential for elevated reserve releases somewhat lessens the headwinds.

Targets

The company missed most of the targets set at the start of FY19 such as 3-5% growth, a 10% cash return on equity, a 12% underlying insurance margin and bank cost-to-income ratio of less than 50%. UBS believes return on equity and margin targets are clearly out of reach for FY20, although there is scope to achieve these in FY21 amid falling costs and increases in commercial rates.

Importantly, Macquarie notes the business improvement program targets have been retained, if not increased in dollar terms for FY20. The company has upgraded its net benefit target to $380m in FY20, although Citi points out this includes $12m in savings from the removal of stranded costs from the divested life business.

Capital Return

Citi welcomes the renewed focus on core businesses, envisaging the strong balance sheet offers flexibility over and above the pending capital reduction. In time, Suncorp should overcome difficulties with growth although the broker suggests this will be contingent on who is eventually appointed as CEO.

Suncorp announced a $506m capital return will  be accompanied by share consolidation on a 0.971 ratio. Macquarie expects this will be the focus for investors in the near term and the stock could trade well, while the appointment of a new CEO later in 2020 should provide the next major catalyst and pin down the company's future strategy.


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