Are Market Fears For Suncorp Overdone?

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In his first presentation to investors as CEO of Suncorp, Steve Johnston opted to exclude all reference to profit margins and returns, implying potential for another earnings re-set.

-Banking focus back towards the Queensland market
-Stable margin outlook in banking for the first half
-Some signs of improvement in home and motor insurance
 

By Eva Brocklehurst

Suncorp ((SUN)) has renewed the focus on its home banking market in Queensland, as the first investor briefing from the new CEO, Steve Johnston, avoided referencing past targets. Mr Johnston opted to exclude all references to profit margins and returns, Credit Suisse points out, implying management is not yet comfortable with putting in place any medium-term targets.

This signals to the broker another earnings re-set and a gradual rebuilding of investor confidence. Credit Suisse also suspects a renewed focus on the Queensland market may worry some investors.

A tough lending environment continues to shape the business as total lending contracted -0.6% over the first quarter. The housing book declined -0.6% amid a competitive mortgage market, although volumes appear to have improved since July. Business loans contracted -0.4%, affected by a reduction in agribusiness.

Net interest margins in the first half are expected to be consistent at around 1.9% amid solid deposit growth and improved wholesale funding costs. There are some signs of recovery in the property market but the competition for owner occupier and investor business is expected to continue. Moreover, Suncorp has pointed to ongoing drought in Queensland and NSW contributing to a decrease in funding demand from farmers who are focused on paying down debt.

Some slippage may have occurred in the bank loan book but UBS assesses the margin outlook for the first half is stable and benign bad debt should provide support. Citi agrees market fears of a more significant downgrade to bank estimates were not realised. Also, the simplification of reporting lines appears to have potential to alleviate some of the recent difficulties with growth. 

Macquarie is not so certain, finding the FY20 performance difficult to benchmark and noting, along with a new CEO, there are only acting chief financial officers, and a vacant CEO position for the bank division.

Impairment levels in the first quarter appear unsustainable and the broker envisages heightened risk for expectations being re-based in FY20, particularly given the drought, and adds 3.5 basis points of impairments to FY20 forecasts.

General Insurance

In the larger general insurance business there appears to be some signs of improvement across both home and motor insurance, and Citi understands momentum is strong in motor insurance. Suncorp has reversed its previous decision to shut down call centres.

Pricing is mostly in line with, or ahead of, inflation, which should ease concerns about the necessity to pull on the price lever. Commercial insurance is enjoying price increases, although there is greater competition outside of Queensland in CTP (green slip) insurance. Macquarie points out there remain ongoing market share losses for Suncorp in home and motor products.

Surplus Capital

Suncorp has still not indicated what it will do with the proceeds from the sale of Capital SMART. The after-tax profit has been upgraded to $285-295m while cash consideration for ACM Parts is unchanged at $20m. Bell Potter assesses these transactions will generate around $300m in excess CET1 capital. Suncorp is expected to update the market on these initiatives at the FY20 result in August 2020.

Given strong organic capital generation, and assuming natural hazards do not exceed the $820m allowance for the full year, Bell Potter forecasts another $0.08 special dividend and a further return of capital in the second half of FY20.

The broker, not one of the seven brokers monitored daily on the FNArena database, has a Buy rating and $14.80 target, based on Suncorp's yield and growth story. Citi agrees the dividend yield is attractive and a PE (price/earnings) multiple below 16x indicates some value exists. In contrast, Credit Suisse considers the earnings risk elevated and still not reflected in the share price.

FNArena's database has three Buy ratings, one Hold (Ord Minnett) and three Sell. The consensus target is $13.38, suggesting 0.7% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 5.4% and 5.3% respectively. Targets range from $12.10 (Morgan Stanley, yet to comment on the update) to $14.50 (Citi).

See also More Returns as Suncorp Sells Chop Shops? On October 2, 2019.

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