Growth Returns For Suncorp

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Suncorp Group has underscored confidence in FY22, with a special dividend and buyback announced after profit and premium growth returned in FY21

-Return to mortgage growth for Suncorp's bank division
-Insurance margin target of 10-12% retained for FY23
-Will net interest margins decline back to target ranges?
 

By Eva Brocklehurst

Suncorp Group ((SUN)) remains on track and has become more assertive about the benefits of its strategy. Underlying gross written premium growth of 6.7% in FY21 was the strongest since 2013. Moreover, growth returned to the banking division for the first time in several years.

Goldman Sachs highlights the company's confidence in the external environment and its targets, underscored by the decision to launch a buyback immediately. Features of the result included profit that was well ahead of forecasts, while the final dividend of $0.40 and special dividend of $0.08 were welcomed. A share buyback of up to $250m was also announced.

The path to FY23 insurance margin targets of 10-12% is now more clear, in the broker's opinion, while the bank strategy is more credible in an environment where there is a return to mortgage growth.

Morgans is also optimistic about the expected improvement over the next few years, noting a comprehensive plan to drive better earnings across all divisions. Yet, the stock is trading in line with valuation and value is envisaged elsewhere in the sector.

UBS asserts profitability could beat expectations in FY22 amid potential for further reserve releases, lower bank impairments and additional capital management. The company expects first half of costs to be broadly in line, or better than the second half of FY21, while overall margin improvement should occur in the second half.

Over time, Ord Minnett suspects some of the costs will come out yet retains a preference for QBE Insurance ((QBE)) given its strong cycle in commercial business and lower price/earnings multiple.

The cost base may be unchanged, although Macquarie suspects “healthy scepticism” will continue given recent experience. The broker only factors in 55% of the improvement to margin targets in its FY23 forecasts.

While lauding Suncorp's execution, Credit Suisse flags the fact that reserve releases can be volatile, particularly in the current environment. Suncorp continues to allow for reserve releases equivalent to 1.5% of net earned premium.

The broker upgrades to Outperform as, with mortgage processing times now better than most major banks, strong growth is expected from FY22 and beyond, and benign bad debts should add further upside.

Citi goes the other way and downgrades to Neutral from Buy, given the strong rally in the stock and the fact further significant improvement is unlikely before the second half of FY22.

Insurance

Australian general insurance was driven by profits on the inflation-linked bond portfolio and reserve releases. Ord Minnett was particularly surprised by the growth in premiums in motor vehicles which suggests some ability to push prices while still obtaining volume, and this has not been observed for some time at Suncorp.

In contrast, home insurance was disappointing as volumes fell -3.6%, probably affected by high average price increases. Yet, given the price increases and the elevated expenses factored into base forecasts, Ord Minnett suspects some possibility remains for underlying margins to expand in FY22.

The broker asserts the bull case centres on the ability to preserve pricing in personal lines without sacrificing market share. Suncorp is looking to improve margins along personal lines while growing volumes and this is requiring substantial investment.

Citi expects general insurance may slow as the rise in home prices moderates, while rate increases are likely to be subdued given the lockdowns. The latter should eventually pick up when restrictions are eased. Citi continues to expect Suncorp will deliver on FY23 general insurance margin targets.

Yet Morgan Stanley still finds the way forward to insurance margins of over 10% unclear and remains unconvinced about the ability to generate additional excess capital. Suncorp may be seeking to improve its underwriting and claims handling but the broker points out it is already more efficient than Insurance Australia Group ((IAG)) by 300-500 basis points.

Jarden differs, noting initiatives on internal expenses and the pleasing progress in the second half while envisaging a 10% return by FY23.

Bank

Offsetting insurance, Ord Minnett suggests the bank division is likely to face headwinds as lending growth is still weak. The bank benefited in FY21 from the release of $60m in provisions and elevated net interest margin.

Citi anticipates the banking division margin will drop back and the target of a 50% cost-to-income ratio will be hard to achieve, although the return to growth in mortgage lending is a positive sign.

Net interest margins for the bank in FY21 were at 209 basis points. Yet in FY22 this is expected to be lower and Suncorp anticipates a trend back to within its target range of 185-195 basis points over the next few years.

Citi expects net interest margins will drop but perhaps not to the extent Suncorp is signalling, suspecting some conservatism in the numbers. There may be other strategic options for the bank that could emerge over time but, for now, the broker envisages few catalysts.

Among those stockbrokers not monitored daily on the FNArena database, Jarden has an Overweight rating and $12.90 target while Goldman Sachs, although finding it hard to argue the stock is cheap, maintains a Buy rating and $13.74 target.

FNArena's database has three Buy ratings and four Hold. The consensus target is $13.32, suggesting 1.1% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 4.5% and 5.1%, respectively.

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