Growth Returns For Suncorp

Australia | Aug 10 2021

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.


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