Suncorp Group: Plan makes sense, but all about delivery
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 17 May 2021, 1:30 PM
- Sectors Covered:
- Insurance, Diversified Financials
- Suncorp Grop (ASX:SUN) has conducted a Banking and Wealth forum.
- As part of the update, SUN confirmed that the momentum in its banking franchise broadly continued as expected in Q3.
- Achieving SUN’s bank cost-to-income ratio target of ~50% (1H21 ~56%) will come 1/3rd from revenue growth and 2/3rd from cost improvements. We expect some market scepticism on this target given the difficulties SUN has had in improving banking efficiency in the past.
- We lift our SUN FY21F/FY22F EPS by 1-2% respectively.
- Our price target rises slightly (login to view). With a bit of a pull-back in SUN’s share price over the last week, we move back to an ADD recommendation with >10% TSR upside existing on a 12-month view.
SUN has conducted a Banking and Wealth forum. As part of the update, SUN confirmed the momentum in its banking franchise broadly continued as expected in Q3, e.g. NIM remains strong (supported by lower funding costs), 3Q21 impairment losses of just 1bps and a return to lending growth in February, March and April.
On the bank collective provision, SUN noted that it had maintained its current provisioning level as at the end of March, but it would likely wind back some of this provisioning at the end of the financial year, if favourable macro conditions continue.
SUN’s key medium term banking targets remain largely unchanged overall, e.g. targeting above system home lending growth and a cost-to-income ratio of 50% by FY23.
Target drivers – a mix of revenue and cost out
SUN disclosed achieving its bank cost-to-income ratio target of ~50% will come 1/3rd from revenue growth and 2/3rd from cost improvements.
The key on the revenue side of the equation is achieving above system home lending growth, which management believes is achievable due to:
- Improved lending processes
- A better broker experience (e.g. a new broker portal, etc.)
- Automated/simplification of processes.
The accompanying cost out benefits are expected to come from:
- A reduced branch footprint (SUN has closed 30 branches in the last 15 months)
- The bank having better control of its direct cost base (the bank now manages 2/3rd of its direct costs).
While the expected timeframe of achieving the 50% bank CTI target is FY23, SUN did note revenue growth benefits particularly will be more back-end weighted (cost benefit improvement should be more linear).
Overall, we view the SUN bank strategy as logical and detailed, but we expect some market scepticism, particularly on the CTI target, given difficulties SUN has had in improving banking efficiency in the past.
Changes to forecasts
We lift our SUN FY21F/FY22F EPS by 1-2% respectively. Our PT rises slightly (login to view).
We think SUN’s recent investor briefings on both the general insurance business and the bank point to a clear strategic plan to drive overall business improvement. However, execution will be key and the expected earnings uplift from the strategy is more skewed to FY23.
Nevertheless, with a bit of a pullback in SUN’s share price over the last week, we move back to an ADD recommendation with >10% TSR upside existing on a 12-month view.
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