Suncorp Group: APS 330 quarterly banking update
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 11 November 2021, 8:00 AM
- Sectors Covered:
- Insurance, Diversified Financials
- The key takeaways from Suncorp Group's (ASX:SUN) quarterly banking update were the company achieved 1Q22 lending growth of 0.9% (~4% annualised) and only had a A$1m quarterly bad debt charge.
- Despite SUN’s home lending growth improving on the 2H21 level (1.5% annualised), the 1Q22 result is still below the current system level (~6.5% in the September quarter).
- We marginally lift our SUN FY22F/FY23F EPS by 1%-2% on higher loan growth and lower bad debt assumptions. Our price target rises marginally to (login to view).
- We remain optimistic on further SUN earnings improvement over the next few years, but with upside to our price target somewhat limited (<10%) we maintain our HOLD call.
Event
SUN has put out its APS 330 quarterly banking update.
The key takeaways were:
- 1Q22 retail lending growth of +0.9% and -0.5% business lending growth;
- A ~A$1m impairment charge for the quarter (a negligible percentage of gross loans);
- Gross non-performing loans (A$620m) declining 15% from the end of June (A$730m); and
- Total provision and ERCL coverage remaining relative stable at 0.61%.
Thoughts
As a reminder, SUN retail lending volumes declined 1% in FY21, but grew 0.7% in 2H21 (+0.7%). So, the 1Q22 annualised growth rate of ~4% is a step up on 2H21 performance (~1.5%).
SUN also noted that 1Q22 total home lending lodgments were 40% higher than 1Q21, and up 18% on the June quarter, which should be positive for further momentum from here.
Despite SUN’s improving home lending growth performance, we do note the 1Q22 annualised lending growth rate (4%) is still below the current system level (~6.5% in the September quarter). One of SUN’s key banking aims is to achieve “above system” home lending growth, so the company still has some work to do to bridge this gap.
SUN’s bad debt performance continues to be exceptional, with a A$1m 1Q22 bad debt charge being versus a target level of 8bps-15bps of loans through the cycle.
Forecast and valuation update
We marginally lift our SUN FY22F/FY23F EPS by 1%-2% on higher loan growth and lower bad debt assumptions. Our price target rises marginally to (login to view).
Investment view
SUN’s recent FY21 result was solid, and we expect earnings momentum to improve over the next few years as management executes on their clear strategic plan.
However, with upside to our price target somewhat limited (<10%) we maintain our HOLD call.
Find out more
Download full research note
If you would like access or more information, please contact your adviser or nearest Morgans office.
Request a call
Find local branch
Need access to our research?
You are also welcome to start a two-week trial of our online platform, which provides access to detailed market analysis and insights, provided by our award-winning research team.
Create trial account
Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.
Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely
resilient result given the extent of lockdowns in the period (~70% of stores
impacted) and the strength of the pcp (cycling 27% growth). Composition
comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%.
Overall, BAP stated that non-lockdown areas are outperforming expectations.
▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales -
1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling
+4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling
+36%). Within the Retail segment, online sales were +80% on the pcp. Stores
percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%.
▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with
Auto electrical/Truckline divisions ‘performing strongly’; and WANO
underperforming.
▪ GM pressure expected to be temporary: BAP stated GM was stable across
Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail
(~55% of FY21 revenue), driven by promotional and online pricing in lockdown
areas (we assume no margin pressure witnessed in non-lockdown areas). BAP
expect margins to revert once lockdowns ease.
▪ The cost base has increased vs pcp, a function of duplicated DC costs
(commencement of new VIC DC), and higher group and team member support
(covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.