Re-affirming FY19 guidance metrics
Suncorp Group (SUN) has released an investor presentation in conjunction with its quarterly APS 330 banking update. At the headline level, the key presentation takeaway was reiteration of SUN's FY19 financial targets provided at the FY18 result (a group expense base of A$2.9bn and a group insurance margin (ITR) of at least 12%). The presentation by SUN's Banking and Wealth CEO, David Carter, also noted that banking system credit growth was seeing rising headwinds from mortgage repricing and a lift in funding costs.
The recent rise in the BBSW means SUN's FY18 bank net interest margin is expected to be at the middle of managements target range (1.80% to 1.90%).
Quarterly banking update
Overall we saw SUN's quarterly banking update as pretty stable. Credit quality remains excellent with bad debts to gross loans and advances (GLA's) of just 1 bps (annualised) in 3Q18. Gross impaired assets of A$140m were also broadly flat on 2Q18 although past due loans (A$453m) did rise A$42m reflecting seasonality in retail arrears and several mid-to-large commercial customers moving past due.
Slowing loan growth rate was the weakness in the quarterly performance, with 3Q18 loan growth of approximately 1% compared to 4.7% growth achieved in 1H18. Management noted the loan market is becoming more competitive, although SUN's growth rates in both lending and deposits are still above system this financial year.
We make nominal changes to our earnings per share forecasts for Suncorp (SUN) of -1% in FY18 and +1% in FY19. Earnings changes mainly reflect a slight lowering of bank loan growth assumptions, offset by reduced impairment changes. Our valuation and share price target rises ~2.5% on a valuation roll-forward.
We think 1H18 was the low point for SUN's ITR and we see a clear pathway for the ITR to rise above managements 12% target level by FY19. We also expect SUN to produce a solid 2H18 group result assisted by strong reinsurance protections. SUN still remains at a substantial 4 PE point discount to IAG in FY19, and we expect this gap to close if management can deliver on stated FY19 management targets.
We retain our Add recommendation with an upgraded share price target.
Morgans clients can login to view our detailed report and upgraded share price target for Suncorp Group (SUN). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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.