Suncorp Group – Quarterly update
About the author:
- Author name:
- By Richard Coles
- Job title:
- Senior Analyst
- Date posted:
- 02 May 2018, 10:59 AM
- Sectors Covered:
- Insurance and Diversified Financials
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.
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