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COMPANY NEWS & UPDATES

Suncorp Group Limited ( SUN )

Accumulate Valuation $ 12.50

Earnings Forecast

* Profit & EPS adjusted for options , goodwill , notional earnings and nonrecurring items .

Strategy Ticks the Right Boxes , But It ’ s No Game Changer

Suncorp ' s two-part investor forum outlined how it plans to achieve previously announced targets of :

1 ) an underlying insurance margin of 10 % -12%; and

2 ) a banking cost-to-income ratio of 50 %.

We think the insurance margin is achievable , with our forecast at 11 % in FY23 . This is decent step up from 8.9 % in FY20 but is similar to the average over the last five and 10 years . We expect margin improvements to come from premium price increases , more digital sales and client interactions , and using scale to drive down repairer costs . Suncorp ' s scale benefits are not new , but with margins and returns falling , we believe insurers will have renewed focus on claim approvals and repair costs . IAG and Suncorp account for more than half of the motor and home insurance market , and we expect they can assert some pricing power on repairers reliant on their business .

Ambitions of a 50 % cost-to-income ratio will be more challenging to meet , in our view . We do not expect a revenue uplift before FY23 , with funding cost tailwinds to subside as credit growth outpaces growth in customer deposits , forcing the bank to raise capital from more expensive wholesale markets and pay more on customer deposits . Management is probably also more optimistic on loan growth in comparison to our forecast of 2 % to 3 % per year in FY22 and 2023 . In the 12 months to March 2021 , Suncorp ' s market share of home loans slipped 20 basis points to 2.3 %, and we doubt it can take share without sacrificing margin . Our forecasts assume the cost base is lowered by around $ 50 million or 7 %, a key driver of the cost-toincome ratio falling to around 54 %, compared with 56 % in FY21 .

Our valuation of $ 12.50 is unchanged . The market seems to be less convinced Suncorp can deliver on its strategic targets , with shares trading at a 20 % discount to our valuation .

We support the strategy for the bank , but we do not believe it will lead to material market share gains . Large and mid-size banks are all working on similar initiatives . You could almost interchange any bank ' s name and logo into Suncorp ' s strategy presentation . Reduce approval times , automate and simplify processes , improve customer and broker experience , clear and consistent credit policies , a focus on digital engagement , and optimised branch network ( in other words , smaller and fewer branches ). To achieve abovesystem home loan growth and increase the number of customers using Suncorp as their main financial institution , we think Suncorp would not only need to execute on its strategy but lift the bar higher than peers . Large competitors have shown a willingness to even use price to maintain share when service levels fall , leaving smaller lenders like Suncorp stuck between a rock and a hard place . We think Suncorp will either accept lower margins to drive growth or hold margins and , at best , hold market share .

The third quarter results for the bank are mixed , in our view . Without announcing financials , Suncorp reported net interest margin remained strong after rising 8 basis points to 2.04 % in first half 2021 , driven by increased funding from cheap customer deposits . Impairment losses remain negligible at 1 basis point of loans in the quarter . We forecast NIM to fall around 10 basis points in the medium term , before lifting to around 2 % in FY25 . We also estimate loan losses to loans average 3.5 basis points from FY23 . Suncorp is heavily skewed to home loans , making up 80 % of the loan book . The remainder is 7 % agribusiness and 13 % other business lending .

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