Company Overview - Suncorp Group Limited is engaged in the provision of general insurance, banking, life insurance, superannuation products and related services to the retail, corporate and commercial sectors in Australia and New Zealand. The Company's segments include Personal Insurance, Commercial Insurance, General Insurance New Zealand, Banking and Life. Personal Insurance segment offers home and contents insurance, motor insurance, boat insurance and travel insurance. Commercial Insurance segment offers commercial property insurance, marine insurance and workers compensation insurance. General Insurance New Zealand segment offers business insurance, construction and engineering insurance, and public liability and professional indemnity. Banking segment offers personal and commercial banking, agribusiness, property and equipment finance, home, personal and small business loans. Life segment offers life insurance products, superannuation administration services and funds administration services.


SUN Details

Achieved strong capital position and on track in complying with APRA standards: Suncorp Group Ltd (ASX: SUN) reported a capital Common Equity Tier 1 (CET1) ratio of 9.08%, which is better than the required 8.50% to 9.00% target range. The group maintained its lending assets at $52.9 billion during the quarter ended on March despite tough market conditions. Impairment losses also fell to $4 million, which is an annualized rate of only 3 basis points of gross loans and advances, and less than the group’s normal operating range while on track with performance since the last 12 months. SUN continues to focus on its Basel II Advanced Accreditation. Suncorp Group is also an Advanced Bank and has solid operational risk management and models across its business. Accordingly, the bank is constantly working to enhance its risk selection.
 


Lending Portfolio (Source: Company Reports)
 
Enhancing asset quality: The bank has over 80% of mortgage lending portfolio as of March quarter and an overall lending assets of $53 billion. Moreover, over 72% of the group’s lending exposures is less than $10 million. Despite the challenging market environment, Suncorp has managed to enhance its Commercial (SME) portfolio by 0.5% to $5.23 billion for the quarter ending on March 2016 while the segment’s gross impaired assets fell by 62.5% as compared to Mar 2014. But the gross impaired assets rose over $2.1 million on a quarterly basis. However, the segment continues to witness competitive pressure for pricing and loan and hence Suncorp is making efforts to write low risk, and support business lending within its target markets. Over 55% of the portfolio for Commercial (SME)comprised customer groups having an average exposure of less than $5 million. As per the Agribusiness, the Portfolio improved by 0.1% to $4.26 billion while the gross impaired assets lost 18.7% on a year over year basis. But the gross impaired assets for Agribusiness rose $13.8 million on a quarterly basis. For the agribusiness, 50% of the portfolio comprises customer groups having an average exposure of less than $5 million. The rainfall was mixed across the regions with Queensland witnessing varied quantities while the Eastern seaboard of NSW as well as Victoria got good rainfall which even extended into Central NSW. But, the drought conditions at Central Western Queensland and Northern NSW are continuing while the Bank is making efforts to execute a cautious approach while making risk selection. On the other hand, management reported that they might not witness major impact on its credit quality from the geographic regions which would be impacted by the tough mining conditions, offering some respite. Meanwhile, the group’s Retail lending remained flat at $43.4 billion during the March quarter having an 87% of new loans written at an 80% or less loan-to value ratio.
 


Credit quality as of March 2016 (Source: Company Reports)
 
Ongoing Impairment pressure: For the March quarter, Suncorp’s gross impaired assets rose by 8% to $190 million which is 0.36% of gross loans and advances. On the other hand, the pressure of drought has been decreasing while several nonperforming agribusiness exposures have been supporting borrower’s cash flow given the recovering commodity prices. But the impaired asset rose on a quarter over quarter basis as a major mid-sized agribusiness exposure (which is greater than $10 million) has shifted under specific provision from collective during the quarter. Furthermore, specific provisions witnessed during the quarter were offset by the amounts written off, which comprises two commercial exposures representing a major proportion of the total. However, impaired assets surged by 9.2% to $416 million during the March quarter, on the back of pressure from home loan portfolio which offset the impacts of implementing the new loan collections system by 2015 ending. Overall impaired assets surged by $20 million to $136 million during the March quarter.
 


Impairments (Source: Company Reports)
 
Increasing Non-performing loans: Suncorp’s Gross non-performing loans rose by 8.8% to $606 million during the March quarter signifying 1.1% of gross loans and advances. Retail past due loans surged by $60 million to $365 million for the March quarter, on the  back of changes involved in  the lending and collections system and processes, which were executed by 2015 ending. Moreover, postponements in contacting customers who faced early stage arrears led to home loan arrears rising post the reporting date. Therefore, the residual portion of these arrears have been currently under past due loans, while early stage arrears have been improving. The Bank is also making solid analysis of major segments like mining and agricultural which might lead to collapses. Agribusiness lending decreased for the last due loans on the back of recovering commodity prices which is adding some support.
 
Investment in Trov is a major opportunity to the group: Suncorp invested in Trov, which is an insurtech firm based in San Francisco. This is a mobile app firm which enable consumers to get all data on things they are buying. Accordingly, management reported that they are aiming to tap the millennial age group via on-demand insurance coverage, as users can just swipe their items and insure them right away.
 
Guidance: Suncorp Group intends to maintain its focus on balance sheet and strong risk management processes and has accordingly limited exposure to high risk personal lending and commercial property exposures, while maintaining high quality new lending. Management reported that they would expect their rate of exposures being impaired to be low and be below their historic levels, which would add some support to deliver a better performance in the coming quarters. Suncorp’s efforts to assess exposures on individual as well as portfolio basis across industries would be ongoing and the company intends to have a low impact of the ongoing tough market conditions on their portfolio. As a result, on a medium term outlook, SUN forecasts to operate at the lower end of the range of 10 to 20 bps of gross loans and advances.
 
Stock Performance: The shares of SUN have been recovering this year and delivered a year to date rise by 5.5% (as of May 13, 2016) and surged by 15.95% in the last three months. On the other hand, the group witnessed a rise in gross non-performing loans in its retail portfolio due to their changes in the systems which is a one-time expense. But, Management estimates that its underlying performance of the home loan portfolio would continue to be strong. SUN even launched a home lending campaign during March 2016 which is forecasted to deliver growth from the fourth quarter of 2016, while SUN estimates its retail lending portfolio annual growth to be in the range of 1 and 1.3 times. Meanwhile, the bank is also enhancing its LVR mix on the back of ongoing improvements of its quality of new home lending. Management reported that their new business risk quality is decent and estimates its LVR portfolio mix to shift toward sub-80% lending. In addition, Suncorp’s investment in Trov would also enhance its performance as the group is targeting the unexploited millennial age group via this app. Suncorp is also trading at an attractive P/E as compared to its peers like QBE Insurance Group Ltd (ASX: QBE) and Insurance Australia Group Ltd (ASX: IAG). SUN stock recovered over 6.1% (as of May 13,^, 2016) in the last four weeks and we believe that the momentum in the stock to continue in the coming months. Based on the foregoing, we reiterate our “Buy” recommendation on this dividend yield stock at the current price of $12.82
 

SUN Daily Chart (Source: Thomson Reuters)

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