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Mid-Cap

Suncorp Group – Will this be good for your bottom line?

October 06, 2015 | Team Kalkine
Suncorp Group – Will this be good for your bottom line?

FY15 Overall Performance:



Suncorp Group Ltd (ASX: SUN) reported a 55.2% year on year (yoy) rise in its net profit after tax (NPAT) to $1,133 million in the fiscal year of 2015, driven by bank and Life business as well as cost optimization efforts. On the other hand, the group’s profit after tax from business lines fell by 7.1% yoy to $1,235 million impacted by the poor performance of its general life insurance business. Meanwhile, SUN improved its statutory return on average shareholders’ equity to 8.5% as compared to the 5.3% in fiscal year of 2014 but its cash return on average shareholders’ equity decreased to 8.9% during the period against 9.4% prior corresponding period (pcp). Suncorp slightly improved its total ordinary dividends to 76 cents per share fully franked against 75 cents in FY14 and declared a special dividend of 12 cents per share fully franked. The group increased its Bank Common Equity Tier 1 (CET1) capital ratio to 9.15%, to comply with the recent CET1 regulatory requirements and has over $570 million in CET1 capital which is far ahead of its operating targets. The Group CEO change to Michael Cameron may also help SUN maintain stability and growth.
 
 
Suncorp group’s business performance by Segments (Source: Company Reports)
 

Natural hazard events impacted General Insurance performance:

The group’s general Insurance NPAT fell to $756 million during the period, against $1,010 million in FY14, as the business witnessed a severe financial impact due to the unexpected natural hazard events. Claims due to natural hazards reached $1,068 million in FY15, which is 473 million more than the FY15 allowance. The business incurred over $650 million costs due to five major weather events in Queensland and New South Wales. Therefore, the segment witnessed a reserve releases of $427 million, which is much ahead of the long-run estimation of 1.5% of net earned premium (NEP), due to higher long-tail claims management. Meanwhile, the underlying insurance trading ratio rose to 14.7% in FY15 from 14.3% in FY14 post the adjustments in investment markets, reserve releases and natural hazards. Gross written premium reached $8,872 million, driven by customer unit growth in personal insurance products.
 

Event costs incurred in FY15 (Source: Company Reports)
 

Bank and Life business performance offset General Insurance pressure:

Suncorp’s Bank NPAT surged to $354 million in FY15, as compared to $228 million in pcp driven by better net interest margin (NIM) to 1.85% against 1.72% in FY14 and decrease in impairment losses. The segment’s Bank lending improved to 3.9% indicating the emphasis on the group’s quality, lower risk lending, non-performing loans and risk-weighted assets. SUN improved its bank’s lending momentum during the second half leading to an annualized housing loan improvement of over 10% on a year over year basis. As per the Life business highlights, the NPAT improved to $125 million during the fiscal year of 2015, as compared to $92 million in FY14. Life’s underlying profit improved to $113 million during the period, which is well ahead the group’s estimations of $90 to $100 million. Life Embedded Value improved over $1.9 billion during the period as compared to $1.76 billion in FY14, while the value of one year’s sales doubled to $25 million.
 

Suncorp’s bank lending assets and exposures (Source: Company Reports)
 

Cost Optimization efforts:

Suncorp estimates to derive over $170 million in annual benefits in the 2018 financial year driven by its Optimization efforts. The group targets to drive more efficiencies from transformation of claims processes, ongoing rollout of the SMART repair network, simplification, business intelligence efforts and through technology and procurement. Suncorp estimates to invest over $75 million for the Optimization program and finish the restructure of the Group’s operating systems. Meanwhile, SUN is also making revisions to its Group, Life and General Insurance capital targets based on risk based capital models.



Optimisation Program (Source: Company reports)

Outlook:

Suncorp estimates its underlying ITR to be better or around 12% through the cycle. SUN estimates a sustainable returns on equity of at least 10% and anticipates an ordinary dividend payout ratio in the range of 60% to 80% of cash earnings. The bank is adopting a low risk model to derive growth by maintaining its diversified funding base and A+/A1 credit ratings. SUN targets its NIM to be in the range of 1.75% to 1.85% driven by its price control efforts and targets a retail lending growth of 1 to 1.3 times system. Meanwhile, the group anticipates a retail deposit to lending ratio in the range of 60% to 70% driven by the Bank’s ability to leverage its ‘A+/A1’ credit ratings to raise diverse wholesale funding and improve CET1 to 12.5% to 15%. The group’s new banking platform, Ignite, is also on track to be finished by next year June.
 
 
Dividends across years (Source: Company Reports)
 

Stock Performance:

The shares of SUN delivered a negative year to date returns of 12.4% owing to the challenging market conditions and natural hazards impact on its general insurance business. On the other hand, the group issued a positive outlook and the recent correction placed the stock at attractive P/E of 13.8x. SUN is also improving its competitiveness in the industry and delivered better customer satisfaction scores, positive customer unit growth in its Australian Personal Insurance products as well as enhancing customer retention. Suncorp also has solid dividend yield of 6.2%. We do note the recent weakness in the equity market in the last quarter but given SUN’s strength, we maintain our positive stance on the stock and accordingly give a “BUY” recommendation at the current price of $12.12.


SUN Daily Chart (Source: Thomson Reuters)

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