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Analysts take gloomy view on Suncorp trading update

Analysts are wary of Suncorp’s exposure to the difficult banking and general insurance environment.

An analyst says more conservative dividends are now expected from Suncorp in the short term Picture: Liam Kidston.
An analyst says more conservative dividends are now expected from Suncorp in the short term Picture: Liam Kidston.

Suncorp’s exposure to the difficult banking and general insurance environment would outweigh the prospective gains flagged by the bancassurance group in its trading update, according to analysts.

As investors marked the stock back after a burst of enthusiasm on Monday, the report card on Suncorp Bank’s $133m increase in the collective provision and staff underpayments of up to $70m was gloomy.

Morgans said in a note there were some positive aspects to the update, including natural hazards likely to be inside budget and lower targeted expenses, but they would be easily overshadowed by lower volumes in banking and general insurance.

“Management said they have deliberately tried to be conservative, with the (collective) provision allowing for negative outcomes like an 11.5 per cent unemployment rate and double-digit falls in both gross domestic product and house prices,” the note said.

Against a weaker overall market, shares in Suncorp retreated 45c, or 4.9 per cent, to $8.83.

The March quarter update continued the broader trend in the financial services industry of higher provisions, pressure on revenue, and thousands of customers taking advantage of ­assistance packages.

Goldman Sachs said that while there were a number of moving parts in the update that would continue into the 2021 ­financial year, the level of disclosure was better than peers.

That said, the sentiment was “downbeat”.

The positive initial response from the market, according to Goldman, reflected the banc­assurer’s solid investment performance, “surprise-free” com­mentary on the short-term outlook for claims, and a “fairly strong” capital position.

At the end of March, the group had $682m in common equity tier one capital that was in excess of regulatory requirements, including the impact of $205m in mark-to-market adjustments and the $133m in top-up provisions. Suncorp will also secure an extra $194m in equity from a resale and conversion process related to convertible preference shares.

On dividends, the company said it would consider any final payment as part of the normal process of preparing the full-year accounts.

UBS said more conservative dividends were now expected from Suncorp in the short term. But there was still “compelling upside” in the share price, given the group’s forward price earnings ratio (share price divided by earnings per share) of 12.9.

UBS retained its buy recommendation for the stock, as did Goldman, which cited a target price of $11.01, down from $11.24. Goldman also said it was encouraged by March-quarter investment losses “tracking much better than we had anticipated”.

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Original URL: https://www.theaustralian.com.au/business/financial-services/analysts-take-gloomy-view-on-suncorp-trading-update/news-story/f59f3e60bcc1647b6e7ea71129ad1452