Suncorp Just Not Worth It

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            [3] => ((WBC))
            [4] => ((CBA))
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This story features SUNCORP GROUP LIMITED, and other companies.
For more info SHARE ANALYSIS: SUN
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Greg Peel

The GFC has been clearly hard on all Australian financial institutions but none more than Suncorp-Metway ((SUN)) – the hybrid regional bank slash general insurer hailing from Queensland way. While the marriage of these two otherwise exclusive parts might have seemed like a good idea in the boom, and using the one branch office for your insurance and banking needs a convenience, the GFC has made the two uneasy bedfellows.

It hasn’t helped that the insurance business has had its own set of problems, mostly based on Queensland’s questionable weather, but bad loans and lack of funding have rendered the banking business somewhat of a basket case. Suncorp shares fell from as much as $8.00 only in February to under $4.50 before the March stock market rally. At that point, analysts noted that the insurance business’s dominant value was rendering the value of the banking business actually negative based on the share price.

It was also at that point analysts decided it was worth buying Suncorp shares, because the above equation implied quite emphatically that Suncorp was worth more were it to be split into its constituent parts. The insurance business might be able to go the course alone, or perhaps Queensland-based QBE Insurance ((QBE)) might be interested, but otherwise the banking business must be valuable to one of the Big Four looking to expand its white-shoe exposure, or even regional rival Bank of Queensland ((BOQ)). Analysts were nevertheless convinced that Suncorp had no other viable solution.

But Suncorp hasn’t been mown down in the rush. A couple of months later, and there has been apparently little interest. Nevertheless, the stock market bounce – led predominantly by banking sector stocks – has helped the Suncorp share price recover to well over $6.00. At least it no longer looks like the whole Group might slip out the back door.

But that’s enough for BA-Merrill Lynch to yesterday downgrade Suncorp to Underperform. In so doing, Merrills becomes a lone Sell-rater among five Holds and four Buys left over from the “break-up value” theme. While the analysts acknowledge the risk to this downgrade is that Suncorp is indeed broken up and sold, they struggle to see just who would buy either bit.

It is unlikely Suncorp would let its banking business go for less than 80% of net tangible asset value even despite its current struggle. But Merrills can’t see how anyone else could pay more than 80% NTA and still make the deal accretive. With economic conditions still at risk to the downside, and bank funding costs likely to drag returns on equity back to “unacceptable” levels, Suncorp is just not attractive. And while the press has speculated that Suncorp and BOQ make a handsome couple, BOQ has enough of its own regional banking problems, thank you very much, without taking on more. What’s the point of acquiring more of a bad thing?

The ACCC has also now hinted that the Australian banking sector has already contracted far enough, and any further merger applications would not be treated favourably. Westpac ((WBC)) has swallowed St George and Commonwealth ((CBA)) has secured BankWest. Foreign banks have withdrawn and non-bank lenders disappeared. The ACCC does not want any further loss of competition. It would just be like this useless organisation to stand in the way of a business-saving merger at exactly the wrong time.

On the other side of the coin, if you assume Suncorp’s share price rally is all about a bear market bounce and nothing about any real improvement in Suncorp’s banking business, Merrills points out that this makes the insurance business now look expensive at the current share price (12x earnings) compared to peers. So there is no bargain for QBE (who’s never shown the slightest bit of interest anyway) or anyone else.

Citi analysts nevertheless see Suncorp’s only option as possibly being “selling the good and keeping the bad”. The market has always assumed Suncorp would sell the (bad) bank and keep the (good) insurer.

Citi’s view comes as Suncorp management – which has never publicly entertained the idea of renting its company asunder – has released its new strategy idea which revolves around Suncorp bolstering its deposit base to reduce its need for offshore funding. That’s all well and good, and Australians have retreated to the idea of saving money rather than spending it, but with bad loans growing by the day Suncorp’s target deposit growth becomes somewhat unrealistic. Perhaps the only option is to sell the insurance business and save the bank.

Citi yesterday downgraded Suncorp from Buy to Hold.

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