Banks/insurance/SUN
Suncorp’s result is okay, with the strong market reaction a function of low embedded expectations.
Insurance
Natural perils impacted profits, finishing the half year some $205m above expectations, which you can see quite clearly in the reported insurance trading result below. Netting out reserve releases leaves us with the underlying ITR, which showed reasonably good growth.
The market is clearly focusing on the strong ITR ratio, and breathed a sigh that the perils experience improved over November, December, and, based on management commentary, into January (recall that SUN had blown through the perils allowance by November).
It should be noted though that decreased motor claims associated with less travel / WFH due to COVID means we need an underlying measure that nets out the positive impact associated with COVID, which gives us the more modest 8% underlying ex COVID ITR.
Gross written premium growth was strong, comprising decent volume growth and price increases.
The strong pricing environment has come from the realisation that climate changes means greater frequency of loss (which requires the price of insurance to go up, over time) and the recognition that low bond yields means income from technical reserves and shareholder funds (the equity and predominantly bond portfolios) is going to be low, indeed, not especially meaningful.
Claims, loss ratios, expenses ratios returned to historical averages.
Banking
The banking arm, to our mind, had a result that reflects the highly competitive environment, with NIM down 12bps over the half.
ANZ reported an underlying NIM down 5bps, citing structural headwinds to the industry, and WBC reported NIMs down 8bps. WBC’s NIM guidance was, to our mind, quite bearish, foreshadowing weaker NIMs over the remained of FY22.
CBA’s prior quarterly likewise highlighted strong NIM pressure, and overall, the industry is consistently pointing to pressure from higher exposure to lower spread fixed rate mortgages, the increased liquidity requirements (all the banks hold more high quality liquid assets today, than in years gone by) and the aforementioned competitive pressures.
Expectations
However, expectations are low, and SUN’s current implied earnings trajectory appears to reflect the bearish NIM commentary (as it does for all the banks), whilst broker consensus appears to reflect the underlying insurance trading ratio (UITR) guidance of 10-12%, up from 8% currently.
Arguably, that, and the potential upside if interest rates move higher (resulting in higher income from the bond portfolio) reflects the investment case.
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