We like the Suncorp Group credit which benefits from diversified earnings from its general and life insurance businesses across AU/NZ. The group also maintains a capital position which allows it to weather any unforeseen events which may not be catered for via its reinsurance protection. In our view, indicative pricing will land somewhere between +275-300bps which represents good relative value versus the opportunity set.
The terms of this transaction are akin to other subordinated transactions led by Suncorp Group. There will be a dividend stopper and deferred interest is cumulative and compounding. Holders have the option to convert 7.75 years after the issue date. Notes will qualify for equity-credit with S&P initially.
The sale of the bank may result in a one-notch downgrade to Moody’s/S&P ratings but importantly the company would still have an A3/A (from A2/A+) rating, respectively.
Fundamentals
Suncorp Group contains both insurance and banking businesses. In 2022, Suncorp signed a share sale and purchase agreement with ANZ to sell its banking business. This sale is expected 2H23. The rationale for the sale is to align Suncorp to the core insurance business.
Suncorp insurance (in its own right) is an attractive investment opportunity with economies of scale across numerous insurance capabilities (motor, home, commercial, and other statutory classes).
Source: Suncorp Investor Presentation
The 1H23 results across the group were particularly strong with all business units contributing to overall NPAT.
- Insurance AU – GWP Home up 12.1%, GWP Motor up 11.7%
- Suncorp NZ – GWP up 12.2%
- Suncorp Bank – Home Lending up 5.2%, Cost to Income of 49.9%.
Furthermore, the Suncorp Group capital position provides adequate buffer, with the GI Group and Bank CET1 ratios improving within their target operating ranges, even after the payment of dividends.
Relative Value
Suncorp Group has six capital instruments outstanding in the market. However, the best comps would be the Dec-25 (call date) and Jun-27 (call date) notes which are priced via Yieldbroker below.
As a 4.5-year equivalent to call date, the SUNAU Jun-27s are pricing at ~+261. Adding another 20bps for the 1.25-year to call date, would bring pricing to ~+280. Insurance tends to price at a 50bps discount to bank based on the comps below. As a 4.5-year equivalent to call date, the major bank subs are pricing around the ~+213/214 mark. Adding another 20bps for the 1.25-year to call date and 50bps for the insurance/bank discount, would bring pricing to ~+285.
Outside of the bank, the group’s next maturity for a Suncorp Group instrument is the Dec-25 (call date) notes below. Therefore, we expect demand from investors to be strong as the supply pipeline is limited.
In our view, indicative pricing will land somewhere between +275-300bps (to allow for new issue concession). This represents good relative value versus the opportunity set.
*** COMPS – SUNCORP GROUP LIMITED A$ 15.75 NC 5.75 YEAR WHOLESALE SUBORDINATED NOTES ***
Source: Yieldbroker (YB) mids close as at 20/02/2023
Financials
Source: Suncorp Investor Presentation
Source: Suncorp Investor Presentation
