"Depends what the separation looks like": Morningstar on Suncorp's demerger plans
While the benefits of the current model are modest, a demerger won't deliver shareholders an automatic win, says Morningstar equity analyst Nathan Zaia.
Mentioned: Bendigo and Adelaide Bank Ltd (BEN), Bank of Queensland Ltd (BOQ), Insurance Australia Group Ltd (IAG), Macquarie Group Ltd (MQG), Suncorp Group Ltd (SUN)
Nathan Zaia: Yeah. So, the main goal is to unlock value for shareholders. So, management will be exploring if the insurance business and the bank, would they be valued more by the market if they're in two separately listed companies? Secondly, the outlook for each business be better if now you had a management team whose sole focus was that respective business. And finally, could this be worth more to an acquirer who is looking to add scale now it allows Suncorp to sell the bank at a premium to what it currently trades at and return that capital to shareholders?
I think it really depends on what a separation looks like. I think being two separate entities it's neither here nor there really. I don't think it alters the competitiveness of either business. And if you look at the multiples IAG, Bendigo, Bank of Queensland trade on, which are pretty close comparables for the insurance and banking businesses, we don't really see a large material mispricing of Suncorp shares at the moment. So, I think the benefits of the current model, yes, they're modest. Cross-selling, banking, insurance and the expenses on risk and compliance, technology and marketing. But the bank does benefit from cheaper funding than if it was on its own. So, that's probably one downside and management would need to offset that with cost savings or volume growth. And in a competitive banking environment, that's not easily done.
We think a trade sale would be better for shareholders. But again, that depends on the sale price. So, that might be tricky in the current environment, and there's a lot of uncertainty around margins and bad debts, and this is a reasonably large acquisition. So, it does limit the number of potential buyers. So, we don't think the major banks would be allowed to competitive reasons. Bank of Queensland (got its hand short) with ME Bank and consolidating banking platforms. Macquarie Group driving strong organic volume growth, doesn't really need to do it. So, there's only a couple of players that could potentially look at it, and even for them, it would be a pretty big acquisition with a lot of risk.