Stock Update - Suncorp Bank sale

Need to know:

• ANZ A$4.9b purchase of Suncorp Bank (13.8x PER, 1.3x P/B). Price is premium to regional banks.
• Intention to return proceeds back to shareholders as a capital return.
• SUN will emerge as a pure domestic insurer, with the potential for the PER to re-rate closer to IAG.

Investment implications

Suncorp Bank sold to ANZ for $A4.9bn. The transaction has been valued at 13.8x P/E or 1.3x P/B. We had previously valued Suncorp Bank at ~$4bn, which implies a healthy control premium being paid.

The deal will also include a A$50m minimum brand licensing agreement which will last 5 years (branches will remain under Suncorp branding for 5 years). We see this as a strong offer for Suncorp Bank that will provide a meaningful injection into the cash balance and support Suncorp as a pure insurance play.

Suncorp to return the majority of proceeds to shareholders through pro-rata capital returns (expected by SUN to be the majority but depends on ATO) and fully franked special dividends. Management mentioned in their conference call that they will hopefully see this occur in reasonably short order post deal completion (2H 2023).

Suncorp will emerge as a pure domestic insurer. Suncorp’s currently trading on a ~2 PER point discount to Insurance Australia Group [(IAG). Over time there is potential for this gap to close, given the Suncorp bank was typically seen as a drag on the PER multiple.

Deal risk remains as there are multiple parties to go through before settlement. SUN and ANZ need confirmation from the ACCC, Federal Treasurer, and Queensland Government before the deal can go through. In the situation where the deal gets knocked back, they could be stuck doing the deal with one of the regional banks (BEN or BOQ) – presumably at a lower price.

We see this as a good result. SUN has achieved a strong price and will emerge from the deal as a pure-play domestic insurer. We reiterate our BUY rating for SUN. Our positive investment view remains; 1) potential for an improving domestic insurance cycle, 2) SUN’s valuation is below prior mid-cycle levels; and 3) following the deal, high likelihood of capital management – likely in the form of a capital return (~A$4bn on a ~A$14bn Mkt cap).

This commentary reflects our initial view. For detailed reports for companies under Sandstone Insights coverage, see our latest research notes for our investment view and specific risks associated with investing in these companies.

Figure 1: IAG vs SUN PER. Suncorp has traded at a 2-point PER discount to IAG over the past ~6 years. Potential to see the gap close with the removal of the bank.

Source: Refintiv, Sandstone Insights