HSBC a left-field suitor for Suncorp Bank?
We have written extensively in the past on the benefits of merging Bendigo and Adelaide Bank (ASX:BEN) and Suncorp Bank (ASX:SUN). However, we believe it is also worth considering HSBC Australia as a potential and unconventional suitor for SUN Bank.
This is based on the former’s greater acquisition firepower and renewed focus on domestic home lending (market share <1%), increased branch and mortgage broker usage, and desire for more market visibility. There would also be the huge opportunity to reduce surplus QLD branches (perhaps up to 50%) given SUN Bank’s 68% higher reliance on brokers.
At the end of the day, we believe SUN Bank will add good quality mortgage and agribusiness books to HSBC Australia’s portfolio. Having similar long-term credit ratings (Standard & Poor’s A+ and Moody’s A1, both outlooks stable) should also enhance the compatibility of HSBC Australia and SUN Bank. Around $3.0bn CET1 capital is tied up in SUN Bank, handy in terms of a potential capital return to shareholders.
We have increased the price target to $14.50, and maintain our Buy rating for SUN. SUN’s 3Q19 APS 330 update today indicated total lending was broadly flat since the end of 1H19 with business lending growth offset by lower home lending, although both segments should improve in 4Q19 particularly following some SME and agribusiness initiatives.
Home loan arrears (but not impaired) were up by 2.5% qoq to $357m mainly due to major weather events (the increase should be temporary with expected recovery after six months) but overall credit quality remained strong with a credit in impairment charges in 3Q19.
Despite intense price-driven competition on mortgage lending (no surprises), SUN reaffirmed 2019 NIM to be at, or just below the bottom of its 1.80-1.90% target range (BP forecast 1.79%). As such, our overall estimates are largely unchanged.
SUN’s life business sale has also reduced earnings volatility in our view and this has allowed us to lower its cost of equity by 25bp to 10.5%. Taking into account further valuation time creep, SUN’s price target is increased by ~3% to $14.50 (noting the upside risk to this should our mooted bank divestment to either BEN or HSBC Australia eventuate).
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