Suncorp to demerge its banking arm

Suncorp Group (ASX:SUN) is planning to offload its banking business to that it can better focus on its main business, its insurance arm, in an attempt to improve returns and value for shareholders.

Suncorp Group (ASX:SUN) is planning to offload its banking business to that it can better focus on its main business, its insurance arm, in an attempt to improve returns and value for shareholders.

The move is in line with the big banks that have offloaded their investment, advice or insurance arms to re-focus on their core businesses. Suncorp Group’s banking arm makes about $400 million a year in cash profit.

It’s expected to find a buyer for the bank and will also consider listing the bank on the ASX. The business generates a decent cash profit return, and has approximately 2 percent of the of the Australian commercial banking market.

According to the Australian Financial Review, “Analysts said it might be easier to have Suncorp’s bank sold than listed, given the recent sell-off in bank shares, which reflects a weakening appetite for the sector.”

In the past Suncorp has spoken with AMP, Macquarie Group and Bank of Queensland about merging together to create a much bigger competitor to the Big Four. Either way, any move will see Suncorp retain its insurance division.

It’s a little too early to see broker reactions to the news. Morgan Stanley released a short note over the weekend, which doesn’t take into consideration the demerger; the broker isn’t too positive, downgrading SUN shares to an “underweight” recommendation with a target price of $10.25. It follows a report showing Australia to have eight times more economic exposure to catastrophe costs than the global average. It also notes that reinsurance pricing is increasing, and the potential for a higher catastrophe budget. All in all, negatives for Suncorp.

Despite Morgan Stanley’s view, there are another six broker “buys” on the stock. UBS is the most recent, with a Buy and a target price of $14.40. UBS expects a strong pricing response from the domestic general insurer. However the East Coast floods impacted margins and fixed income losses were incurred during the quarter. The broker continues to prefer Suncorp and has kept its Buy.