Should you buy Suncorp?

Suncorp shares dropped as low as 3% this morning on the back of a sale of its “bad bank” loans.

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Suncorp (ASX: SUN) shares dropped as low as 3% this morning on the back of a sale of its “bad bank” loans to Goldman Sachs (NYSE: GS) for 60 cents on the dollar.

The sale will total approximately $1.6 billion worth of Suncorp loans, which the company has struggled to manage since the Global Financial Crisis. In 2009, the Queensland-based insurance, retail and business banker was left with over $17 billion of commercial real estate loans that it could no longer fund.

Last month, Suncorp said that it predicted the portfolio of non-performing loans would fall below $2.7 billion by June. Today’s purchase has taken most of that amount and the remaining will be integrated into the main bank next month once payments are finalised.

Is it worth your money?

The removal of the bad bank will cost Suncorp between $470 million and $490 million in the second half of this year. This is never a good thing unless you’re looking for a bargain entry price into the stock. In which case, this may be the perfect opportunity for the long term investor.

When it realised the news, the market took 3% off its value only to bump it straight up again, which indicates that this stock is in demand and many investors are just waiting for an opportunity to get into it. It’s not surprising given the good news it’s been pumping out in recent months.

Outlook

In the past year alone, Suncorp shares have risen more than 50%, but unlike the big banks, its gains could be well-founded. The company reported NPAT up 47% to $574 million for that half year ended 31 December 2012 and outlined a top-line growth of between 7% and 9% annually over the next two years.

By the 2015 financial year the company sees 10% return on equity and increased simplification will lead to benefits of $225 million. It sees this expanding as time goes on and will ‘Meet or beat’ an underlying insurance Trading results of 12% through the cycle and return a dividend between 60% and 80% of earnings in addition to any excess capital.

Foolish takeaway

Suncorp has a diversified business model but relies heavily upon insurance products for its underlying profit. The past year has produced “benign” weather conditions and as a result, the company and other insurance institutions like QBE (ASX: QBE) and Insurance Australia Group (ASX: IAG) have been able to produce good profit margins. Now is a better time than ever for the company to completely remove bad debts and set itself straight going into the future. Investors could do worse than add this one to their portfolio.

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Motley Fool contributor Owen Raszkiewicz does not own shares in any of the companies mentioned in this article.

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