The Suncorp Group Ltd (ASX: SUN) share price has been a solid performer on Tuesday morning.
At the time of writing the insurance and banking giant's shares are up 1.5% to $13.69.
Why is the Suncorp share price on the rise?
Investors have responded positively to reports that the company is looking to spin off its banking business.
According to the AFR, Suncorp is believed to have enlisted bankers from UBS to look into its options, with a view of becoming a pure play insurance company with its collection of brands including AAMI, APIA, GIO, and Vero.
By doing so, fund managers believe it could close the significant value gap between Suncorp and insurance rival Insurance Australia Group Ltd (ASX: IAG).
Prior to today, Suncorp's shares were changing hands at 16x estimated full year earnings, whereas IAG was commanding a multiple of 20x estimated forward earnings.
It would also mean that Suncorp's spun off banking business could then look at merging with local rival Bank of Queensland Limited (ASX: BOQ).
This is something that Bank of Queensland has mulled before. According to the SMH, in 2014 Bank of Queensland and Suncorp held preliminary merger discussions about creating an $8 billion institution which aimed to challenge the big four banks.
The two parties ultimately decided against formal negotiations after Suncorp's then-CEO Patrick Snowball expressed doubts about the timing of the deal.
What now?
I think that spinning off its banking business makes a lot of sense and could add value for Suncorp shareholders.
After which, I think a potential merger of its banking business with Bank of Queensland would also be a great move and would put both banks in a much stronger position to compete with Commonwealth Bank of Australia (ASX: CBA) and the rest of the big four.
But for now, it is worth noting that this is just speculation. So I would suggest investors keep their powder dry and wait to see if things develop from here.
