The Suncorp Group Ltd (ASX: SUN) share price is edging higher in early trade today after finishing Thursday less than 1% in the green. At the time of writing, shares are swapping hands for $10.77 apiece, up 0.28%.
The ASX bank's shares have taken a backward step lately after coming off a high of $12.94 in September.
Despite these challenges, the team at JP Morgan is bullish on the direction of the Suncorp share price. The firm sees a considerable amount of upside left in the company for FY22.
What does JP Morgan think about Suncorp shares?
The firm notes that Suncorp appears to be in a "consolidation phase" where its FY22 margins are likely to benefit from factors such as "margin expansion in home personal lines; margin expansion in commercial lines; small benefits from perils allowances and expenses; and some margin degradation in CTP [compulsory third party insurance]".
Aside from this, it reckons the bank is likely to benefit from industry-wide surges in commercial markets, and reduced motor incidents from COVID-19 lockdowns.
These factors are set to place Suncorp in a prime position to start delivering on margin performance and drive value for shareholders, JP Morgan says.
One other factor the firm covers is Suncorp's liability adequacy test (LAT) which has improved by 81% to $33 million – a marked improvement on the $173 million deficiency at September 20.
From this result, JP Morgan reckons the trends in the LAT can give a leading indicator of underlying profit trends. "In a COVID environment", the firm says, "assumptions around bounce-back can however influence how closely to watch these statistics".
So what does it think of the Suncorp share price? With its analysis over Suncorp's future growth trajectory, JP Morgan values the bank at $13.30 per share, representing around 23% upside potential at the time of writing.
However, this figure is also a discount to its discounted cash flow (DCF) valuation of $14.32. It applies this discount to reflect "adverse events such as heavy rains and flooding in NSW that pose some downside risk and may cause the market some concerns about SUN's exposure".
Given the spate of flooding events that have occurred these past few months in NSW and most recently in QLD, it stands to reason that JP Morgan's risk-adjusted price target may be the suited option.
What are the risks?
No investment case is without its embedded risks. In light of this, JP Morgan notes Suncorp's Australian personal lines business still faces challenges around achieving unit and price growth.
It also thinks the bank is "operating in a challenging and competitive environment that will place pressure on its elevated [net interest margin] NIM over the medium term".
Moreover, JP Morgan is still of the view Suncorp's medium-term insurance margin and bank cost-to-income targets remain ambitious.
Aside from this, the firm notes COVID-19 style risks that would impact the entire market and wider economy.
Suncorp share price snapshot
In the past 12 months, the Suncorp share price has climbed 7%. It is also up 10% this year to date.
However, it is down more than 4% in the past month and has also slipped almost 3% in the past week of trading.