Suncorp (ASX:SUN) share price spikes after 'strong underlying momentum' in 2021

The half was plagued by natural hazards costs for the banking giant.

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Key points

  • Suncorp released its half year results today 
  • The company had a mixed quarter with weakness in some areas offset by strengths in others
  • The half was earmarked by a substantial jump in natural hazard claims costs 

Shares in Suncorp Group Ltd (ASX: SUN) have started the new year well and are up more than 8% this year to date.

That's a substantial gain over the benchmark S&P/ASX 200 Index (ASX: XJO), itself faltering over 4% in the red during that time.

Today Suncorp released its half yearly results for the six months ended 31 December 2021. Let's take a closer look.

Suncorp earnings slump amid higher claims costs

The bank outlined several highlights for investors during the half, including:

  • Group net profit after tax was down 20.8% year on year and reached just $388 million
  • Cash earnings of $361 million decreased by 29.1% over the prior corresponding period
  • Responded to 19 separate weather events and more than 50,000 natural hazard claims during the half
  • Natural hazard claims costs of $695 million – $205 million more than expected for the first half
  • Profit in the Bank increased to $200 million and accounted for 55% of Group cash earnings
  • 1H 23 cents per share dividend fully franked interim dividend

What else happened this quarter for Suncorp?

During the half, bank home lending grew by 2.7%, reflecting "credit assessment efficiency, consistent competitive offerings and improved customer and broker experiences" according to the bank.

Customer deposits also grew by 7.8% to over $44 billion during the half, underscored by at-call transaction accounts. In line with broad market expectations, net interest margin (NIM) decreased 12 basis points from 2H FY21 to 1.97%.

Furthermore, the net impact of investment markets on the result was $61 million, and was down significantly with "volatility across yields, breakeven inflation, credit spreads and equity markets across the year".

However, the group's profits were down substantially for the half, falling 21% behind the result recorded at this time last year.

Not only that, but cash earnings were almost 30% lower than the year prior. Both of these results stemmed from Suncorp responding to 19 separate weather events and over 50,000 separate natural hazard claims during the half.

Naturally, hazard claims costs ballooned more than $200 million over original forecasts for the half at $695 million as a result of this.

Finally, Suncorp's operating expenses were up $42 million on the prior corresponding period to $1.4 billion. The Group attributed this to "temporary increase in spending on strategic initiatives, and higher growth-related costs with increased commissions and marketing" and hence believes the jump is a one-off.

Management commentary

Speaking on the announcement, Suncorp Group CEO, Steve Johnston said:

While we have been challenged by the La Niña climate pattern and the operational impacts of COVID-19, we continue to deliver against our strategic priorities and have good momentum as we move into the second half of
FY22. I am particularly proud of how we have supported our customers and communities during this time. Despite the many challenges of COVID-19 our teams have mobilised quickly to get our customers back on their feet".

What's next for Suncorp?

The company aims to deliver a growing business with a sustainable return on equity (ROE) above its cost of equity over the coming 12 months.

For instance, Suncorp notes its General Insurance business is targeting an underlying insurance trading ratio (ITR) in FY23 of between 10–12%, and a Bank cost-to-income ratio of around 50%.

The bank also gave its hazard cost guidance an upward revision. It now expects the full year outlook for natural hazard costs to sit around $1.075 billion, up from $980 million on previous allowance.

"This year will be critical for the Group as we continue to deliver on our FY23 plan and strategic initiatives" Johnston added.

"Inefficient taxes and charges built into insurance premiums are in some cases adding more than 40% to the cost of home insurance. This unfairly impacts those in higher-risk locations, and it needs to be addressed as part of a wider reform of the tax system" he concluded.

Suncorp share price snapshot

In the last 12 months, the Suncorp share price has climbed more than 14% and is now up over 8% since January 1.

This past week, it has climbed 8% and has jumped well into the green for the month as well.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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