At what price a regional bank?

Out of the regional/second tier banks do you have a preferred exposure? Which one is it at what are some of the reasons that make it attractive? Do you see opportunity for consolidation amongst the regional/second tier banks? Where does this make sense?

Bendigo and Adelaide Bank holds more appeal than Bank of Queensland, for example, as it's more diversified by geography and chiefly relies on deposits for funding. That's also an advantage over the big four banks, though they've reduced their reliance on short-term overseas wholesale funding since the GFC.

Despite benefiting from the resources boom, low unemployment and interest rates, Bank of Queensland was forced to raise capital and cut the dividend two years ago due to higher bad debts. The share price has increased dramatically since then, but the tourism industry is struggling with the strong Aussie dollar, and the floods and cyclones from a couple of years ago showed the risk of being reliant on the Queensland economy.

As the regional banks are less diversified by geography and product, less profitable, often more reliant on non-deposit funding than the four majors and less likely to receive government assistance during a crisis, all things being equal we're unlikely to recommend them over the big four banks, particularly at current prices. Although the regional banks are usually statistically cheaper, that doesn't make them better value.

Consolidation is possible amongst the regional banks as interest rates are low and the regulators are unlikely to oppose a regional bank tie up given the big four banks and others provide competition in every state. It doesn't make sense at current prices, though, as the acquirer would need to pay well over the odds to consummate a deal.

Some of the regional banks (SUN, BEN) will be reporting in August, what are your expectations and is there a result that you will be following closely?

Suncorp is the company that most attracts us amongst the regional banks. Chief executive Patrick Snowball has done a good job cleaning up the company after it ran into a wall of bad debts due to lousy loans made prior to the GFC. The company was also nearly pushed to the brink after John Mulcahy paid a ludicrous amount at the peak of the cycle for insurance company Promina.

Suncorp is really an insurer with a tiny bank attached to it, and together with Insurance Australia Group and QBE Insurance it is more than one third of an oligopoly in the general insurance market. The profitability of these three businesses in Australia is the envy of overseas insurers that struggle to earn an underwriting profit and instead try to make a living by investing premiums.

Suncorp has offloaded most of its problematic loans, the natural catastrophe environment remains benign, premiums have been increasing, it's taken write-offs on the poor performing life insurance business and there's plenty of opportunity to pay out more special dividends over the next couple of years. At current prices we're prepared to wait for bit more bad news to be priced in before considering an upgrade.